The American Recovery and Reinvestment Act of 2009, signed by President Obama on Tuesday, February 17 includes provisions designed to make COBRA coverage more affordable for those who have lost their jobs because of the recession. The law also temporarily extends COBRA coverage for certain individuals. Here is a look at the new requirements and what steps you should take to implement this new law.
COBRA premium subsidy
The Act includes COBRA subsidies for any employees (and their qualifying dependents) who lose their group health plan coverage because of an involuntary termination of employment between September 1, 2008 and December 31, 2009. These individuals will be allowed to pay only 35% of the COBRA premium, with the employer (your company) paying the remaining 65%, which you will then deduct from your federal payroll taxes or, if necessary, obtain in refunds from the government. Curiously, the law does not define what “involuntary termination” means, though we hope for clarification from the Department of Labor or the Internal Revenue Service. (Keep in mind that characterizing a termination as an involuntary termination may have an impact on eligibility for certain benefits, such as unemployment benefits and severance benefits.) The subsidy does not apply to the continuation of health flexible spending accounts under COBRA.
The subsidy applies to periods of COBRA coverage that begin after February 17, 2009. A period of coverage is the monthly (or shorter) time period for which premiums are charged. If the period of coverage under your plan is a calendar month, your company will have to start providing the subsidy beginning March 1.
The subsidy is available for up to nine months so long as the individual remains eligible to continue COBRA coverage, but will end earlier if the individual becomes eligible for any other group health plan coverage or Medicare. (Note that this is different from the COBRA early termination rule, which says COBRA ends if the individual becomes covered under other insurance or Medicare. Even though the individual may still be entitled to COBRA coverage, he or she will no longer be eligible for the subsidy once the other coverage is available.) The individual receiving the COBRA subsidy must promptly notify the employer in writing upon becoming eligible for such other coverage; otherwise, he or she will be taxed 110% of the subsidy amounts paid thereafter.
The subsidy phases out for high-income individuals earning more than $125,000 individually or $250,000 jointly and completely disappears for those earning $145,000 or $290,000 jointly. To the extent that these individuals are not eligible for the subsidy, their individual tax liability will be increased by the amount of subsidy that they receive. If your company has any high-income individuals subject to this restriction, you must give them the opportunity to permanently waive the subsidy and pay the full COBRA premium.
Employer's option to allow alternative health plan election
If your company offers more than one health plan option to those who are actively employed, you may give those who qualify for the subsidy the choice to elect another plan option that costs the same or less than the option in which they are currently enrolled. If you choose to make this option available, eligible individuals will have a 90-day election period to change coverage once you provide them with notice.
Special COBRA election right
Any individual who lost health plan coverage because of an involuntary termination since September 1, 2008, and who is not currently enrolled in COBRA can elect COBRA during a special election period that begins February 17, 2009 and continues through a 60-day period following the date your company provides notice of the special election right. This special election right applies to individuals who became eligible for COBRA beginning September 1, 2008 and initially waived their COBRA coverage or elected COBRA coverage but then dropped the coverage.
An individual electing COBRA coverage under this special election right will receive coverage beginning with the first period of coverage that begins under your plan after February 17, 2009 (March 1, 2009 if your plan uses a calendar month coverage period). The COBRA election is not retroactive to the date of the initial qualifying event, but the maximum length of the COBRA coverage will be measured from the initial qualifying event. If your health plan has any pre-existing condition exclusions, the time period between the qualifying event and the date of enrollment under the special election is disregarded when calculating whether there has been a 63-day break in coverage for purposes of determining whether the pre-existing condition exclusions apply.
Your company will now need to include information about the COBRA subsidy and, if applicable, the individual’s ability to change health plan options with the election notice that you send to all individuals who become COBRA qualified beneficiaries through December 31, 2009. The election notice can be revised to include information about these special rights, or the information can be included in a separate document that is sent with the election notice.
For individuals who became COBRA qualified beneficiaries since September 1, 2008, your company will have to provide an additional notice that describes the subsidy, the right to change health plan options (if applicable), and the special enrollment/election periods that apply to those whose qualifying event was termination of employment.
