The sprawling stimulus legislation that may or may not jumpstart the U.S. economy has certainly jumpstarted employers' interest in coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). That's because the temporary federal COBRA subsidy for involuntarily terminated employees that is at the heart of the American Recovery and Reinvestment Act (ARRA) of 2009 represents the highest-profile expansion of the basic COBRA framework in its 23-year history. The subsidy took effect for monthly or other periods of COBRA coverage beginning after February 17, 2009.
Subject to income limitations, employees who are terminated "involuntarily" between September 1, 2008 and December 31, 2009, and their covered dependents, are eligible for a subsidy of 65 percent of the premiums they would be required to pay for up to nine months for any group health plan in which they participated at the time of termination, excluding health flexible spending accounts (FSAs). "Involuntary termination" is not further defined in the ARRA and is touched on only briefly in the latest informal guidance from the Department of Labor (DOL). The DOL guidance provides that a layoff ("being told not to come back to work until further notice") is a "termination" for purposes of the COBRA changes.
"Assistance eligible individuals" are required to pay only 35 percent of the premium charged under a plan. Employers do not receive any subsidy payment upfront, but are able to recover the other 65 percent of premiums in the form of a credit against their income tax withholding and FICA taxes (employer and employee portion). If the premiums due an employer exceed its tax obligations in any given quarter, the U.S. Treasury will issue a check to make up the difference. This tax credit arrangement also applies to insurers and multiemployer plans to whom COBRA premiums are payable.
The value of the subsidy is reduced for employees (and their dependents) with modified adjusted gross incomes of $125,000 ($250,000 for joint filers) in the year they receive a subsidy, and fully eliminated at the $145,000 level ($290,000 for joint filers).
Coverage And Election Periods
Adding a new complication to COBRA, the ARRA also gives involuntarily terminated employees and their dependents 90 days to select coverage under a different, lower-cost coverage option than the one they were enrolled in at the time of involuntary termination. Qualified beneficiaries only have this option, though, if an employer allows these changes. Moreover, the new coverage option also has to be offered to active employees and cannot be a limited option (such as dental, vision or health FSA benefits).
Employees who were terminated as far back as September 1, 2008, and who did not elect COBRA coverage, effectively have a new election period. These employees have 60 days after they receive the notices required by the ARRA to start COBRA coverage, generally at the subsidized rate. Their COBRA coverage starts on March 1, 2009, and does not continue past the date that would have been the end of the maximum coverage period had they elected it initially - i.e., generally 18 months after termination. By contrast, employees terminated involuntarily on or after September 1, 2008, who did elect COBRA when initially eligible are eligible for the new subsidy, but not retroactive to their termination date. Similarly, the Joint Explanatory Statement clarifies that such an employee who elected COBRA initially but then lost coverage due to nonpayment of premiums would be entitled to the notices and premium subsidy.
Note that the subsidy and new elections are limited to cases of involuntary termination, and are not available for other COBRA qualifying events - such as voluntary termination, death, divorce, reduction in hours, or a dependent child reaching a limiting age under a health plan.
Under the ARRA, certain information about the new subsidy and the option to enroll in different coverage must be added to current COBRA notices or provided in separate documents. The DOL has released four separate model notices, each designed to apply specifically to a different group of recipients, to help employers meet their obligations. "Model" notices would not usually have to be followed, and the DOL in the past has spoken of these models as mere safe harbors. No such reassurances were found in the model notices or guidance, however.
The DOL notices include a form for individuals to request to be treated as an assistance eligible individual. This suggests that an individual already on COBRA would need to affirmatively elect to receive the premium reduction. Many employers and COBRA administrators prefer a sort of negative-election approach where these individuals would be treated as eligible for the premium reduction unless they notify the plan otherwise. In any event, employers will want to examine the model notices closely to see how the DOL approaches some challenging issues.
Notices regarding the new subsidy also must be delivered to qualified beneficiaries who are eligible for assistance because they were involuntarily terminated and are already receiving COBRA coverage or are still in their initial election period. These notices are required to be issued by April 18, 2009.