The American Recovery and Reinvestment Act of 2009 signed into law by President Obama on February 17, 2009, and the Department of Defense Appropriations Act signed into law on December 19, 2009, impose significant new COBRA obligations upon employers. The law contains provisions that allow employees who were or will be involuntarily terminated between September 1, 2008 and February 28, 2010 to continue their, and their qualified beneficiaries, group health insurance coverage at a subsidized rate for up to 15 months.
COBRA is a federal law that applies to any employer that has employed 20 or more employees on at least 50 percent of working days during the current or preceding calendar year. COBRA permits former employees and their qualified beneficiaries to elect to continue their health insurance coverage for up to 18 months after a qualifying event (such as termination of employment), as long as they continue to pay their premiums each month. However, many terminated employees turn down this opportunity due to difficulties in making premium payments at a time when they have little or no income.
The stimulus plan provides a subsidy to employees who have lost their jobs that will make it easier for them to take advantage of COBRA rather than losing their health insurance coverage. The stimulus plan also defines “COBRA continuation coverage,” to include continuation coverage provided under a State program that provides comparable continuation coverage.
Under the stimulus plan, an “assistance eligible individual” electing COBRA will pay 35% of their premiums for up to 15 months of continuation coverage, while the employer will pay the other 65%. An “assistance eligible individual” is defined as any qualified beneficiary who elects COBRA during the period September 1, 2008 through February 28, 2010, providing the qualified employee’s employment ended as the result of involuntary termination during that period. This would include, therefore, employees and their dependents. Employers then recoup the remaining 65% by reducing their quarterly federal payroll tax (FICA and Medicare) payments. Example: Under COBRA, an employer may charge an assistance eligible individual 102% of the premium (the extra 2% is to cover the costs of administration). If the premium is $500 per month, the employer could normally charge the assistance eligible individual $510 per month (102%). Under the stimulus plan, however, the employer would pay $331.50 (65% of $510), and the assistance eligible individual would pay just $178.50 (35%).
Who is not eligible?
A former employee does not qualify for the COBRA discount if he or she:
• was terminated prior to September 1, 2008, or
• voluntarily resigned from employment, or
• was not eligible for COBRA at the time of his or her termination (e.g., employer did not offer group health benefits, or employee had declined available group health insurance and was therefore not insured through the employer’s plan).
If any of the above applies, the employer is not obligated to provide the former employee or their qualified beneficiaries with any notice or forms. If none of the above applies, the employee and their qualified beneficiaries are assistance eligible individuals and qualify for the COBRA discount (even if he or she previously declined COBRA) and the notice requirements below apply.
What Employers Must Do
• Make a list of assistance eligible individuals whose coverage ceased due to the discharge or lay-off of the covered employee between September 1, 2008 and February 17, 2009. Add to this list through February 28, 2010 with any employee who is discharged or laid off, and include their qualified beneficiaries. These individuals will be eligible for the subsidized COBRA coverage period.
• Provide written notice to all assistance eligible individuals who are currently enrolled in COBRA informing them of their right to continue COBRA at the subsidized rate of 35% of the premium.
• Provide assistance eligible individuals whose coverage ceased between September 1, 2008 and February 17, 2009 with the revised COBRA election forms during the special election period.
• Assistance eligible individuals who become eligible for COBRA due to discharge or lay-off of a covered employee from February 18, 2009 through February 2010 will receive the revised COBRA election forms with the subsidized rates.
Notice Requirements
Employees who are discharged or who are subject to layoff from February 18, 2009 through
February 28, 2010 must be provided the COBRA notice and election form within 44 days of termination of employment. Notice must also be provided to qualified beneficiaries.
Special Election Period: While the law specifically provides that there is no "reach-back," an assistance eligible individual who waived coverage between September 1, 2008, and February 17, 2009, must be provided notice that they may elect as of March 1, 2009, at the subsidized rate. For example, a qualified employee who was laid off in September and declined COBRA would have another chance to elect COBRA now. Coverage would begin as of March 1, 2009, and the total COBRA period under the special election provision would not be extended, rather, it will end as of the date 18 months from their qualifying event (or at the conclusion of an applicable state continuation coverage period). Any medical expenses incurred by the assistance eligible individual between the time of the termination of coverage and March 1 would not be covered.
An employer’s COBRA notice must, at minimum:
• explain prominently that the assistance eligible individual is being offered health insurance at the reduced rate of 35% of the regular premium;
• list the amount of the monthly premium he or she would be required to pay each month;
• state that if the assistance eligible individual wishes to elect COBRA, he or she must do so within 60 days of the date of the notice;
• state the name, address and telephone number at which the plan administrator can be contacted;
• describe the assistance eligible individual’s obligation to inform the health insurance plan in writing if he or she becomes eligible for coverage under another group health plan or Medicare, and the penalty for failure to do so (liability for 110% of the subsidy).
The U.S. Department of Labor is expected to issue model notice and election forms no later than March 18. Although employers may create their own forms, to avoid liability and ensure compliance with the law, we strongly recommend that employers use the model forms. The forms should include the assistance eligible individual’s monthly premium amount, contact information for the employer’s health insurance plan, etc. A link to the DOL model forms will be posted on Yeo & Yeo’s website as soon as they become available.
Administrative Considerations
New Coverage: The earliest date on which an individual may begin subsidized COBRA coverage is March 1, 2009. An assistance eligible individual who elects COBRA and pays the first month’s subsidized premium begins coverage as of the first day of his or her coverage period.
Currently on COBRA: An assistance eligible individual, currently on COBRA, who has already paid the March premium at the full rate, must either be reimbursed by the employer for 65% of the March premium paid, or this amount must be credited against future premiums. Remember to change the billing of such employees so that they are charged only 35% of the premium in future months.
Alternate coverage: Instead of offering continuation coverage in the same health plan in which an employee participated at the time of termination, an employer may offer coverage in a different health insurance plan under the following conditions:
• The health insurance plan offered to the former employee is also currently offered to current active employees.
• The premium is no more than the premium amount the employee had been paying at the time of his or her discharge or layoff.
• The health plan is not a flexible spending arrangement.
• The plan is not one that provides only dental, vision, counseling or referral services (or some combination thereof).
• The plan is not one that primarily provides first aid and/or prevention and wellness care in an on-site medical facility maintained by the employer.
An assistance eligible individual must be given at least 90 days to elect any alternate health plan offered.
High income employees: Employees with adjusted gross incomes of $125,000 ($250,000 for employees filing federal taxes jointly) are taxed on the COBRA subsidy on a sliding scale basis.
Employer Reimbursement
Employers may receive payroll tax reimbursement for their portion of COBRA premium payments by documenting these payments on the employer’s quarterly federal tax return, IRS Form 941.
Questions?
For more detailed information about your COBRA notice or payment obligations under the stimulus plan, please refer to the IRS website.
