President Obama signed the American Recovery and Reinvestment Act of 2009 (“ARRA”) on February 17, 2009. The Act contains several important provisions related to COBRA continuation coverage, including but not limited to the following:
- a federal government subsidy of COBRA continuation coverage premiums for an “Assistance Eligible Individual” (“AEI”) (for a maximum of nine months), and
- expansion of the COBRA continuation coverage period for individuals receiving Trade Adjustment Assistance (“TAA”) benefits or pension benefits from the Pension Benefit Guaranty Corporation (“PBGC”).
This summary will focus on the provision of the government subsidy for COBRA continuation coverage. Please contact us if you would like any information regarding the expansion of the COBRA continuation coverage for individuals receiving TAA benefits for PBGC benefits.
COBRA Premium Subsidy
An AEI is only required to pay 35 percent of the premium actually charged for COBRA continuation coverage (or similar continuation coverage under comparable state or federal law, collectively referred to as “COBRA continuation coverage”). The remaining 65 percent of the premium is “paid” by the federal government to the entity to which the premiums are payable (e.g. employer, plan or insurer) by reducing the entity’s federal payroll tax liability by the amount of unpaid premiums.
The COBRA premium subsidy does not apply to COBRA continuation coverage premiums for health flexible spending arrangements under a cafeteria plan.
Duration of COBRA Premium Subsidy
The COBRA premium subsidy applies to periods of COBRA continuation coverage beginning after the enactment of ARRA. A period of coverage for this purpose is the monthly or shorter period of coverage with respect to which COBRA premiums are charged to the COBRA qualified beneficiary. Since most group health plans use calendar months as the period of coverage under COBRA, the COBRA premium subsidy will begin for most plans on March 1, 2009.
The COBRA premium subsidy shall cease to apply to an AEI for months of coverage beginning on or after the earlier of: (1) the first date that the AEI becomes eligible for coverage under any other group health plan (other than plans providing only dental, vision, counseling or referral services, or flexible spending plan) or Medicare; or (2) the date which is nine months after the first day of the first month to which the COBRA premium subsidy applies; or (3) the end of the maximum COBRA continuation coverage period required by law; or (4) for an AEI who elects COBRA continuation coverage during the special enrollment period (as described below), the end of the maximum COBRA continuation coverage that would have applied if the AEI had elected COBRA continuation coverage when first eligible.
If an AEI becomes eligible for coverage under another group health plan or Medicare, the AEI is required to provide written notice to the plan (in a time and manner prescribed by the Secretary of Labor) providing the COBRA continuation coverage notification in writing of the other coverage. If an AEI fails to notify the plan of his/her eligibility for coverage under another group health plan or Medicare, such AEI may be subject to a penalty equal to 110 percent of the COBRA premium subsidy paid.
Mechanism for Reimbursing Remainder of COBRA Continuation Coverage Premium to Entity to Which COBRA Continuation Coverage Premiums are Payable
ARRA provides that the entity to which premiums are payable for COBRA continuation coverage shall be reimbursed for the amount of the COBRA continuation coverage premium that is not paid by the AEI. Each entity entitled to reimbursement from the federal government shall be permitted to take a credit against the entity’s payroll taxes in an amount equal to the portion of such reimbursement relating to the premium. To the extent that the credit exceeds the entity’s payroll tax liability, the Secretary of Treasury will credit or refund such excess in the same manner as an overpayment of payroll taxes. To the extent that the entity overstates the amount such entity is entitled to receive for reimbursement, such overstatement shall be treated as an underpayment of payroll taxes by such entity. Each entity entitled to reimbursement is not eligible for the reimbursement until such entity receives the reduced COBRA premium payment from the AEI.
Assistance Eligible Individuals
An Assistance Eligible Individual (AEI) is any COBRA qualified beneficiary (e.g. terminated employee, his/her spouse and dependent children) who meets the following three criteria: (1) at any time on or after September 1, 2008 through December 31, 2009, such COBRA qualified beneficiary is eligible for COBRA continuation coverage; (2) such COBRA qualified beneficiary elects COBRA continuation coverage (either during the original COBRA election period or during the special election period, as described below); and (3) the qualifying event with respect to the COBRA continuation coverage is due to an involuntarily termination of employment (other than for gross misconduct).
