The American Recovery and Reinvestment Act (“ARRA”, “the Act”), generally referred to as “the stimulus package,” was signed into law on February 17. Provisions of this Act include important changes to COBRA continuation of health plan coverage. This is a summary of those changes.
OVERVIEW
The most significant change for COBRA is a 65% subsidy of COBRA premiums for nine months for eligible individuals. This subsidy is available effective March 1, 2009.
The Act also provides a Special Election Period for qualified individuals whose employment was involuntarily terminated on or after September 1, 2008 and were eligible for COBRA but did not elect coverage (and are not covered by another group health plan or Medicare). Employers must provide notice of this special election opportunity by April 19, 2009. The Department of Labor (DOL) plans to issue model notices on or before March 18, 2009.
The following provides further detail on these new requirements.
PREMIUM SUBSIDY
The Federal Government will subsidize 65% of the COBRA premiums for qualified beneficiaries who are assistance eligible individuals for a period of no more than nine months. This means a COBRA qualified beneficiary will pay 35% of the former COBRA premium.
A COBRA qualified beneficiary is an assistance eligible individual if:
- The qualified beneficiary elects COBRA coverage,
- The qualifying event with respect to the covered employee is the loss of group health plan coverage due to involuntary termination of employment, and
- The qualifying event occurs during the period beginning on or after September 1, 2008 and ending December 31, 2009.
The subsidy is available to all group health plans eligible for COBRA except a health flexible spending account (FSA).
STATE LAW “COBRA-LIKE” REQUIREMENTS
The Act extends the premium subsidy to state programs that provide comparable continuation of coverage. This likely includes state programs for small employers that are not currently covered by federal COBRA. In many cases these state requirements are purely insurance requirements (i.e. former employee pays the insurance company directly for continuation of coverage). If there is no employer involvement under these continuation programs, the insurer is likely responsible for compliance and eligible for the government reimbursement.
REIMBURSEMENT
EMPLOYER PAYROLL CREDIT
Generally, the employer (in the case of a group health plan subject to federal COBRA requirements) will receive a reimbursement for the 65% of the cost of coverage.
Reimbursement to the plan sponsor will be through reduction in payroll taxes in an amount equal to the portion of such reimbursement related to the premium. Payroll taxes include wage withholdings, employee FICA taxes and employer FICA taxes. If the amount exceeds the payroll tax liability, the Internal Revenue Service (IRS) will provide a credit or refund.
DURATION OF THE SUBSIDY
The premium subsidy is available to an assistance eligible individual for a limited period of time.
The subsidy ends the earlier of:
- The first date that the assistance eligible individual becomes eligible under any other group health plan or is eligible for benefits under Medicare (Title XVIII of the Social Security Act),
- 9 months after the first month that the individual receives the subsidy,
- The end of the maximum COBRA period, or
- The end of the maximum period under any state “COBRA-like” requirement.
The assistance eligible individual has the obligation to notify the group health plan in writing if he or she becomes eligible for other group health plan coverage or Medicare. Failure to do so may result in a penalty imposed on the individual of 110% of the premium reduction unless the failure was due to reasonable cause.
SPECIAL ELECTION PERIOD
There is a special COBRA election period available to individuals who would otherwise be an assistance eligible individual but did not elect COBRA continuation of coverage when it was initially offered (or elected and later dropped coverage).
Individuals who were involuntarily terminated on or after September 1, 2008 must be notified of their ability to elect continuation of COBRA coverage and receive the subsidy. They will have the opportunity to elect COBRA on or after the date of enactment and ending 60 days after the date a notification is sent to the individual.
COBRA coverage will be offered from the first period of coverage on or after the enactment of the Act. The period of coverage is a monthly or shorter period in which premiums are charged. For most plans this will be March 1, 2009.
Under this provision the duration of coverage is measured from the original qualified event date.
Example
Bob was involuntarily terminated and experienced a COBRA qualifying event November 1, 2008. COBRA premiums were too expensive and Bob did not elect to continue coverage. Under the Act, Bob’s former plan will need to notify Bob of his right to elect COBRA and the availability of the premium subsidy. Bob has 60 days from the date of the notification to elect COBRA. If he elects COBRA coverage he pays a premium of 35% of the COBRA rate.
Bob elects coverage and pays the premium starting March 1, 2009. Bob’s COBRA coverage is prospective (not retroactive), but the 18-months of continuation of coverage is measured from November 1, 2008.
If the assistance eligible individual was without health coverage beginning on the date of the COBRA qualified event and ending with the first period of coverage under the Act (March 1, 2009), this period will be disregarded for purposes of determining whether the individual had a 63-days break in coverage under the creditable coverage rules.
OPTIONAL – ALTERNATIVE COVERAGE
Employers that offer a variety of group health plan options (e.g. HMO, PPO, Qualified High Deductible Health Plans) may allow the assistance-eligible individual to enroll in COBRA coverage that is different from the coverage held at the time of the qualified event.
