On February 17, 2009, President Obama signed into law a US$787 billion economic stimulus package entitled the American Recovery and Reinvestment Act of 2009 (the “Act”). The Act includes significant modifications to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). Among other changes affecting employee benefits, the Act provides a 65 percent government subsidy for up to nine months toward payment of COBRA premiums for certain employees who are involuntarily terminated from employment during the period beginning September 1, 2008, and ending December 31, 2009, and for their qualifying dependents. The 65 percent premium subsidy must be initially paid by employers, who will then recoup the payment from the federal government. The payment structure of the premium subsidy, coupled with the new notice and reporting requirements imposed by the Act, require employers to act quickly to address the administrative, payroll, and other changes necessary for compliance.
Background on COBRA
COBRA amended the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986 (the “Code”), and the Public Health Service Act to provide “qualified beneficiaries” with the right to temporary continuation of employer-sponsored group health coverage at group rates when their coverage is lost due to the occurrence of certain “qualifying events.” A qualified beneficiary is generally an individual covered by the group health plan on the day before the qualifying event who is an employee, an employee’s spouse, or an employee’s dependent child. A qualifying event includes events such as the employee’s death, termination of employment (not due to gross misconduct) or a reduction of hours, divorce or legal separation, or loss of dependent child status. Qualified beneficiaries are generally eligible for COBRA continuation coverage for a maximum of 18 months or 36 months, depending on the type of qualifying event.
A group health plan providing COBRA continuation coverage may generally charge qualified beneficiaries 102 percent of the cost of coverage to the plan for the same period of coverage for a similarly-situated non-COBRA covered employee or dependent. Qualified beneficiaries generally pay the entire COBRA premium themselves.
Changes to COBRA Under the Act
65 Percent COBRA Premium Subsidy
The Act provides for a COBRA premium subsidy, whereby the federal government will pay 65 percent of the cost of a qualified beneficiary’s COBRA premium if such qualified beneficiary (i) experiences a qualifying event that is an involuntary termination during the period beginning September 1, 2008, and ending December 31, 2009; (ii) elects COBRA coverage; and (iii) pays 35 percent of the COBRA premium. The employer must then pay the remaining 65 percent of the COBRA premium and receive a credit for such amount against its federal payroll tax liabilities. If the amount of the credit exceeds the amount of payroll taxes owed, then the Treasury Secretary will pay the excess directly to the employer.
With respect to the requirement that the qualified beneficiary must be involuntarily terminated to be eligible for the subsidy, it is unclear whether an employee who takes an early retirement will qualify. However, it is clear that the involuntary termination must not be for gross misconduct, and that layoffs would qualify.
The 35 percent premium payment that the qualified beneficiary must make and the 65 percent premium subsidy are based on the COBRA premium that the qualified beneficiary was otherwise required to pay. For example, if the employer had already agreed to pay 20 percent of the total COBRA premium as part of a severance agreement, the employee will need to pay only 35 percent of 80 percent of the total COBRA premium, and the employer will receive a payroll tax credit for only 65 percent of 80 percent of the total COBRA premium. Note that the employer will not be entitled to a payroll tax credit for the 20 percent of the premium that the employer is obligated to pay under the severance agreement and not by reason of the Act.
The COBRA premium subsidy will also apply to health care continuation coverage provided by state and federal governments, or mandated by state law for group health plans with fewer than 20 employees. However, subsidies may not be applied to payments for coverage under a health flexible spending account offered under a cafeteria plan within the meaning of Section 125 of the Code.
The Act conditions an individual’s entitlement to the COBRA premium subsidy during any taxable year on an income threshold: if an individual’s modified adjusted gross income for the taxable year in which the subsidy is received exceeds US$145,000 (or US$290,000 for joint filers), then the amount of the premium subsidy that was provided to the individual, the individual’s spouse, or the taxpayer’s dependents for all months during such taxable year must be repaid. For taxpayers with modified adjusted gross income between US$125,000 and US$145,000 (or US$250,000 and US$290,000 for joint filers), the amount of the premium subsidy for the taxable year that must be repaid is reduced proportionately. The repayments are captured on the individual’s federal income tax return. The Act allows each individual to make a permanent election to waive the right to the premium subsidy for all periods of coverage, thereby allowing any individual who is certain that he or she will surpass the income threshold to avoid being subject to the recapture tax.
