The American Recovery and Reinvestment Act of 2009 (ARRA) makes substantial, but temporary, changes to the rules governing the continuation of health coverage under COBRA and a number of other modifications affecting welfare benefit plans.
As part of the American Recovery and Reinvestment Act, the government will subsidize, on a limited basis, up to 65% of the cost of “COBRA” premiums for eligible workers who are “involuntarily terminated” other than for cause. This means an employee who is involuntarily terminated from employment and who meets the eligibility requirements for a subsidy will only pay 35% of his COBRA premium for COBRA coverage. Since this legislation is effective retroactive to terminations occurring on or after September 1, 2008, and with the subsidy beginning for periods of coverage generally starting March 1, 2009, employers need to implement the provisions immediately.
Date of Enactment: February 17, 2009
Effective Date: Period of coverage beginnning on or after February 17, 2009 (generally March 1, 2009)
WHAT IS THE COBRA SUBSIDY?
The subsidy is equal to 65% of the monthly COBRA premium for the employee and his/her eligible dependents.
For example, if a covered employee has elected COBRA coverage for medical, dental and vision benefits, with monthly COBRA premiums of $1,000, $150 and $50 respectively, the individual is eligible for a subsidy of $650, $97.50 and $32.50 per month. The individual would be required to pay only $350, $52.50 and $17.50 per month to maintain coverage, and the employer may not deny coverage for nonpayment of premiums if it receives this 35% amount. In addition, the employer may further subsidize the employee’s portion of the premium.
Employees whose adjusted gross income (AGI) is between $125,000 and $145,000 ($250,000 to $290,000 for married couples filing jointly) will see a declining subsidy. Those employees whose AGIs are above the top end of the declining subsidy range (i.e., above $145,000 for single filers and married filing separately and $290,000 for joint filers) will not receive any subsidy. If an individual received this subsidy, and his/her applicable AGI exceeds the subsidy limit, the individual will be required to return the subsidy to the government (by adding it to his/her tax liability) when they file their tax return. An individual can permanently waive the subsidy for all coverage periods and avoid being subject to the recapture tax; however, the waiver may not be reversed later if the income thresholds are not exceeded. Importantly, although a highly-paid employee may waive the subsidy, the burden of determining income eligibility for the subsidy is on the employee not the employer.
WHO IS ELIGIBLE?
Employees and covered dependents who are (or were) covered under a group medical plan and who lose (or lost) coverage because the employee’s employment ended due to an involuntary termination between September 1, 2008 and December 31, 2009 will be eligible to receive this COBRA subsidy. (Under ARRA, such eligible individuals are referred to as “assistance eligible individuals”).
Involuntary Termination: The legislation is aimed primarily at employees whose jobs are (or were) eliminated as a result of economic related reductions–in-force. Additional guidance has indicated that the COBRA subsidy is also available for involuntary terminations resulting from poor job performance; however this would not include an involuntary termination due to change in job category; e.g., an employee’s position has been eliminated, such employee is offered an alternate position but declines, thereby resulting in a termination of employment.
Gross Misconduct: If an employee was involuntarily terminated due to gross misconduct, and if no COBRA election was provided to that employee (and his/her covered dependents) as a result of that termination, this legislation does not revive that individual’s COBRA right or make that individual eligible for the subsidy. The legislative history to this provision makes it clear that such individuals are not eligible for the COBRA subsidy.
Individuals Who Declined/No Longer Have COBRA Coverage Are Still Eligible: Employees and their eligible dependents who suffered a loss of coverage due to an involuntary termination on or after September 1, 2008 do not need to have elected COBRA to be eligible for the subsidy. Such individuals are eligible to elect COBRA coverage and receive the subsidy even if they did not previously elect COBRA coverage.
Additionally, individuals who elected COBRA due to an involuntary termination on or after September 1, 2008 and no longer have COBRA coverage (e.g. because premiums have not been paid) are eligible to re-elect COBRA coverage and receive the subsidy.
WHAT PLANS ARE AFFECTED?
The new subsidy rules apply to plans that are subject to COBRA, certain government plans, and plans that are exempt from COBRA but subject to comparable requirements for health coverage continuation under state laws (e.g. “mini-COBRA” laws). For convenience, this update refers to the continuation of coverage under all of these plans as COBRA coverage.
Health flexible spending arrangements provided through a cafeteria plan, as well as church plans not subject to ERISA or a COBRA-comparable state program, are exempt from the new subsidy rules.
