On February 13, 2009, Congress passed The American Recovery and Reinvestment Act of 2009 (the “Act”), commonly referred to as the economic stimulus legislation. The Act provides a subsidy of 65% of the COBRA or state continuation coveragepremiums for certain involuntarily terminated employees. The subsidy is effective for the coverage period beginning after the Act is enacted into law, which is expected to occur on February 17, 2009. For most group health plans, this means that the subsidy will be effective March 1, 2009. The federal government will fund the subsidy because the employer or insurer accepting the reduced premiums will be entitled to a credit against payroll taxes in an amount equal to the subsidy. Given the imminent effective date of the premium subsidy, employers need to begin planning for implementation of the new rules, as discussed below.
The Act also increases the health coverage tax credit and COBRA continuation benefits for individuals covered by the Trade Act of 2002. These changes are also described below.
Overview of Subsidy. The subsidy of COBRA and state continuation coverage premiums is available to an employee (and his or her covered spouse and dependent children) if the following requirements are met: (1) group health coverage is lost due to an involuntary termination of employment; (2) the termination of employment occurs on or after September 1, 2008 and before January 1, 2010; and (3) the income of the individual who elects coverage does not exceed certain limits. The subsidy is equal to 65% of the applicable premium and is available for a maximum of nine months. In other words, the covered employee only needs to pay 35% of the applicable premium to continue health insurance coverage. The employer (or the insurer with respect to state continuation coverage) recoups the remaining 65% of the applicable premium by claiming a credit on its payroll tax return.
Eligibility for Subsidy. An individual is entitled to the subsidy only if his or her loss of coverage under the group health plan is due to an involuntary termination of employment, such as a reduction in force. In addition, the involuntary termination must occur on or after September 1, 2008 and before January 1, 2010. However, as under current law, COBRA continuation coverage is not available if the involuntary termination is due to gross misconduct. The subsidy applies to any qualified beneficiary (i.e. the covered employee’s spouse and dependent children) whose coverage is lost due to the covered employee’s involuntary termination of employment. Thus, if a qualified beneficiary, such as a spouse or dependent child, loses coverage due to the covered employee’s involuntary termination, the qualified beneficiary may make a separate election to continue coverage and get the benefit of the subsidy.
The subsidy is only available if the individual’s modified adjusted gross income does not exceed $145,000 for an individual filer or $290,000 for a joint filer. Modified adjusted gross income is adjusted gross income increased by certain income exclusions for individuals living abroad or by income from US possessions or Puerto Rico. The subsidy is phased out for individuals with modified adjusted gross income between $125,000 and $145,000 for single filers and $250,000 and $290,000 for joint filers. The subsidy is subject to recapture if an individual receives the subsidy and then earns modified adjusted gross income in excess of the applicable threshold. For this reason, an individual may make a permanent election to waive the subsidy if the individual is certain he or she will have income in excess of the threshold. The Secretary of the Treasury is charged with prescribing the time and form for making such an election.
An individual who is denied the subsidy may request an expedited review of this denial by the Secretary of Labor (with respect to COBRA continuation coverage) or the Secretary of Health and Human Services (with respect to state continuation coverage). The review must be completed within 15 business days after receipt of the request for review. Given the relatively straightforward requirements for the subsidy, it is unlikely there will be many disputes over the eligibility for the subsidy under an employer’s group health plan. One potential area of dispute is whether an employee’s termination of employment was voluntary. An employee who resigns may argue that he or she was “constructively discharged” based on the circumstances surrounding his or her termination. If the employer disagrees and denies the subsidy, the employee may file a request for review with the applicable Secretary.
Termination of Subsidy. The subsidy is available for no longer than nine months, reduced from the 12 months provided in the House bill. However, the subsidy does not extend beyond the maximum required period of continuation coverage under COBRA or, for group health plans not covered by COBRA, state continuation coverage law. In addition, entitlement to the subsidy terminates when the individual becomes eligible for Medicare benefits or health coverage under a group health plan (so long as such coverage is not limited in scope, e.g. dental coverage only). An individual receiving the subsidy is required to notify the group health plan if the individual becomes eligible for coverage under another group health plan or Medicare. If the individual does not provide the notice, he or she is subject to a penalty equal to 110 percent of the subsidy that is provided after eligibility terminates.
