COBRA Benefit Subsidies Strike Quickly
by Evan D. Chinn and Mark R. Busto
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), commonly known as the Economic Stimulus Package. As a result, effective March 1, 2009, certain individuals involuntarily terminated from employment between September 1, 2008 and December 31, 2009 will be eligible for subsidized COBRA premiums. The subsidy will be paid by the federal government and amounts to 65% of COBRA premiums for up to 9 months. Unfortunately, the burden of administering the subsidy falls on benefits administrators and employers that sponsor group health plans. To avoid potential tax and administrative penalties, employers must respond immediately to these new requirements without extensive guidance from the IRS or DOL.
I. COBRA—A Brief Overview
In general, employers with 20 or more employees are required to notify and offer COBRA coverage to their terminated employees after a “qualifying event.” A qualifying event typically involves a voluntary or involuntary termination of employment (for other than gross misconduct), or a reduction in hours. COBRA coverage extends the right to temporary continuation of health coverage at group rates to certain former employees, retirees, spouses, former spouses and dependent children. COBRA applies to plans maintained by private-sector employers and those sponsored by most state and local governments.
II. The Changes ARRA Makes to COBRA
A. Subsidy Available to Individuals Previously Enrolled in Group Health Benefit Plans. For purposes of subsidized COBRA assistance, “Assistance Eligible Individuals” (AEIs) are persons who become eligible for COBRA continuation coverage between September 1, 2008 and December 31, 2009 due to their “involuntary termination” of employment. Employees who have another COBRA qualifying event, such as reduction in hours, divorce or attainment of a certain age or who voluntarily resign from their employment are not eligible for the subsidy.
The government subsidy applies to each health benefit (medical, dental, vision, employee referral services and Health Reimbursement Arrangement plans) for which an employer is required to offer COBRA coverage. The subsidy also applies to plans subject to state continuation of coverage laws (i.e., small employer group plans). All AEIs who were terminated on or after September 1, 2008, and are paying full COBRA premiums will be entitled to the subsidy beginning March 1, 2009.
Additionally, individuals who were previously eligible for COBRA on or after September 1, 2008, but did not elect COBRA coverage, or who elected but subsequently terminated COBRA coverage, are given a “second chance” to enroll for subsidized COBRA benefits starting on March 1st. (The ARRA, however, does not allow for retroactive subsidy payment or coverage to “reach back” to months in which the AEI was not enrolled for COBRA coverage.)
The subsidy phases out for AEIs whose federal modified adjusted gross income (MAGI) exceeds $125,000 ($250,000 for joint filers), so that AEIs whose MAGI exceeds $145,000 ($290,000 for joint filers) are not eligible for any subsidy amount.
B. Premium Payments and Employer Reimbursement. As noted, the ARRA provides a 65% subsidy of COBRA premiums for up to 9 months. In essence, the IRS requires the employer to “advance” the subsidy by collecting only 35% of the applicable COBRA premium from the AEI and paying the rest. The employer is then reimbursed through the employer’s quarterly federal payroll tax transmittals for the 65% of the COBRA premium it paid (or with a direct payment, if payroll tax transmittals are insufficient).
Employers seeking subsidy reimbursements must submit reports to the IRS with information that includes: (1) an attestation that involuntary termination of covered employees triggered the basis for AEIs’ eligibility; (2) a report of the amount of payroll taxes offset by subsidy reimbursements for the current reporting period and estimated offsets for the subsequent reporting period; (3) Taxpayer Identification Numbers for all covered employees, including the subsidy amount reimbursed for each covered employee and qualified beneficiary; and (4) a designation for each covered employee indicating whether the subsidy reimbursement covers one individual or two or more individuals.
C. Termination of COBRA Subsidy. The subsidy will end on the earliest of: (1) when COBRA would normally end; (2) after nine months of subsidy; or (3) when the AEI becomes eligible for coverage under another group health plan, a flexible spending arrangement, an on-site medical treatment program or Medicare. An AEI is required to notify the former employer of eligibility for other coverage, and is subject to an income tax penalty for failure to do so.
D. Notice Requirements. AEIs who are not currently receiving COBRA coverage must be given a second chance to enroll in COBRA. This special election period began on February 17, 2009, and continues for 60 days following the date the individual receives notice of the special election period. Accordingly, employers prior to April 18, 2009, must provide to AEIs:
- The forms necessary to establish eligibility for the premium reduction;
- The name, address, and telephone number necessary to contact the plan administrator and any other person with relevant information in connection with premium reduction;
- A description of the eligibility requirements and election period for the subsidy;
- A description of the same premium or lower premium coverage available; and
- A “prominent” display of the reduced premiums after the application of the subsidy.
This notice may either be incorporated into COBRA materials explaining election rights or be sent with COBRA materials as a separate notice. The ARRA does not change the previous statutory or regulatory disclosure and fiduciary responsibility rules. Congress has directed the DOL to issue a model notice for employer use by March 19, 2009. Denials of premium assistance will be resolved through an expedited review process administered by the government.
E. What Employers Must Do Now. Employers must immediately work with their benefits administrator to clearly communicate the responsibilities each will take for administering the changes to COBRA. Revised COBRA election notices must be sent to all employees (and qualified beneficiaries) who have been terminated since September 1, 2008, even if they are not eligible for premium assistance. Employers should subscribe here for updates and model notices.
This Employment Law Note is written to inform our clients and friends of developments in labor and employment relations law. It is not intended nor should it be used as a substitute for specific legal advice or opinions since legal counsel may be given only in response to inquiries regarding particular factual situations. For more information on this subject, please call Sebris Busto James at (425) 454-4233.