In order for an individual to take advantage of this option:
- The employer must make the option available,
- The premium associated with the alternative coverage must be less than the premium associated with the current coverage,
- The alternative coverage was offered to active employees as part of open enrollment, and
- The alternative coverage is not a standalone vision or dental plan, a health FSA or HRA plan or an onsite medical facility.
The assistance eligible individual has 90 days after notification of this option to elect to enroll in alternative coverage.
NOTIFICATION REQUIREMENTS
QUALIFIED BENEFICIARY NOTICES
- Election Notice
The Election Notice must include the following in order to be considered sufficient notice of the premium subsidy:
- Availability of a premium reduction with respect to the COBRA coverage
- The option (if available) to enroll in different coverage under the employer’s plan including a description of the other available coverage options,
- Forms necessary to establish eligibility for the premium reduction,
- Contact information (including name, address and phone number) to the plan administrator and any other person maintaining information in connection with the premium reduction (e.g. COBRA administer),
- A description of the extended election period,
- A description of the obligations of the qualified beneficiary to notify the plan of eligibility for other group health plan coverage or eligibility for benefits under Medicare and the penalty for failing to provider such notice, and
- A prominent description of a qualified beneficiary’s right to reduced premium and any condition on entitlement to the reduction in premium.
This notice may take the form of an amendment to the existing notice forms or by inclusion of a separate document with the election notice.
- Notice in Connection with Extended Election Periods
The plan administrator must provide notice of the special enrollment period to all individuals who involuntarily terminated on or after September 1, 2008 and are not receiving COBRA continuation of coverage. This notice should contain the information described above and must be provided by April 18, 2009. A model notice should be issued by the Department of Labor (DOL) on or before March 19, 2009.
Failure to provide this notice is treated as a failure to comply with notice requirements under COBRA.
IRS NOTIFICATION
The employer will need to submit reports to the IRS in a time and manner to be determined that include:
- An attestation of the involuntary termination of employment of each employee claiming the subsidy;
- The amount of payroll taxes offset by the reimbursement;
- The tax identification numbers of all covered employees;
- The amount of the subsidy reimbursed with respect to each covered employee, and
- The type of coverage (one individual or two or more individuals) associated with the subsidy.
OVERPAYMENT
As this transition is happening very quickly, it is likely that many participants will pay the full COBRA premium, even though they may be eligible for the premium subsidy. In the event of an overpayment, the employer has the option of reimbursing the individual the difference or applying the overpayment as a credit toward future premium payments. However, when using the credit option the employer must have a reasonable belief that the credit will be used within 180 days from the date the individual made the full payment. If not, the employer must reimburse the individual within 60 days.
SPECIAL RULES FOR HIGH INCOME INDIVIDUALS
HIGH INCOME INDIVIDUALS – RECAPTURE TAX
Generally, the full subsidy will not be available to certain high income individuals. An individual with adjusted gross income for the taxable year exceeding $145,000 ($290,000 for a joint return) will need to repay the subsidy for all months received during the taxable year. This is handled by an increase in the taxpayer’s liability for the year equal to such amount, referred to as the recapture tax.
If the taxpayer’s adjusted gross income is between $125,000 and $140,000 (or $250,000 and $290,000 for joint filers) the premium subsidy is available on a proportionate basis for the taxable year. The taxpayer will be subject to a reduced recapture tax bases on their adjusted gross income.
It is important to note that an individual who does not satisfy the income threshold to receive a full or partial subsidy in 2009 may nevertheless be eligible in 2010 assuming the adjusted gross income falls below the required levels.
Waiver
Individuals may waive the right to the premium subsidy for all periods of coverage. This waiver is permanent and the individual must provide written notice to the employer. The waiver avoids the recapture tax should the income threshold be exceeded. However, the waiver applies to all periods of coverage regardless of tax year. Therefore if an individual waives their premium subsidy in 2009 he or she may not claim the subsidy in 2010 even if their income falls below the threshold.
APPEAL OF A SUBSIDY DENIAL
An individual who requests the subsidy and is denied by the group health plan may appeal the determination to the DOL. The DOL (in consultation with the IRS) shall provide an expedited review of any such denial. The DOL must make its determination within 15 business days after receipts of an individual’s application for review.
ACTION ITEMS
- If applicable, determine whether you will make alternative coverage options available.
- Review all the individuals that terminated employment on or after September 1, 2008 and provide proper notification of the new subsidy under COBRA. This includes:
- Developing proper notices –DOL model notices should be available March 19, 2009.
- Update election notice and provide to qualified beneficiaries with qualifying events going forward.
- Send notice to current COBRA qualified beneficiaries that are assistance eligible employees eligible for a subsidy, and
- By April 18, 2009, send the special election notice to individuals who are otherwise assistance eligible individuals but are not receiving COBRA continuation of coverage.
- Track qualified beneficiaries receiving the subsidy and comply with the proper reporting requirements to the IRS.
- Collect waivers from highly compensated employees forgoing the subsidy.
- If applicable, discuss these requirements with your COBRA administrator to ensure they have the proper notices and reporting process in place to assist you in your compliance obligations.
For more information:
Summary of the Act (COBRA pages 212-227)