Those individuals who qualify for the subsidy and who are currently enrolled in COBRA do not have to wait to receive this notice, but are entitled to the subsidy beginning with the first COBRA coverage period that begins after February 17, 2009 (March 1, 2009 if your plan uses a calendar month coverage period). However, the law anticipates that not all eligible individuals will learn of the subsidy right away and may continue to submit the full COBRA payment for the first or even second coverage periods following enactment. If this happens, you are allowed to either reimburse the subsidy amount to the individual or apply it as a credit to future COBRA premiums (if the full amount of the overpayment can be applied to future COBRA premiums within 180 days).
Extension of COBRA periods
The law also includes some temporary extensions of COBRA rights. Individuals who receive Trade Adjustment Assistance (TAA) benefits may continue their participation in COBRA while receiving TAA benefits, and individuals receiving Pension Benefit Guaranty Corporation (PBGC) benefits may continue COBRA until their death (and their covered spouse and dependents for an additional 24 months after the covered employee’s death). Both of these temporary extensions expire on December 31, 2010.
The House version of the economic stimulus bill had included a provision extending COBRA for those with over 10 years of service or over age 55. These provisions were not included in the final version of the bill.
Additional guidance expected
The Department of Labor is required to make model notification forms available by March 19. The Department of Treasury is also expected to provide guidance on how to report the COBRA subsidy in connection with federal payroll taxes. Warner will provide you with more information once this guidance is available.
What to do
Here are the things you should start doing immediately:
Identify all individuals who have received COBRA election notices since September 1, 2008 and make sure that your records reflect the most current contact information that they have provided to your company. Break these down into three groups:
Those were involuntarily terminated since September 1, 2008 and currently have COBRA coverage. These individuals are potentially eligible for the subsidy starting with the next COBRA coverage period (March 1 for calendar month coverage periods).
Those who were involuntarily terminated since September 1, 2008, but do not currently have COBRA coverage. These individuals are potentially eligible for a special COBRA election right and must be notified by April 18, 2009
All others who received COBRA election notices. These individuals must be notified of the new COBRA rights by April 18, 2009.
Determine how you (or your COBRA administrator) will credit those who qualify for the subsidy with full payment when they submit only 35% of their COBRA premium.
Modify COBRA premium notices for those qualifying for the subsidy to reflect the 35% premium amount (or have your COBRA administrator do this).
Determine whether you are going to permit those who qualify for the COBRA subsidy to change their health plan option, and how you (or your COBRA administrator) will modify your administrative process to accommodate this election.
Revise (or have your COBRA administrator revise) your COBRA election notice (or prepare an attachment to use with the existing election notice) that describes the subsidy and, if applicable, the right to change the health plan option. Begin using this new notice immediately for all individuals who become eligible to elect COBRA coverage through December 31, 2009.
Determine if anyone entitled to PBGC or TAA benefits qualifies for a temporary extension of COBRA benefits and how you (or your COBRA administrator) will administer the extension.
Review health plan documents and Summary Plan Descriptions to determine whether they need to be amended.
Here are additional steps you should take soon:
Evaluate your payroll system (or talk to your payroll administrator) to determine how you will offset the subsidy against your federal payroll taxes.
Determine how you will allow high-income individuals to waive the COBRA subsidy and how you (or your payroll/COBRA administrators) will administer the waiver.
Determine how you (or your COBRA administrator) will adjust your administrative process to allow individuals to make a special election for COBRA coverage and determine their maximum period of coverage.
For those who overpay their COBRA premium during the first two months, decide whether you will refund the overpayment or apply it as a credit against future COBRA premiums.
Keep an eye out for sample notification forms and additional guidance from the Department of Labor. Warner will send out additional information when this becomes available. These notices will need to be sent to individuals who became eligible for COBRA coverage prior to February 17, 2009, and will need to be mailed by April 18, 2009.
Keep an eye out for guidance from the IRS on certification requirements and additional guidance on how to take a credit for the subsidy against your federal payroll taxes. Warner will send out additional information when this becomes available.
Consider whether the COBRA subsidy will impact COBRA participation rates and claims experience, and whether COBRA premiums may need to be adjusted.
If you have any questions about the law or need assistance with notices or plan documentation, please contact Norbert F. Kugele or any other member of Warner's Employee Benefits Practice Group.