The American Recovery and Reinvestment Act of 2009 (the “Act”) was signed into law by President Barack Obama on February 17, 2009. Group health plans, employers and insurers need to take immediate action to implement the “Premium Assistance for COBRA Benefits” provisions contained in the Act. This new legislation creates a federal government subsidy paying 65% of the COBRA premium charged to an assistance-eligible individual for up to nine months. With an immediate effective date for these COBRA subsidy provisions, employers, insurers and their group health plans will need to take immediate action to comply. This article outlines administrative, payroll and other system changes necessary to comply with these provisions and other key aspects of the COBRA provisions contained under the Act.
Action Items For Employers
Identify Assistance-Eligible Individuals. The employer needs to identify all “assistance-eligible individuals.” An assistance-eligible individual is anyone who involuntarily terminated employment during the period beginning on September 1, 2008 and ending on December 31, 2009, and is eligible for and actually elects COBRA continuation coverage. A spouse and dependent children also are treated as assistance-eligible individuals if they are entitled to COBRA coverage during this applicable time period as a result of the employee’s involuntary termination of employment.
The employer also needs to identify any individual who otherwise would be an assistance-eligible individual but for the fact he or she does not have a COBRA election in effect on February 17, 2009 (e.g. such an individual who declined COBRA coverage or otherwise prematurely discontinued COBRA coverage). Note that an employee who is involuntarily terminated for gross misconduct is not eligible for COBRA coverage and thus would not qualify as an assistance-eligible individual under any circumstances.
The Act does not define “involuntary termination” and it is unclear if such terminology will cover those employees who voluntarily terminated as part of a reduction in force, were constructively discharged or mutually terminated through an agreement with the employer. It is likely that subsequent regulations and other guidance will clarify the meaning of “involuntary termination.”
Notify Certain Individuals of an Extended Election Period under COBRA. No later than April 18, 2009, a group health plan must notify certain individuals that they have a second chance to elect COBRA coverage. These extended election rights apply to any individual who otherwise would be an assistance-eligible individual but for the fact he or she does not have a COBRA election in effect on February 17, 2009. This extended election period will apply not only to those assistance-eligible individuals who did not elect COBRA, but also to those who elected and then discontinued such coverage prior to the maximum COBRA period (e.g. for failure to pay premiums). This extended election period begins on February 17, 2009, and ends 60 days after the employer (or its plan administrator) provides the required notice.
The Act requires the DOL to issue a model notice by March 19, 2009. An employer, however, may elect to send out its own notice immediately so that the extended election period can begin without delay, in an effort to minimize adverse selection of COBRA coverage for those individuals who otherwise would wait out the election period to see if they actually incur medical expenses before electing COBRA coverage. The Act sets forth the content requirements of such notices, which are generally described in the next section.
For individuals who elect COBRA coverage during this extended election period, such coverage will start retroactive to the first period of COBRA that begins after February 1, 2009 (i.e. for most plans, March 1, 2009). Note, that coverage is not retroactive to the date the individual originally lost active coverage under the plan. The coverage of an assistance-eligible individual who elects COBRA during this extended election period will end when COBRA coverage otherwise would have ended for such individual had he or she elected COBRA when initially eligible to do so after the qualifying event. These individuals also will not be treated as experiencing a significant break in service for purposes of applying preexisting condition exclusions under a plan for the period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period after February 17, 2009 (i.e. for most plans, March 1, 2009). There is no guidance on when such an individual will be required to pay his or her first COBRA premium payment of 35% after electing COBRA coverage during this extended enrollment period. Presumably, the existing rules would apply requiring premiums be paid within 45 days of the date of COBRA coverage elected, unless subsequently issued regulations provide otherwise.
Satisfy Other Notice Requirements. No later than April 18, 2009, the employer (or its plan administrator) must notify all assistance-eligible individuals who currently have COBRA coverage of the subsidy and the requirements to qualify for the subsidy.
The plan must notify any individuals who become qualified beneficiaries after February 17, 2009, about the availability of the subsidy. The plan can notify them either by amending existing COBRA forms to include such information or issuing a separate notice that is mailed with all other required COBRA election notices and forms. A separate notice may be the preferable approach, since the new legislation has a limited duration applying only to involuntary terminations occurring between September 1, 2008, and December 31, 2009.
Under the Act, these notice requirements are met only if the notice contains all of the following (as further explained in the article):
- a description of the subsidy and any conditions on entitlement to such subsidy — such information must be displayed in a prominent manner in the notice;
- a description of different health care options for COBRA purposes, if the employer chooses to offer special coverage options;
- the forms necessary for establishing eligibility for the subsidy;
- contact information for the plan administrator and any other person (e.g. the insurer or third party administrator) maintaining relevant information in connection with the subsidy;
- a description of the extended election period available to individuals who do not have a COBRA election in place as of February 17, 2009 but otherwise would qualify as assistance-eligible individuals; and
- a description of the individual’s obligation to inform the plan if he or she becomes eligible for another group health plan or Medicare.
The DOL is directed to issue a model notice for these purposes by March 19, 2009.
The Act provides that failure to timely provide such notices shall be treated as a failure to meet the notice requirements under COBRA, which potentially could lead to civil penalties under ERISA (e.g. $110 per day), and the Internal Revenue Code (e.g. $100 per day).