WHEN IS THE PREMIUM ASSISTANCE AVAILABLE?
Assistance is available for premiums for “periods of coverage” beginning on or after February 17, 2009. “Period of Coverage” means a monthly or shorter period of coverage with respect to which premiums are charged; in most cases the premium assistance will be available March 1, 2009.
WHEN DOES THE PREMIUM ASSISTANCE END?
Assistance ends on the earliest of: (i) 9 months after the first day of the first month of coverage period; (ii) the date following the expiration of the maximum coverage period; or (iii) the date following expiration of the period of coverage that would have been required if COBRA had been elected.
Assistance terminates early if the assistance eligible individual becomes eligible for Medicare benefits or health coverage under another group health plan*. (*Note – it is important to note that the subsidy ends on mere eligibility, whereas COBRA coverage ends when the individual is actually covered.)
However, the individual will remain eligible for the subsidy if the other group health plan provides only dental, vision, counseling or referral services, is a health flexible spending account or health reimbursement arrangement.
SPECIAL TRANSITION PERIOD
For the first and second premium payment following February 17, 2009, the employer may continue to require the COBRA covered individual to pay the full COBRA premium for coverage. However, once this 60-day period expires, the employer must either offset future subsidized premiums by the subsidy that applies to this period or directly refund the additional amounts to the covered individual.
If a qualified beneficiary pays more than 35 percent of the COBRA premium amount during the first 60 days, the employer must provide for payment of a 65 percent subsidy. The employer may decide to either reimburse the qualified beneficiary for the overpayment and treat the reimbursement as a credit toward payroll tax or to credit the overpayment toward future premium payments. In order to credit the overpayment toward future payments, the employer must reasonably expect the overpayment to be exhausted within 180 days.
WHAT IS THE COBRA SUBSIDY AMOUNT IF EMPLOYER ALREADY SUBSIDIZES PREMIUM?
The ARRA specifically states that 35% of the premium must be paid by the eligible individual or on the individual’s behalf by someone other than the individual’s employer and that an employer cannot claim a subsidy credit until the group health plan has actually received the 35% of the COBRA premium as required by ARRA. Therefore, the eligible individual is required to pay 35% of what the plan charges for the premium. For example: If the plan charges $1000 (representing 102% of the applicable premium), the eligible individual must pay $350 – the subsidy is for $650.
An employer is permitted to claim only a subsidy credit of 65% of what the total COBRA premium would be if the amount actually paid by the eligible individual was 35% of the total COBRA premium. For example: A plan charges $1000 (representing 102% of the applicable premium) and as part of a severance package the employer pays $500 of the eligible individual’s COBRA – the eligible individual is charged the remaining $500; the eligible individual must pay 35% of the $500 or $175 – the subsidy is for 65% of $500 or $325.
NOTIFICATION BY COBRA PARTICIPANTS
Individuals who are eligible for the COBRA subsidy and who become eligible for another group medical plan or Medicare are required to notify their prior employer that they are so eligible and that they are no longer eligible for the COBRA subsidy. If they fail to notify the employer and continue to receive the subsidy, they will be subject to a tax penalty of 110% of the subsidy when they file their tax returns. The reporting burden rests on the individual, not the employer.
ALTERNATE COVERAGE
Many employers maintain their medical plans as part of a larger cafeteria plan pursuant to which employees may elect different medical coverages. Under this legislation, employers are permitted (but not required) to allow involuntarily terminated employees (and their covered eligible dependents) to elect to receive their COBRA coverage under another medical plan with a premium cost that is equal to or less than the premium cost for the plan in which they are currently participating. If the employer elects to make this option available, this will permit employees (and their covered dependents) to elect to receive lower-cost coverage.
NOTICE REQUIREMENTS
Employers must provide notice to employees/former employees who experience a qualifying event during the period that begins with September 1, 2008 and ends with December 31, 2009 of the availability of the COBRA premium subsidy. The law provides that the notification can either be in the COBRA notification itself or as a separate addendum sent with the COBRA notification.
The new notification or addendum must include:
- Name, address, and telephone number to contact the plan administrator and any other relevant person;
- Description of the extended election period;
- Description of the obligation of the qualified beneficiary to notify the plan of eligibility for subsequent coverage;
- Description (displayed in a prominent manner) of qualified beneficiary’s right to a reduced premium;
- Description (displayed in a prominent manner) of any conditions on entitlement to a reduced premium;
- Description of the option of the qualified beneficiary to enroll in different coverage (if the employer permits); and
- Any forms the employer requires to establish eligibility for the premium reduction.
