On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act (the “Act”). The Act significantly expands the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) rules by providing a 65% government-funded COBRA premium subsidy for all COBRA-eligible employees who have been or will be involuntarily terminated from employment between September 1, 2008 and December 31, 2009. The new government-funded premium subsidy, which is effective March 1, 2009, lasts for up to nine months.
Because the premium subsidy applies to all employer-sponsored group health plans that are subject to the COBRA rules, affected employers will be required to act quickly in order to implement procedures necessary to implement the premium subsidy and to provide notices to those eligible for the subsidy.
What is COBRA?
COBRA is a federal law that requires employers with 20 or more employees to offer continuation of group health coverage to covered employees, their spouses, their former spouses, and their dependent children when the group health coverage would otherwise be lost due to certain specific events. Among other events, the death of a covered employee, termination, or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct or divorce are all COBRA triggering events.
Who is eligible for the premium subsidy?
All employees involuntarily terminated from employment between September 1, 2008 and December 31, 2009 are eligible for the 65% premium subsidy, which means that COBRA participants only pay 35% of the required COBRA premium. These employees and their dependents (spouse, children) are referred to as “Assistance Eligible Individuals” or “AEI.” An involuntary termination refers to an employer initiated termination and includes employees terminated as part of a reduction in force or for poor performance. Employees terminated prior to September 1, 2008 are not eligible for the premium subsidy. Further, employees terminated for gross misconduct and those whose COBRA rights are triggered because of a reduction in hours, voluntary termination of employment, death or divorce are also not eligible for the premium subsidy.
When is the premium subsidy effective?
The premium subsidy is effective with the period of COBRA continuation coverage that begins on or after February 17, 2009. Because most group plans charge COBRA premiums on a monthly basis, the first premium subsidy will likely be effective March 1, 2009. However, because most employers will be unable to adjust their COBRA premium processes by March 1, 2009 to account for the 65% premium subsidy, many AEIs will need to pay the full COBRA premium and will then be entitled to a refund or credit of the overpayment. The Act provides that if an AEI pays the full COBRA premium for the months of March and April, the AEI is entitled to (1) a reimbursement for the amount of the premium that exceeds 35% of the COBRA premium or (2) a credit equal to the 65% premium subsidy that is used to reduce future COBRA payments. The credit must be used within 180 days.
How does the premium subsidy work?
An example is the best way to explain the process. ABC Company provides group health insurance. The COBRA continuation premium is $1,000 per month. In accordance with the Act’s subsidy provisions, the AEI is deemed to have paid the COBRA premium once he or she pays $350 (35% of $1,000). The employer or insurer is required to pay the remaining $650 (65% of $1,000) which equals the government’s premium subsidy. Then, the employer or insurance company receives a reimbursement of the 65% of the premium by claiming a credit against their company’s payroll taxes.
Note: Generally, the AEI pays 35% of the required COBRA premium. However, if the employer pays 100% of the COBRA premium, there is no 65% premium subsidy available to the employer. Therefore, employers that are consider offering COBRA coverage as part of a separation agreement should consider how to structure and offer the COBRA coverage.
To properly claim the credit taken, payroll systems will need to be modified and a new recordkeeping process established. Further, entities seeking reimbursement of the subsidy must provide to the federal government “attestations of involuntary termination” with respect to the individuals for whom the credit is claimed, a report of the payroll taxes offset for the reporting period, an estimate of such offsets for subsequent periods and a report containing the amount of premiums reimbursed to each employee. Here, employers should maintain a conservative approach and ensure that you are attesting to truly involuntary terminations.
Note: The IRS has posted information on its website regarding the subsidy, to include a question and answer summary. The IRS has also issued a 2009 version of Form 941 (Employer’s Quarterly Tax Return) that takes into account the new COBRA continuation coverage rules. The new Form 941 should be used with the first quarterly return due on April 30th. The Form 941 has been revised to add Line 12a – COBRA Premium Assistance Payments and Line 12b – Number of Individuals Provided Assistance. The Form 941 is available at: http://www.irs.gov/pub/irs-pdf/i941.pdf.
How long is the premium subsidy available?
The 65% government funded premium subsidy is payable for up to nine (9) months. The subsidy will end earlier if the AEI becomes “eligible” for another group health plan, Medicare, or is no longer eligible for COBRA continuation coverage. This is a different standard than normal COBRA rules which require the person to be “enrolled” in another plan. The AEI is required to provide a written notice to the plan providing COBRA coverage regarding becoming “eligible” for another group health plan or Medicare. If the AEI fails to provide written notice, the AEI is subject to a penalty of 110% of the premium subsidy, unless there is reasonable cause for the failure to notify.
