Employers who sponsor group health plans must act quickly to prepare for and comply with the health continuation coverage subsidy provisions in the recently enacted American Recovery and Reinvestment Act of 2009 (Act), signed into law by President Barack Obama February 17, 2009. The new continuation coverage requirements will take effect as of the first period of coverage beginning after the February 17, 2009 enactment date – March 1, 2009, for group health plans that process continuation coverage premiums monthly – allowing employers and plan administrators only days to assess and respond to the new law, and begin to implement new procedures.
Under current COBRA law, employers may charge employees up to 102% of the total cost of coverage elected upon a COBRA qualifying event. Although 102% of the group premium rate is generally less expensive than individual insurance market premiums, Congress has expressed a concern that, with the high cost of COBRA premiums, many individuals who lose their jobs may forgo coverage under COBRA because they cannot afford it. The provisions of the Act are intended to make COBRA premiums more affordable to individuals who were, or will be, involuntarily terminated during the period from September 1, 2008 to December 31, 2009.
The Act applies to group health plans that are subject to the federal COBRA law (i.e., generally employers with 20 or more employees), as well as to group health plans subject to state COBRA laws (i.e., generally insured plans with fewer than 20 employees and in some cases church plans to the extent they are subject to state law). The continuation coverage implemented by the Act does not apply to health flexible spending accounts. For purposes of this summary, the term “COBRA” is used as it is defined in the Act and refers to continuation coverage offered under federal or state continuation coverage laws.
Subsidy Under the Act
Under the Act, the federal government will subsidize COBRA premiums for an “Assistance Eligible Individual” (AEI). An AEI is a COBRA-qualified beneficiary (i.e., a covered employee, his or her covered spouse and dependent children) if:
- At any time during the period September 1, 2008 through December 31, 2009, the qualified beneficiary is eligible for COBRA;
- The qualified beneficiary elects COBRA; and
- The applicable qualifying event is the employee’s involuntary termination between September 1, 2008, and December 31, 2009.
Note about Involuntary Terminations — “Involuntary termination” is not defined under the Act, calling into question the application of the Act’s COBRA rules for employees who terminate employment under a voluntary severance program, for “good reason” or who are constructively discharged. While the U.S. Department of the Treasury is authorized to issue guidance on these provisions, employers will have to establish a policy on how to apply the term “involuntary termination” until the Treasury provides guidance.
Amount. AEIs are required to pay only 35% of the premium cost. The employer (or the plan in the case of a multiemployer plan, or the insurer in the case of a fully insured group health plan that is not subject to federal COBRA) is required to subsidize the remaining 65% of the premium cost. After providing the 65% subsidy, the employer may seek reimbursement by claiming the subsidized amount as a credit against payroll taxes (i.e., income tax withholding and FICA taxes). If an employer’s COBRA subsidy payments exceed its payroll tax liability, the Treasury will credit or refund the employer the excess in the same manner as if the excess amount were an overpayment of taxes.
Note about Premium Amount — For employers that are already subsidizing employees’ COBRA premiums under certain circumstances (e.g., as part of a reduction in force), the COBRA premium amount to which the subsidy applies is the portion that is charged to the employee. Employers may want to take this provision into account in designing their severance programs.
Term. For AEIs, the subsidy is available until the earliest of the following:
- The first date the AEI is eligible (actual enrollment is not required) for other group health plan coverage or Medicare (individuals are required to notify the plan of eligibility for other group health plan coverage or Medicare);
- The date that is nine months after the first day of the first month for which the AEI is eligible for the COBRA subsidy; or
- The date following the expiration of the maximum period of continuation coverage under the applicable COBRA continuation provisions.
Reporting. An employer (or the plan in the case of a multiemployer plan, or the insurer in the case of a fully insured group health plan that is not subject to federal COBRA) will have to report to the Treasury the payment of subsidized premiums, including:
- An attestation of the involuntary termination of each individual for whom reimbursement is claimed;
- The amount of payroll taxes offset for the reporting period and estimated offsets for the subsequent reporting period; and
- The taxpayer identification number of all covered employees with:
- The amount of subsidy reimbursed with respect to each covered employee and qualified beneficiary; and
- The designation as to whether the subsidy with respect to each covered employee relates to coverage for a single person, or two or more people.
The Act provides that the Secretary of the Treasury will issue guidance to carry out these provisions, including on the timing and form the reports must take.
Income Treatment. An AEI’s subsidy is excluded from gross income and will not be treated as income or resources in determining eligibility for any public benefit under federal or state law.
Elimination of Subsidy for High-Income Individuals. The subsidy is phased out for AEIs with adjusted gross income between $125,000 and $145,000 for individuals, and between $250,000 and $290,000 for joint filers. A waiver provision is available for AEIs to waive permanently the right to the subsidy.