The U.S. Department of Labor has been charged with creating a sample subsidy notification form within 30 days of the law’s effective date of February 17, 2009.
SPECIAL COBRA ELECTION PERIOD
Eligible individuals who previously lost coverage and who were offered but did not elect COBRA will have a special additional 60-day election period. The 60-day election period begins on the date that notice is provided to the eligible individual about the special election period. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum required period (generally 18 months after coverage was originally lost) and any COBRA continuation coverage elected pursuant to this special election period begins on the first period of coverage following February 17, 2009, (which for most plans will be March 1, 2009) and does not include any period prior to that period of coverage. However, the period of time following the original loss of coverage does not count as a gap in coverage that would permit the application of any preexisting condition limitation provisions.
For example, if an employee lost coverage on September 1, 2008 and declined COBRA coverage, the individual could elect coverage from the date of enactment forward; i.e., from February 17, 2009 forward, but the maximum period of coverage would end on February 28, 2010 (i.e., 18 months from the original loss of coverage). In addition, any medical expenses incurred between September 1, 2008 (the date coverage ceased) and March 1, 2009 (the date COBRA coverage begins under this election) would not be eligible for reimbursement under the employer’s medical plan.
EMPLOYER REIMBURSEMENT
An employer may obtain reimbursement for its subsidy from the federal government through a reduction in the amount that it deposits in payroll taxes, including wage withholding amounts and FICA contributions (both the employer and employee portions). An employer must file applicable reports to support the reduction. Where payroll taxes are not sufficient to support the amount of the subsidy, a credit or refund will apply. Insurers must follow similar procedures.
EMPLOYER REPORTING REQUIREMENTS
Employers seeking subsidy reimbursements must submit reports to the IRS with information that includes: (a) an attestation that involuntary termination of covered employees triggered the basis for individual’s’ eligibility; (b) the amount of payroll taxes offset by subsidy reimbursements for the current reporting period and estimated offsets for the following reporting period; (c) Taxpayer Identification Numbers for all covered employees; (d) the subsidy amount reimbursed for each covered employee and qualified beneficiary; and (e) a designation for each covered employee indicating whether the subsidy reimbursement covers one individual or two or more individuals.
Forthcoming IRS guidance will set the exact time and manner for the reporting requirements.
CORRECTIONS
If a claim for a discount or for continuation coverage under ARRA is denied, the claimant has the right to request that the federal government rule on his or her eligibility on an expedited basis. If an individual pays a full premium when the discount should have applied, the individual is entitled to reimbursement of (or credit against future premiums for) the excess payment.
Specifically, ARRA requires the Department of Labor to provide for expedited review of any situations where an individual requests treatment as an assistance eligible individual and the group health plan denies that treatment. Under this provision, the Department of Labor is required to make its determination within 15 business days of the date it receives the individual’s application for review.
ACTION BY EMPLOYERS
- Identify employees who have been involuntarily terminated since September 1, 2008.
- Establish a procedure to identify any employee whose employment is involuntarily terminated through December 31, 2009.
- Prepare a notice to affected former employees and their covered dependents informing them about the subsidy and work with any outside COBRA vendor to distribute to affected individuals on or before April 18, 2009; i.e., within 60 days following February 17, 2009. As noted above, the Department of Labor has been instructed to issue a model notice within 30 days following February 17, 2009.
- Supplement ongoing COBRA notices to include a description of the new COBRA subsidy provisions and work with any outside COBRA vendors to include the supplemental COBRA notice as appropriate. Again, the Department of Labor has been instructed to issue a model notice within 30 days following February 17, 2009.
- Decide whether the employer will permit affected employees and their covered dependents to elect alternative COBRA coverage. If the employer chooses to permit affected employees and covered dependents to elect alternative coverage, the notice must include a description of this alternative coverage.
- Work with the payroll/tax department to establish procedures and record keeping requirements for filing for a refund of the 65% subsidy from the government; (government input on the mechanics of this process is pending).
- Be prepared to compile necessary evidence that the affected employee was involuntary terminated; (reporting requirements are pending).
- Amend affected severance and health plans and summary plan descriptions.
Although many of the key points of the COBRA subsidy legislation are identified in this update, many questions continue to arise with respect to the administrative compliance of this legislation. We will continually update our clients as guidance is released. In the meantime, if you have any questions or we can be of any assistance, please contact us.