An AEI who is considered a “high-income individual” or the spouse or dependent of a high-income individual, will be required to repay the subsidy as an additional tax on the high-income individual’s federal individual tax return for the tax year in which the subsidy was provided. ARRA defines a high-income individual as a taxpayer with modified adjusted gross income for the tax year that exceeds $125,000 (or $250,000 for joint returns). The tax “recapture” provision of ARRA effectively imposes an income limit on individuals receiving COBRA premium assistance. The amount of the subsidy required to be repaid by a high-income individual with modified adjusted gross income between $125,000 (or $250,000 for joint returns) and $145,000 (or $290,000 for joint returns) is increased proportionately until the full premium subsidy is recaptured.
A plan administrator must permit a high-income individual to permanently and irrevocably waive the right to premium assistance in such form and manner prescribed by the Secretary of Treasury. If a highincome individual waives the premium subsidy, the high-income individual must pay the full COBRA continuation coverage premium.
Special Election Period
In the case of an individual who would be an AEI except the individual does not have a COBRA election in effect on the date of enactment of ARRA, such individual must be given a second opportunity to elect COBRA continuation coverage. The individual eligible for the special election period will have sixty (60) days from the time the notice (discussed below) is provided to make an election. If an individual elects COBRA continuation coverage during this special election period, COBRA continuation coverage shall begin on the first period of coverage after the enactment of ARRA and end on the date that COBRA continuation coverage otherwise would have ended if the individual had elected COBRA when initially eligible to do so. For an individual who elects COBRA continuation coverage during the special election period, the period from the date of the involuntary termination until commencement of COBRA continuation coverage under the special enrollment period is disregarded in determining if the AEI has a 63-day significant break in coverage for purposes of applying HIPAA’s pre-existing condition exclusions.
An employer may, but is not required to, allow an AEI to enroll in a different group health plan that is available to active employees, provided the premium for such coverage is less than the premium for the plan in which the individual was enrolled at the time he lost coverage.
ARRA provides that with respect to any individual who becomes entitled to elect COBRA contribution coverage after the enactment of ARRA, the plan administrator must revise its existing qualifying event notice and provide additional information regarding the COBRA premium subsidy and the option to enroll in different coverage if the employer permits such election (see explanation under “Other Provisions,” above).
Additionally, the plan administrator is required to notify any individual who was eligible to elect COBRA continuation coverage during the period beginning September 1, 2008 and ending February 17, 2009 (regardless of whether the individual is an AEI), of the availability of the COBRA premium subsidy and the option to enroll in different coverage if the employer permits such election (see explanation under “Other Provisions,” above). This notice must be provided within 60 days after the enactment of ARRA and contain specific information as set forth in ARRA.
The plan administrator is required to provide an additional notice to any individual entitled to the special enrollment period (described in “Special Election Period” above). This notice must also be provided within 60 days after the enactment of ARRA and contain specific information as set forth in ARRA, including a discussion of the COBRA premium subsidy.
ARRA provides that the Department of Labor must provide model notices for plan administrators within 30 days of the enactment of ARRA or approximately March 19, 2009.
In order to implement the COBRA premium subsidy, the plan administrator for a group health plan must identify each individual entitled to the COBRA premium subsidy, notify each individual eligible to elect COBRA continuation coverage after February 17, 2009 of the availability of the COBRA premium subsidy and permit AEIs who are not currently utilizing COBRA continuation coverage to make a special election. Until the plan administrator notifies its AEIs regarding the COBRA premium subsidy, an AEI may pay the full COBRA premium. The plan administrator must then either provide the AEI with a credit against future COBRA premiums or reimburse them for the overpayment of the COBRA premium. The plan administrator must also revise its existing COBRA qualifying event notice to include information regarding the COBRA premium subsidy. Finally, the plan administrator should review its plan document to determine whether an amendment is necessary.