The income threshold applies on a per-taxable-year basis. For example, if an individual is eligible for COBRA continuation coverage based on a qualifying event that is an involuntary termination in August 2009, but such individual is not entitled to the premium subsidy for any period of coverage during 2009 due to having modified adjusted gross income for 2009 that is above the threshold, the individual may nevertheless be entitled to the premium subsidy for any period of coverage in the remaining COBRA continuation period during 2010, if the individual’s modified adjusted gross income for 2010 is not above the threshold.
Period of Premium Subsidy
The 65 percent COBRA premium subsidy is effective for the first period of coverage beginning on or after February 17, 2009. Therefore, for employers who bill COBRA premiums on a monthly basis, the subsidy will commence on March 1, 2009. Note that the subsidy will not be available for COBRA premiums paid prior to February 17, 2009.
The COBRA premium subsidy will end on the earliest of the following dates:
(i) the date that is nine months after the first day that the individual became eligible for the subsidy;
(ii) the date the individual becomes eligible for coverage under any other group health plan (other than coverage consisting of only dental, vision, counseling, or referral services (or a combination thereof)), coverage under a flexible spending arrangement, or coverage of treatment that is furnished in an on-site medical facility maintained by the employer that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof);
(iii) the date the individual is eligible for Medicare;
(iv) the date following the expiration of the maximum period of continuation coverage required under the applicable COBRA continuation coverage provision; or
(v) the date following the expiration of the period of continuation coverage elected pursuant to the special COBRA election opportunity discussed below.
An individual must notify the plan of a loss of COBRA entitlement due to eligibility for other health plan coverage. Failure to do so will result in a penalty imposed on the individual equal to 110 percent of the improperly paid subsidy amount.
The Act does not seem to address whether the subsidy will still apply if an employer offers alternative coverage independently from COBRA following the involuntary termination. For instance, if an individual is involuntarily terminated on December 1, 2009, and the employer provides for a 12-month period of non-COBRA continued coverage, and the COBRA coverage does not begin until the employer-provided coverage expires (i.e., on December 1, 2010), it is unclear whether the COBRA premium subsidy will still apply for nine months (i.e., through August 31, 2011), assuming that the other subsidy termination events listed above do not occur earlier.
Due to the immediate application of these new COBRA rules, the Act provides a grace period for employers and plan administrators who are unable to modify March or April COBRA bills in time to reflect the 65 percent subsidy. The grace period permits the employer or plan administrator to charge the qualified beneficiary for the full COBRA premium for two billing periods following February 17, 2009. The employer must then either reimburse the qualified beneficiary for the amount equal to the premium subsidy, or credit such qualified beneficiary for the amount of the subsidy toward future COBRA premium payments. Note, however, that if the employer plans to credit a qualified beneficiary, the employer must reasonably believe that the credit will be used by the qualified beneficiary within 180 days of the date on which the employer or plan administrator received the payment of the full COBRA premium amount from such qualified beneficiary.
Special COBRA Election Opportunity
The Act provides that qualified beneficiaries who would otherwise be eligible for the COBRA premium subsidy but who did not elect COBRA continuation coverage prior to February 17, 2009, will have an additional opportunity to elect COBRA. This special COBRA election period begins on February 17, 2009, and ends 60 days after notice is provided to the qualified beneficiary of such special election opportunity (as discussed below, employers must provide such notice by April 18, 2009). Coverage elected pursuant to this special COBRA election right begins on March 1, 2009, and ends no later than the date that the original maximum COBRA continuation coverage period would have expired. For example, if an individual was involuntarily terminated from employment on September 10, 2008, but did not elect COBRA continuation coverage, and such individual is otherwise eligible for the COBRA premium subsidy, the individual would have 60 days after notification of this special COBRA election opportunity to elect COBRA coverage and receive the subsidy. If the individual makes the election, the coverage would begin on March 1, 2009, and end no later than the maximum required COBRA continuation coverage period (generally 18 months or 36 months) after September 10, 2008. This special election right is also available to a qualified beneficiary who elected COBRA coverage but who is no longer enrolled on the date of enactment because, for example, the beneficiary was unable to continue paying the premiums.