Special COBRA Rights. An individual who meets the requirements for a subsidy, but who does not have a COBRA election in effect on the date of enactment of the Act, must be given the right to elect COBRA within the 60-day period following receipt of the notice described below. This special COBRA election must be provided to an eligible individual even if his or her regular COBRA election period has expired, or if he or she had elected COBRA, but then dropped COBRA coverage prior to enactment of the Act. However, the Act does not extend the COBRA continuation coverage period, except for certain individuals (see the discussion below under the heading, “Health Coverage Tax Credit and COBRA Extension”).
A group health plan may also allow a qualified beneficiary to elect a health plan coverage option other than the coverage option in effect at the time of the qualifying event. The premium for any such alternative coverage option must be equal to or less than the premium for the coverage that was in effect on the date of the qualifying event. The alternative coverage option must be an option that is offered to active employees.
Notice Requirements for Plan Administrator. The plan administrator of a group health plan is required to include information about the premium subsidy in the notice of COBRA continuation coverage that is provided following a qualifying event. The information must include the qualified beneficiary’s right to the subsidized premium rate, the conditions for such subsidy, the qualified beneficiary’s obligation to provide notice to the group health plan if the qualified beneficiary becomes eligible for Medicare or another group health plan and the penalty on the qualified beneficiary for failing to provide this notification. In addition, if the employer would allow a qualified beneficiary to change to another coverage option, as described above, the notice must include information on any such alternative option.
A special notice must also be provided to each individual who has the special COBRA election right provided above; that is, each person who had a right to COBRA continuation coverage by virtue of a covered employee’s termination of employment on or after September 1, 2008, who does not have a COBRA election in effect on the date of the Act’s enactment. The notice must be provided, whether the termination of employment was voluntary or involuntary, although the special right to elect COBRA is limited to individuals whose right to COBRA coverage resulted from an involuntary termination of employment. If the individual elects COBRA, then continuation coverage will begin on the first day of the coverage period that begins after the enactment of the Act. For purposes of determining whether an individual has a 63-day break in coverage (which would allow a pre-existing condition limitation to be imposed), a group health plan must ignore the gap period; that is, the period that begins on the date of the qualifying event and ends prior to the date that COBRA continuation coverage becomes effective pursuant to an individual’s special election.
The Secretary of Labor is instructed to issue model notices within 30 days of the legislation’s enactment.
Action Steps. Employers should begin planning now for implementation of the premium subsidy rules. Following is a proposed action plan:
- Identify when the reduced premium provisions will apply to your group health plan. The effective date is the first coverage period that begins after the legislation is enacted. If coverage under your group health plan is based on the calendar month, then the first coverage period will be March 1.
- Review how your COBRA tracking system needs to be modified to reflect the reduced premiums for eligible individuals.
- Talk with your payroll department about how information on the subsidized premiums should be provided to the payroll department so that credit for the premium subsidy can be claimed on your payroll tax returns. A credit may be taken only after receipt of the reduced premium.
- If your COBRA is administered by a third party, talk with your COBRA administrator about how it plans to implement the premium subsidy rules and provide you with the information you need to get the payroll tax credit for the subsidy.
- Update any COBRA continuation coverage notices that you provide to a qualified beneficiary. The Department of Labor should post model notices on its website: http://www.dol.gov/ebsa.
- Prepare a list of the individuals who must receive the special election notice (i.e. individuals who terminated employment on or after September 1, 2008 and do not have a COBRA election in effect on the date of the Act’s enactment). This will allow you to send out the required notice soon after the Department of Labor issues its model form.
Health Coverage Tax Credit and COBRA Extension. The Trade Act of 2002 provided certain individuals eligible for Trade Adjustment Assistance (TAA) and certain retired employees who are receiving payments from the Pension Benefit Guaranty Corporation (PBGC) with a refundable tax credit for 65% of premiums for qualified health insurance. The Act increases this credit to 80% effective May 1, 2009 until December 31, 2010. In addition, the Act temporarily extends the COBRA continuation period for certain individuals who lose group health plan coverage due to a termination of employment or a reduction of hours. Coverage is provided to death (but not beyond December 31, 2010) to a covered employee who has a vested right to a benefit any portion of which is paid by the PBGC. The surviving spouse and dependent children of such covered employee are entitled to coverage for 24 months after the covered employee’s death, but not beyond December 31, 2010. TAA eligible individuals are entitled to coverage for so long as the individual is a TAA eligible individual, but not beyond December 31, 2010.