Employee Leasing (PEO) and COBRA Issues

Question from Agent that is concerned about PEO not offering COBRA to the employees of employers who decide to leave services. The quesstion follows:

“The PEO I work with here in Nameless State does not offer COBRA as an option for employees after the employer leaves the PEO. I questioned this policy and the PEO owner stated that their attorney determined that if the contract between the employer and the PEO was terminated there was no need to offer COBRA, the reason given that employers would use the PEO as a ” dumping ground” for unhealthy employees. I do not know if there is a set ruling for all PEO’s, but it would be interesting to find out.”



Dear Wondering Agent,

The owner of your company better get another attorney and fast. The Courts rule in FAVOR of the employee. And in this case not offering COBRA could put your business out of business with the fines if there is ever a disgruntled employee or someone decides that they should have been offered COBRA. Todd read this and let us know your thoughts. Most PEOs offer some kind of cobra after the contract is over but I think this owner is getting bad advice. Also the conclusion that it becomes a dumping ground has no merit. Remember people need to pay for the premiums thus if the employer gets health insurance then there is really no need to be concerned. He could make it a revenue generator by charging for the cobra services.Ric Joyner, CEBS, GBA, CFCIAnswer from eflex attorney:

Ric and Wondering Agent

This is a really messy issue. Here is my analysis of the legal requirements: (1) The first part of the analysis begins with the age old question – whose employee is it? – If the sole employer is the PEO, the PEO has responsibility for COBRA. This could be the case if the PEO is also providing supervision, training etc. of the employees. This is not the traditional PEO structure. – If the sole employer is the recipient organization, that organization has responsibility for COBRA and not the PEO. While the Department of Labor recognizes a joint employment arrangement such as for purposes of FMLA., the IRS generally takes the position that the recipient organization is the employer, not the PEO. – If the employment is truly joint, both organizations may have obligations under COBRA – it is then the contract between the parties that would govern who does what. (2) Another issue is whether there is a qualifying event. Without a qualifying event, employees have no rights to COBRA. – If the sole employer is the PEO and the recipient organization terminates the PEO arrangement and takes the employees – there may be a qualifying event – a loss of coverage due to a termination of employment – and the PEO would be responsible for COBRA. – If the sole employer is the recipient organization and it withdraws from the PEO – there is no termination of employment and the loss of coverage is not a qualifying event under COBRA. This would be treated as any change of insurance or plans. – If the employment is truly joint – there may be arguments that the termination of joint employment with the PEO would constitute a COBRA qualifying event. I don’t believe this is clearly settled and it may be that the IRS’ rejection of co-employment and position that the recipient organization is the employer would prevent this in the context of COBRA. (3) An additional issue is what the contract says about rights and responsibilities. The PEO contract could provide additional rights or allocate responsibilities for COBRA. (4) Another issue is the impact of state insurance laws. Some states provide requirements for continuation or conversion of coverage for fully insured policies or MEWAs in the event of a loss of coverage. These laws ultimately apply to the insurance carrier but the policyholder (the PEO) may be impacted. (5) Finally, another issue is responsibility for individuals already on COBRA at the time of the withdrawal from the PEO. If new coverage is provided by another carrier – that new carrier will usually be responsible for taking the COBRA participants as well as the active employees. However, that result can change depending on the facts. I hope this is helpful. I am attaching an excerpt from EBIA which also addresses some of these issues. COBRA and PEOs


Todd Todd W. Martin Reinhart Boerner Van Deuren, s.c.22 East Mifflin StreetMadison, WI 53703(608) 229-2244 (direct)(608) 229-2100 (fax)(608) 219-7196 (cell)tmartin@reinhartlaw.comwww.reinhartlaw.com