Under the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), a group health plan may refuse to cover pre-existing conditions for a certain period of time for an individual who has a 63-day break in health plan coverage. The Act provides that if a qualified beneficiary elects COBRA continuation coverage pursuant to the special COBRA election opportunity, then the period between the date of the qualifying event and March 1, 2009, will be disregarded for purposes of calculating HIPAA’s 63-day break-in-coverage rule.
Special Enrollment Right to Different Coverage
Under current law, a group health plan may provide a special enrollment right to qualified beneficiaries to allow them to change coverage options under the plan in conjunction with electing COBRA continuation coverage. The Act permits a group health plan to offer such different coverage options and treats such different coverage as COBRA continuation coverage subject to the applicable COBRA continuation provisions. For example, if a group health plan allows a qualified beneficiary to choose a different coverage and the qualified beneficiary does so, the different coverage elected must generally be permitted to be continued for the applicable required period (generally 18 months or 36 months, absent an event that permits coverage to be terminated under the federal COBRA continuation provisions) even though the premium subsidy is only for nine months. The qualified beneficiary’s election must be made within 90 days after the date of notice of the different coverage option. The different coverage option is available only if all of the following conditions are met:
(i) the employer has made a determination that such employer will allow qualified beneficiaries to enroll in alternate coverage;
(ii) the premium for the alternate coverage does not exceed the premium for coverage in which the qualified beneficiary was enrolled at the time the qualifying event occurred;
(iii) the alternate coverage elected by the qualified beneficiary is coverage that is also offered to the active employees of the employer at the time the election is made; and
(iv) the alternate coverage is not coverage that provides only dental, vision, counseling, or referral services (or a combination thereof); a flexible spending arrangement; or coverage that provides for services or treatments provided in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof).
New COBRA Notice Requirements
In addition to the COBRA general and election notices, employers must inform COBRA-eligible individuals about their new COBRA rights under the Act by April 18, 2009. The new information must be provided to any individual who becomes a qualified beneficiary—not just to individuals who were involuntarily terminated—during the period beginning September 1, 2008, and ending December 31, 2009. Employers may revise their current notices or include the new information as a separate document, but regardless, the new notices must be distributed on an ongoing basis for all new qualified beneficiaries through December 31, 2009. Employers must also send new COBRA notices to individuals who are entitled to the special COBRA election opportunity describing such special election opportunity. The Secretary of Labor is to provide model notices by March 19, 2009, but even if no model notice is issued, the April 18, 2009 deadline for employers still applies. Thus, employers may wish to begin drafting new and/or revised notices without waiting for the model notice.
Reporting Requirements for Employers
To claim the payroll tax credit, employers must file a report that includes an attestation of the involuntary termination, a report of the payroll tax credits for the current period and the estimated credits for the subsequent period, the taxpayer identification numbers (TINs) of the terminated employees, the amount of the subsidy reimbursed with respect to each qualified beneficiary, and information as to whether the subsidy provided was for one or more qualified beneficiaries. Payment of the subsidy to an employer or another entity is not treated as income but rather as an employee contribution to a group health plan.
Next Steps for Employers and Plan Administrators
The COBRA premium subsidy provisions in the Act require immediate implementation by employers and plan administrators. First, employers should identify individuals eligible for COBRA who were terminated on an involuntary basis on or after September 1, 2008, as well as the qualifying dependents of these individuals. Second, employers should begin drafting new and/or revised COBRA notices. Third, employers and plan administrators should update their COBRA premium payment methodology to take into account their payment for the 65 percent share of the COBRA premium. Fourth, employers and plan administrators should revise their payroll systems and other procedures so that they will be ready to obtain reimbursement from the federal government without delay. Finally, employers and administrators should develop any processes necessary to determine when the premium subsidy ends for an individual and to reinstate the 100 percent COBRA premium charge with respect to such individual.