New COBRA Requirements Require Immediate Employer Action
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”), a section of which will have a dramatic impact on employers’ ongoing obligations under COBRA. One of the significant provisions of the Act is a government-supported employer subsidy of 65% of COBRA premiums for employees who are or were involuntarily terminated between September 1, 2008 and December 31, 2009. The Act applies to all employers subject to federal COBRA or state “mini-COBRA” statutes.
A person who becomes eligible for COBRA between September 1, 2008 and December 31, 2009 due to an employee’s involuntary termination of employment, and the spouse and qualified dependents of such employee, all are Eligible Individuals. The subsidy is not available to employees who voluntarily resign.
A special election period exists for individuals involuntarily terminated on or after September 1, 2008 who previously had not elected COBRA. The Act now requires that these individuals receive a new COBRA Notice (see below) and allows them to elect COBRA coverage within 60 days after receiving the new Notice. The new COBRA coverage, however, will not be retroactive and need not be effective before March 1, 2009. Also, the COBRA coverage period is not extended, so the time (generally 18 months) will end at the same point it would have ended if the former employee had elected COBRA when originally offered.
While all involuntarily terminated employees are eligible for the subsidy, “high income individuals” who receive the subsidy must report and repay part or all of the subsidy with their individual tax returns. A “high income individual” is a taxpayer with a modified adjusted gross income of more than $125,000 ($250,000 for married or joint filers). Employers must give these individuals the option to waive the subsidy and pay the full COBRA premium.
How the Subsidy Works
An Eligible Individual will be required to pay only 35% of his/her COBRA premium. The remaining 65% of the COBRA premium is paid by the employer. The employer then may claim a credit on its next deposit of federal income and employment taxes. If the employer’s tax obligations are less than the subsidy, then the employer will receive a direct payment from the federal government for the difference. The employer must actually collect the 35% payment from the employee, before requesting reimbursement of its share of COBRA premiums. The Secretary of the Treasury will issue guidance on how a claim for the tax credit is to be filed.
The subsidy does not apply to COBRA premiums for health care flexible spending accounts, but may apply to other health benefits subject to COBRA like dental and vision.
The subsidy is available for up to 9 months beginning March 1, 2009. Eligibility for the subsidy terminates at the earlier of (a) 9 months; (b) eligibility for other employer health coverage; (c) Medicare eligibility; (d) the end of the maximum COBRA coverage period required by law; or (e) for those electing COBRA during the special election period, the end of the COBRA period starting from when the employee initially could have elected COBRA. A former employee who does not notify the employer of (b) or (c) above is subject to a penalty equal to 110% of the premium reduction.
Special Election Period
As noted above, individuals who did not elect COBRA at the time of termination and who would have qualified as an Eligible Individual, must be given a new Notice of their rights, including a new COBRA election notice and 60 day election period.
Lower-Cost Health Plan Options
Generally under COBRA, former employees and beneficiaries only can elect to continue the coverage that they had immediately before the qualifying event. Under the Act, an employer may permit Eligible Individuals to elect a lower-cost health plan option available under the employer’s plan, provided that the premium does not exceed the premium for the coverage the Eligible Individual had at the time of termination. The lower-cost health plan must be one that is offered to active employees, and the different coverage must not be: (a) coverage that provides only dental, vision, counseling, or referral services, (b) a flexible spending arrangement, or (c) coverage for services or treatments furnished in an on-site medical facility maintained by the employer, which consists primarily of first-aid services, prevention and wellness care, or similar care.
The Act requires that the current COBRA Notice be modified to contain additional information about the availability of the subsidy, the availability of any lower-cost health plan options, the obligation of a qualified beneficiary to notify the plan of eligibility under another plan or for Medicare, and the penalty for failure to notify the employer of such eligibility. In addition, employers must give Notice to former employees and qualified beneficiaries entitled to the Special Election Period described above. The Secretary of Labor is required to publish model notices by no later than March 19, 2009.
Because it may be difficult to have all Notices out by March 1st (especially given the Department of Labor’s deadline), employers have until April 17, 2009 to issue revised Notices. If the Notices are not issued by March 1, employers may continue to require Eligible Individuals to pay the full COBRA premium for March and April 2009, however, the employer then must either reimburse the employee for the 65% subsidy within 60 days after receiving the full premium amount from the employee, or credit the overpayment toward future premium payments, which must be used within 180 days.
Impact of the Law on Employers – Practice Pointers
COBRA Notice: The subsidy becomes effective March 1, 2009, so employers must first update their COBRA election notices and other communications to reflect the subsidy. Notice of the subsidy must be provided to all Eligible Individuals, including those involuntarily terminated after September 1, 2008, and offer them with another opportunity to elect COBRA. Notices must be provided no later than April 17, 2009.
Payroll: Employers or plan administrators should inform their payroll personnel and vendors as to the premium reimbursements that will be treated as payroll tax credits and make the appropriate application. Employers should establish procedures regarding how to pay the government's 65% of the subsidy, how to obtain reimbursements from the government, and how to credit overpayments by terminated employees who fully paid COBRA but are entitled to the subsidy for March and April 2009.
Waivers: Employers should establish a procedure to allow high income individuals to permanently waive the subsidy.
Severance Plans: Employers should review their severance arrangements and health plan documents to determine how these plans and programs will be affected by the Act.
Miscellaneous Considerations: It is not clear whether the subsidy will be available if the employer provides free post-termination coverage or if an employee pays less than 35% of the COBRA premium (as may be the case if a former employee pays active employee rates) because a literal reading of the Act requires the Eligible Individual to pay 35% of the premium. Therefore, employers should consider whether it is more beneficial to pay for continued coverage as part of a severance arrangement or only to offer COBRA arrangements whereby former employees pay at least 35% of the premium.
For additional information or assistance in ensuring compliance with the COBRA provisions in the Act, please contact Kathryn V. Hatfield at firstname.lastname@example.org or Douglas S. Zucker at email@example.com.