What is the special election period?
The Act requires that employers contact involuntarily terminated employees and offer a “second chance” to enroll in COBRA coverage. If an employee was involuntarily terminated from employment between September 1, 2008 and February 17, 2009 and the employee either (1) failed to enroll for COBRA coverage or (2) enrolled for coverage but had the coverage terminated for failure to pay the premiums, the employee is now being given a second chance to enroll for COBRA coverage and take advantage of the premium subsidy. The special election period for these involuntarily terminated employees (and dependents) began on February 17, 2009 and ends 60-days after the plan administrator provides the required COBRA notice.
Employers must identify and contact these involuntarily terminated employees. The notification must include information about the premium subsidy, the “second chance” to enroll, how to establish eligibility for the subsidy and the penalty for failure to notify the employer of eligibility for another plan during the subsidy period. The U.S. Department of Labor (“DOL”) has been given the responsibility to prepare model notices for use by employers and third-party administrators by March 17, 2009. These new notice forms will be available on the DOL’s website. Employers are required to ensure that these special election period notices are provided to AEIs no later than April 18, 2009.
If the AEI elects COBRA coverage during the special election period, the COBRA coverage will begin on March 1, 2009. The coverage period for an AEI who elects COBRA coverage during the special election period ends when coverage would have otherwise ended, if the employee had elected coverage when first eligible. COBRA coverage is typically available for 18 months.
Example: John was involuntarily terminated by his employer on September 1, 2008. He never enrolled for COBRA coverage. In accordance with the Act, John’s former employer is now required to provide John a “second chance” notice to enroll in COBRA. John now elects COBRA coverage and pays the required 35% of the COBRA premium. His COBRA coverage is effective March 1, 2009 and ends on February 28, 2010. John’s 18-month COBRA continuation period (due to his involuntary termination) is measured from his original eligibility date (September 1, 2008) and not March 1, 2009.
What is the tax impact of the premium subsidy?
For those individuals with an annual income that exceeds $145,000 ($290,000 for joint filers), their income tax liability will be increased by the amount of the subsidy credited to them. For those individuals earning more than $125,000 but less than $145,000 (or more than $250,000 but less than $290,000 for joint filers), their income tax liability will be increased by a percentage of the total subsidy credited to them. The recapture will occur on the high-income individual’s personal tax return. To avoid this subsidy recapture, high-income individuals can permanently waive their rights to the subsidy. The form and manner of electing the subsidy waiver is to be determined by the Treasury Department.
Can AEI’s change coverage options?
If the employer offers more than one medical plan, the employer is permitted, but not required to, allow AEIs the opportunity to elect a medical plan different than the one in which he or she was enrolled when involuntarily terminated. The other option must be an option that is currently offered to active employees and cannot be a more expensive option than the option in which the AEI was enrolled in when involuntarily terminated. The employer must provide the AEI an election period of not less than 90 days.
What employer action is required immediately?
- Identify all employees who were involuntarily terminated on or after September 1, 2008 and their last known addresses;
- Identify all AEI’s that are currently receiving COBRA coverage and notify them of the premium subsidy;
- Identify all AEI’s that may be entitled to the special enrollment period and notify them of the premium subsidy and “second chance” enrollment process and adjust internal systems to identify the maximum coverage period available;
- Determine the correct 35% premium amount for all AEI’s;
- Obtain and use the DOL’s notice forms and mail the forms to all AEI’s; keeping track of the mailing of all forms;
- Process all COBRA elections, including all elections for premiums subsidies;
- Develop processes and procedures to end the premium subsidy when the AEI is no longer eligible to receive it and be able to reinstate the 100% COBRA premium for the remainder of the COBRA continuation period;
- Develop a method to credit or refund those AEI premiums that are received in March and April that are in excess of the 35% that the AEI is required to pay;
- Coordinate your efforts with payroll, information systems, and your insurance company (if applicable) to ensure that systems are updated and a processes developed to identify all AEIs and capture information about enrollments and premium subsidy credits.
- Consider the implications of the new law in any upcoming reductions in force and any severance agreements; if an employer pays the full COBRA premium based on a severance agreement, there is no premium subsidy to claim.
Where can I get additional guidance?
The Firm’s Employment, Labor and Benefits Practice Group is prepared to answer your questions regarding the impact of this legislation on your company. If your company has experienced a reduction in force or is considering a reduction in force in 2009, the new Act will certainly have an impact the planning and any severance benefits.