Economic Stimulus Act Imposes New COBRA Obligations on Employers
Employers need to be aware of the obligations imposed on them by the recently enacted “Economic Stimulus” law. The new law provides a 65% subsidy of the cost of health insurance premiums for up to nine months to help most employees who involuntarily lost or will lose their jobs between September 1, 2008 and December 31, 2009. The subsidy applies to COBRA premiums and also to premiums under state insurance laws for former employees of employers not subject to COBRA (because they have less than 20 employees). The new law mandates that employers provide notice to eligible former employees (and their dependents) so that they will have an opportunity to elect the subsidized coverage. This election opportunity must be provided to individuals who have continued their group health insurance coverage and to individuals who previously declined such coverage (who will receive a second chance to elect coverage).
Effective as of March 1, 2009, eligible individuals may elect to pay 35% of the cost of group health insurance coverage. Employers will pay the remaining 65% and recover the subsidies by taking a credit against payroll taxes.
The law provides that the Department of Labor will issue guidance and model notices by March 18, 2009. Employers have until April 18, 2009 to send required notices. An employer which fails to send notices as required will be exposed to penalties of up to $110 per day for each violation and it also could be responsible for the medical bills of individuals who were denied the opportunity to purchase subsidized coverage.
Accordingly, employers should be taking steps now to identify former employees who were involuntarily terminated from employment on or after September 1, 2008 and the dependents of such former employees. Employers will need to make arrangements so that the required notices are sent on time and the subsidies can be recovered through credits against the employer’s payroll taxes.
Below is a summary which provides more detail about the new law. It is expected that the DOL will soon be issuing guidance to clarify areas of the law which are unclear.
NEW COBRA RULES
The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Economic Stimulus Act) which was signed into law on February 17, 2009, provides a federal subsidy to help employees whose employment has been involuntarily terminated continue their health insurance coverage. The Act allows eligible individuals to continue health coverage for up to nine months following their involuntary termination of employment under either COBRA or a comparable state health insurance coverage continuation law by paying 35% of the otherwise applicable premium. The employer (or the plan, in the case of a multiemployer health plan) pays the remaining 65%, and is subsequently reimbursed by the federal government via a payroll tax credit or refund.
This memorandum answers some questions about the subsidy. It also includes an action plan to assist employers in complying with the new law.
FREQUENTLY ASKED QUESTIONS
1. Who is entitled to the subsidy? Individuals who are “Assistance Eligible Individuals” (“AEI”) are entitled to the COBRA subsidy. An AEI is any employee, his/her spouse, and his/her dependents eligible for continuation coverage by virtue of the employee’s involuntary termination of employment occurring between September 1, 2008 and December 31, 2009.
2. What is an involuntary termination of employment? The Act does not define an “involuntary termination of employment” other than to say that that the termination must not be for “gross misconduct”. An involuntary termination of employment includes a loss of employment due to a layoff, a plant closure, or a termination with or without cause (other than gross misconduct), but does not include a resignation. The Act provides that an individual who believes he/she was wrongfully denied eligibility for the subsidy can appeal to the Department of Labor.
3. Must a former employee who terminated employment between September 1, 2008 and February 17, 2009 (“Enactment Date”) currently be on COBRA in order to receive the subsidy? No. The subsidy is not limited to individuals who have elected COBRA as of the Enactment Date.
a. An AEI who is currently on COBRA can receive the subsidy and pay the reduced premium for up to nine months beginning March, 2009 unless his/her COBRA coverage ends earlier, as discussed in Question 5, below.
b. An AEI who did not elect COBRA or who elected COBRA but lost coverage prior to the Enactment Date must be given a special “re-election” period to elect COBRA. He/She must be notified by April 18, 2009 of his/her re-election rights and his/her entitlement to the reduced premium. He/She has 60 days after receipt of the notice to elect COBRA. If he/she makes the election, COBRA coverage begins as of the first day of the first period of coverage beginning after the Enactment Date (generally, March 1, 2009). It is not retroactive to the date of his/her original qualifying event and he/she is not required to pay any retroactive premiums. However, the maximum COBRA period will be measured from the date of his/her involuntary termination of employment.
4. How is the 35% determined? An AEI must pay 35% of the premium that he/she would otherwise be required to pay to receive COBRA coverage. Therefore, if an employer voluntarily pays 10% of the cost of the coverage and passes on 90% of the cost, the AEI’s actual premium is 35% of the 90%. The subsidy is equal to 65% of the 90%.