Special Election Period
Period. A health plan must extend a special COBRA election period to an individual who would be an AEI but who does not have a COBRA election in effect on February 17, 2009, including individuals who initially waived COBRA and individuals who elected COBRA but who are no longer enrolled on that date (e.g., a beneficiary who was unable to continue paying the COBRA premium). The special election period runs from February 17, 2009, through the date 60 days after the Notice of Special Election Period was provided to that individual. Coverage for an individual who elects COBRA during the special election period starts with the first period of coverage beginning on or after February 17, 2009, (March 1, 2009, in the case of a plan that charges monthly COBRA premiums). The special election period does not extend an individual’s maximum continuation coverage period, determined as if the individual had elected COBRA when initially eligible.
Excess Premiums. If an AEI receiving COBRA continuation coverage pays the full premium for the months of March or April 2009, the group health plan may directly reimburse the excess premium payment (within 60 days), or credit the amount against future premium payments for the individual, if it is reasonable to believe that the credit will be applied within 180 days of the date the plan received the COBRA payment.
Preexisting Condition Provisions. For purposes of determining whether preexisting condition exclusions may apply to affected individuals upon enrollment in subsequent coverage, the gap in time between an initial qualifying event and any election during the special election period will be disregarded in determining whether the individual had a gap in coverage of 63 or more days.
An Employer’s Option to Offer Coverage Change Election
An employer may (but is not required to) allow AEIs the option to change the plan option under which they were enrolled at the time of their qualifying event, as long as the premium for the alternate coverage costs the same or less than the original plan coverage, and the coverage option is also available to active employees.
If an employer offers this option, it must notify AEIs, and AEIs may enroll in the alternate coverage within 90 days of receiving the required notice.
General Notice. The Act expands the information plan administrators are required to include in COBRA election notices. An election notice for any individual who becomes eligible to elect COBRA during the period from September 1, 2008, through December 31, 2009, must include notice of:
- The forms necessary for establishing eligibility for premium reduction;
- The name, address and telephone number to contact the plan administrator and any other person maintaining relevant information in connection with the premium reduction;
- A description of the special election period (as applicable);
- A description of the individual’s obligation to notify the plan of eligibility for subsequent coverage under another group health plan or Medicare, and the penalty for failure to do so;
- A description (displayed prominently) of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the reduced premium; and
- A description of the option to enroll in a different group health plan offered by the employer if the employer permits such an election.
Note about the Notice Requirement — This notice requirement applies to all individuals who become entitled to elect COBRA during the period September 1, 2008, through December 31, 2009, and not just to those who were involuntarily terminated. Plan administrators should be prepared to address questions from former employees who are not eligible for the COBRA subsidy, but who receive the required notices due to the Act’s attempt to notify all individuals who may potentially be eligible for the COBRA subsidy.
Notice of Special Election Period. In the case of any AEI and any individual who would qualify as an AEI but who did not have a COBRA election in effect on the date of enactment of the Act, a plan administrator must provide the notice described above within 60 days of enactment of the Act (i.e., April 18, 2009).
Employers may communicate the new information by either amending existing notices or supplementing existing forms with additional documentation. The Act provides that the Department of Labor will issue model notices within 30 days of enactment of the Act (i.e., by March 19, 2009). The failure of an employer to comply with these notice requirements is treated as a failure to comply with COBRA, generally, and subjects the employer to fines of $110 per day, per affected individual, in addition to any excise taxes that may be imposed.
The imminent effective date of the COBRA subsidy demands that employers immediately prepare to implement the subsidy. Plan sponsors and administrators should consider the following action items:
- Assess Prior Terminations. Identify covered employees (and their qualified beneficiaries) who became eligible for COBRA on or after September 1, 2008, as well as their COBRA elections. Identify those employees and beneficiaries in the group whose qualifying event is the employee’s involuntary termination of employment.
- Alternative Coverage Election. Determine whether the employer wants to permit AEIs to change their coverage option upon electing COBRA. Such a change may have to be reflected in a plan amendment, as well as in COBRA communications.
- Notices. Update COBRA election notices and other relevant COBRA communications. Consider:
- Notice requirements for those entitled to the special election period (required to be made by April 18, 2009); and
- General notice requirements.
- Develop Processes. Benefits, Finance, Payroll and IT systems will also likely need to be modified to accommodate the changes, such as:
- Paying the 65% subsidy and obtaining reimbursement through the payroll tax system;
- Adjusting AEIs’ COBRA premium payment amounts;
- Reflecting AEIs’ reduced premiums on COBRA premium statements;
- Tracking AEIs’ maximum subsidy period;
- Reimbursing (or crediting) AEIs for COBRA premium overpayments for March and/or April, 2009; and
- Preparing required government reports.
In the case of a plan with an outside COBRA administrator, these issues will have to be coordinated with the administrator.
- Assess Impact of Subsidy Provisions. Consider the impact of increased COBRA participation and claims.