Employer is instituting a severance program. Terminating employees will receive six months of coverage at the active employee rate. After that time, the employees may elect COBRA for the full statutory period. (For various reasons, the employer does NOT want to have the COBRA period run concurrent with the six-month subsidized continuation period.

Can the employees pay for the six months of coverage on a pre-tax basis from their severance pay? Section 1.125-1(a)(3)(C) state that "Premiums for COBRA Continuation" are qualified benefits under Code Section 125. Does that logic apply to "Premiums for NON-COBRA Continuation"?

(The COBRA subsidy is not a concern or at issue.)

1. Proposed 125 regs. expressly permit former employees to participate, so based on that they can do pre-tax out of severance if the Section 125 plan document permits it. (We can rely on proposed regs before they are effective, but you can't pick and choose which elements of the prop. regs. to follow and which to ignore.)

2. If this health coverage is 3d-party insurance, will insurance contract permit the deferral of the COBRA period (i.e., in effect a 24-month period of continued coverage once the individual falls out of the group)? I don't think 4980(f)(8) and its Title I counter-part compel insurance companies to allow this.