Should we pay COBRA premiums as part of severance? Cost, tax and Marketplace effects

Should we subsidize COBRA in a severance package?

Often yes, for a set number of months, because losing health coverage is the cost laid-off employees feel first: at KFF's 2026 averages, COBRA runs about $833 a month for single coverage and $2,406 for family coverage. No law requires a subsidy. If you offer one, choose the method deliberately. Paying or reimbursing the premium is tax-free to the person but keeps them on COBRA, which rules out Marketplace tax credits for those months. A taxable cash amount lets them choose. Few continue it for long: in LHH's 2027 study, 12% of organizations continue medical coverage for the whole severance period, down from 52% in 2024.

What it costs

COBRA lets a former employee keep the group plan for up to 18 months at up to 102% of the full premium, and gives them 60 days to elect it. It applies to employers with 20 or more employees.

	Single coverage	Family coverage
Average annual premium, 2026	$9,804	$28,303
Worker contribution while employed, per year	$1,672	$7,471
COBRA charge to the former employee (102%), per month	$833	$2,406
Employer share while employed, per month	$678	$1,736
Employer share for 3 months	$2,034	$5,208
Full COBRA charge for 3 months	$2,500	$7,217

Exhibit 1. Source: KFF 2026 Employer Health Benefits Survey (released October 22, 2026); 102% cap from 29 U.S.C. 1162(3). FST calculation; actual premiums vary by plan.

To model it with the rest of the package, use the total cost calculator: the example there pays three months at $678 a month for 25 people.

Three ways to subsidize, compared

Method	Tax to the former employee	Marketplace effect	Administration
Pay the plan directly	Tax-free (Pub 15-B)	Enrolled in COBRA, so no premium tax credit those months; a 60-day window opens when the employer's payments stop completely	Simple; set an end date
Reimburse the premium	Tax-free (Pub 15-B)	Same as paying the plan	Needs proof of payment each month
Taxable cash amount	Wages, with withholding	Free to choose COBRA or a Marketplace plan with any premium tax credit	Simplest; often grossed up

Exhibit 2. Source: IRS Publication 15-B (2026); 26 CFR 1.36B-2(c)(3)(iv); 45 CFR 155.420(d)(15).

Tax: what's tax-free and what isn't

The IRS says the exclusion for health benefits applies to amounts an employer pays to maintain COBRA coverage for a current or former employee, "whether you directly pay the premiums or reimburse the former employee for premiums paid" (Publication 15-B, 2026). A cash payment not tied to coverage is ordinary wages, with withholding and payroll taxes; some employers gross it up.

On a self-insured plan, a subsidy offered only to executives can fail the section 105(h) nondiscrimination rules, which makes the benefit taxable to the highly compensated people who get it. Offering the same months to everyone at a level avoids most of that question. Also confirm that your stop-loss carrier covers former employees if you keep them on the active plan rather than on COBRA.

What it does to Marketplace options

• While enrolled in COBRA, no premium tax credit. Being eligible for COBRA doesn't block Marketplace credits; being enrolled does, for every month enrolled, subsidized or not (26 CFR 1.36B-2(c)(3)(iv)).
• Losing job coverage opens a 60-day Marketplace window. Dropping COBRA voluntarily later doesn't (HealthCare.gov).
• When the employer stops paying, a new window opens. If the employer completely stops its COBRA contribution, the person can switch to the Marketplace within 60 days (45 CFR 155.420(d)(15)). Reducing the subsidy partway doesn't count.

So a subsidy that ends cleanly on a set date gives people a second, well-timed chance to move to a Marketplace plan. Tell them that date in writing. For their side of the decision, see COBRA or Marketplace after a layoff.

What employers do

For broad-based employees, LHH's 2027 study found only 12% of organizations continue medical coverage for the full severance period, down from 52% in 2024. For executives, 80% of S&P 500 companies with executive severance arrangements continue health benefits, most often for 24 months for the CEO and 12 months for other named executives (Meridian, 2024). For the rest of the package, see how to design a severance plan.

Sources

1. KFF, 2026 Employer Health Benefits Survey, accessed Oct 30, 2026.
2. Internal Revenue Service, Publication 15-B (2026), Employer's Tax Guide to Fringe Benefits: accident and health benefits, accessed Oct 30, 2026.
3. Legal Information Institute, Cornell Law School (eCFR text), 26 CFR 1.105-11, self-insured medical reimbursement plans, accessed Oct 30, 2026.
4. Legal Information Institute, Cornell Law School (eCFR text), 26 CFR 1.36B-2, eligibility for premium tax credit, accessed Oct 30, 2026.
5. Legal Information Institute, Cornell Law School (eCFR text), 45 CFR 155.420, special enrollment periods, accessed Oct 30, 2026.
6. HealthCare.gov, COBRA coverage and the Marketplace, accessed Oct 30, 2026.
7. Legal Information Institute, Cornell Law School, 29 U.S.C. 1161-1162, COBRA continuation coverage, accessed Oct 30, 2026.
8. LHH, Severance and separation practices benchmark study (article, October 23, 2026), accessed Oct 30, 2026.
9. Meridian Compensation Partners, 2024 Study of Executive Severance Arrangements Not Related to a Change in Control, accessed Oct 30, 2026.