When President Obama’s stimulus bill—the American Recovery and Reinvestment Act—was passed, a much-lauded provision in the legislation that allows laid-off employees to get COBRA health insurance through their former employers at 65% off went into effect. Sounds like a great deal, right? Well, there is just one little catch. The government has no intention of being out any money, so the employer is on the hook for that outstanding 65% of the premium. The employee pays the other 35%.

April 18th, 2009 is the deadline for employers to mail out the notices to eligible employees who have been laid off since September 1st, 2008. The coverage itself is retroactive to March 1st, 2009. This means employees must pay their 35 percent share on three months of COBRA premiums through May. In other words, they have to pay 3 months worth of premiums.

In an article on Workforce.com, Jennifer Kluge, COO of the Warren, Michigan-based Michigan Business and Professional Association explained that the big concern right now is how many people will elect this and where the money will come from. Going through payroll taxes to get reimbursed is OK, but it is not cash to pay the premiums.

The problem here is that you as the business-owner have no idea how many of your former employees will take advantage of this offer, which makes it very difficult for you to plan. If you have only laid off one or two people, that’s one thing; but if you have had to lay-off fifty or a hundred, as some small companies have had to do, then the costs escalate dramatically. Also, the fact that this unfunded federal mandate is coming at you during a time of economic distress simply makes things worse. Kluge went on to say that cash flow problems could cause some financially strapped companies to lay off more employees, freeze or cut salaries, or eliminate group health coverage, dental, life insurance, disability and other benefits.

If that happens, then unemployment will go up and more people will turn to this discount (from their perspective) COBRA plan in order to maintain their health coverage, leading to greater expenses for businesses that now have to pay that 65% premium. It becomes an ever-growing cycle of job and benefit loss driven by the additional costs imposed by the program.

If you are facing this issue in your business, I would like to hear from you. Leave a comment and tell us and your fellow small business owners how you are dealing with this and what you think needs to happen to break the cycle this will inevitably create.