5. How long does the subsidy last? The subsidy lasts for a maximum of nine months. The subsidy ends sooner if the individual becomes eligible for coverage under another group health plan or Medicare. The individual must notify the health plan of his/her eligibility and will be subject to IRS penalties if he/she fails to do so.
6. What if an AEI has already paid the full COBRA premium for March, 2009 and subsequent months? An employer can either refund the overpayment or apply it as a credit to future premium payments, provided however, that it must be repaid within 180 days of the overpayment.
7. Will every AEI, regardless of income, benefit from the subsidy? No, individuals with annual income exceeding $145,000, and married couples whose annual income exceeds $290,000 will not benefit from the subsidy. The benefit of the subsidy is phased out for incomes starting at $125,000 for individuals, and $250,000 for married couples. Individuals whose income exceeds the threshold and who nevertheless receive the subsidy will repay the subsidy on their tax return. An employer may not refuse to provide the subsidy based on an employee’s compensation. An individual, may choose to waive the subsidy.
8. How is the employer reimbursed for its share of the premium? The employer is reimbursed for its share of the premium by claiming a credit against its federal payroll taxes. The employer will be required to provide information in connection with the subsidy, including an attestation of involuntary termination of employment for each employee for whom the subsidy is claimed. If the employer’s claim for reimbursement exceeds the amount of its federal payroll taxes, the Act directs the Treasury Department to reimburse the employer directly for the excess amount.
9. Can an individual select a different type of health care coverage? At the employer’s option, an AEI may be allowed to apply the subsidy to any health plan option offered to active employees, provided that the coverage has the same or lower premium as the AEI’s continuation coverage.
10. What notice must employers send? Employers must send a notice to each AEI whose employment terminated prior to the Enactment Date and who either did not elect COBRA or dropped it, giving him/her another chance to elect COBRA coverage, at the subsidized rate. Also, AEIs who are covered under COBRA or who are still in their COBRA election period must receive a notice regarding the subsidy. At least one national COBRA vendor is taking the position that the second chance notice must be sent to all former employees whose employment terminated between September 1, 2008 and the Enactment Date, whether or not the termination of employment was involuntary. As discussed above, this notice must be provided by April 18, 2009. Finally, all individuals who have a COBRA qualifying event between the Enactment Date and December 31, 2009 must be notified of the subsidy.
The notices must include the following information:
- A description of the subsidy
- A description of the extended election period for individuals who do not have COBRA coverage in place as of Enactment Date
- A description of an individual’s obligation to inform the plan if he/she becomes eligible for Medicare or another group health plan
- The forms necessary for establishing eligibility for the subsidy
- Contact information for the plan administrator
- A description of other health care coverages, if the employer allows an individual to elect another type of health coverage
The Act requires the U.S. Department of Labor to issue guidance and a model notice by March 18, 2009.
WHAT SHOULD EMPLOYERS DO?
1. Employers should promptly:
a. Identify former employees whose employment terminated on or after September 1, 2008 and dependents of these former employees. Some of such individuals may presently be covered under the group health plan via COBRA and other individuals may not be presently covered. Determine which of such employees were involuntarily terminated.
b. Coordinate with payroll and benefits personnel and COBRA and payroll vendors, regarding the implementation for providing the subsidy to AEIs and the procedure for obtaining reimbursement of the subsidy from the federal government.
c. Determine whether to allow AEIs the opportunity to select a less expensive health insurance plan (most employers are not likely to offer this additional option).
2. Most employers will wait for the DOL guidance and model notice, which should be published by March 18, 2009, before they decide on the notice and forms they will use. By April 18, 2009 employers will be required to do the following:
a. Adopt notices regarding the subsidy, as discussed in Question 10 above.
b. Adopt an attestation of involuntary termination form and a form allowing AEIs to waive the subsidy.
c. Send the required notices and forms regarding the subsidy.
d. If any AEI has paid his/her full premiums in advance, determine how to repay the overpayment.
e. Prepare to notify all individuals who become eligible for COBRA during the balance of 2009 regarding the terms and conditions of the subsidy.
 For purpose of this memorandum, the term “COBRA” generally includes comparable state health insurance coverage continuation laws, and the term “employer” generally includes the plan with respect to a multiemployer health plan.