Modify COBRA Premium Payment System. The group health plan must modify its COBRA premium process to accept from each assistance-eligible individual only 35% of the premium amount that he or she otherwise would be required to pay. The federal government will subsidize the remaining 65% of such premium payment. This federal subsidy applies to periods of COBRA coverage beginning after February 17, 2009. A period of coverage is the monthly (or shorter) period for which COBRA premiums are charged. For example, if your group health plan uses calendar months, the federal subsidy of COBRA payments will begin on March 1, 2009.
If the employer (plan or insurer) is not able to adjust its systems before this effective date and assistance-eligible individuals actually pay 100% of the COBRA premium, then the plan must either credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days) or refund the subsidized portion within 60 days.
The COBRA subsidy provisions of the Act apply not only to group health plans subject to federal law, but also to health care continuation provisions mandated by comparable state law for small employers with fewer than 20 employees who otherwise are not subject to federal COBRA laws. Michigan currently does not have state COBRA-like laws.
The Act provides that the COBRA premium subsidy will apply to all types of group health plans (e.g. medical, dental and vision plans), except for health care flexible spending account plans.
Modify Payroll Taxes for Reimbursements. While the federal government is actually subsidizing the remaining 65% of the COBRA premium payment, the mechanics of the program require the entity that provides the COBRA coverage to seek the reimbursement from the federal government for such 65% subsidy. For a group health plan that is self-funded through an employer’s general assets and/or subject to federal COBRA law, the employer will be entitled to the reimbursement. For a group health plan that is a multiemployer plan, the multiemployer plan itself will be reimbursed for the premium subsidy. For a fully insured group health plan that is not subject to federal COBRA law and not a multiemployer plan, the insurance company providing the insurance will be entitled to the reimbursement.
Note that even if an insurance company is responsible for seeking a reimbursement for the subsidy, the employer will still have responsibility for the notices mentioned above and will need to assist the insurance company with identifying the assistance-eligible individuals.
The method of seeking reimbursement is to take the 65% subsidy from payroll taxes that the entity receiving the reimbursement owes. If the amount of the 65% premium subsidy is more than payroll taxes, the additional amount due to the entity will be treated as a refund or a credit to payroll taxes as if there were an overpayment of payroll taxes. Any overstatement of the subsidy reimbursement amount shall be treated as an underpayment of payroll taxes by such person and may be assessed and collected by the IRS in the same manner as payroll taxes (including penalties). As a result, employers need to evaluate their payroll systems (i.e. consult with their payroll administrators) to determine how they will offset the federal subsidy.
Determine the Amount of the Subsidy. An employer or other entity cannot claim a subsidy credit on its payroll taxes unless the assistance-eligible individual (or, on behalf of the assistance-eligible individual, someone other than the employer) actually pays 35% of the amount of any COBRA premium that is due by him or her for a period of coverage. If the employer fully subsidizes 100% of an individual’s COBRA premium, then no subsidy reimbursement would be available to the employer.
What is not clear under the Act is the impact on an employer that partially subsidizes a portion of the assistance-eligible individual’s applicable COBRA premium amount. One interpretation of the Act is that if an employer is subsidizing 65% or more of the applicable premium for COBRA coverage, the employer would not be eligible for any subsidy reimbursement under the Act. For example, if the employer already subsidizes 70% of the maximum applicable premium amount under COBRA with the employee paying 30%, then no federal subsidy would be available under these circumstances. If the employer is subsidizing less than 65%, a portion of the subsidy may be available. For example, if the employer subsidizes only 50% with the employee paying the remaining 50%, the employee should be able to reduce his or her payment to 35% of the applicable premium amount under COBRA as of March 1, 2009, and the employer (or insurer or plan) would be reimbursed from the federal government (through payroll taxes) in the amount of 15% of the maximum applicable premium.
Unfortunately, the Act is somewhat ambiguous in its description of the subsidy, stating:
“In the case of any premium for a period of coverage … for COBRA continuation coverage with respect to any assistance-eligible individual, such individual shall be treated for purposes of any COBRA continuation provision as having paid the amount of such premium if such individual (or a person other than such individual’s employer pays on behalf of such individual) 35 percent of the amount of such premium….”
By using “any premium” rather than the “applicable premium amount” that is defined under COBRA, one could make an argument that the federal subsidy should still be available on a limited basis even when the employer subsidizes a portion of the applicable premium amount under COBRA. Assume that the maximum applicable premium under COBRA is $1,000 and the employer currently pays 70% of that amount, i.e., $700, and the individual pays the remaining 30% of that amount, i.e., $300. The alternative argument would be that the assistance-eligible individual is entitled to pay 35% of the already subsidized payment of $300 (i.e., $105 or 35% x 30% = 10.5% of the entire applicable premium of $1,000), and then the employer would be entitled to a reimbursement of 65% of $300 (i.e., $195 or 65% x 30% = 19.5% of the entire applicable premium of $1,000). Hopefully, the regulations or other guidance will address this ambiguity.
To take full advantage of the federal subsidy and in light of the ambiguity mentioned above, employers that pay a portion of the COBRA premium may want to consider prospectively restructuring such employer-subsidy for existing assistanceeligible individuals (to the extent not contractually bound to provide a specified amount), or at least modifying the employer subsidy for future assistance-eligible individuals.
Develop Procedures to Comply with Reporting Obligations. Each person entitled to reimbursement under the Act (via payroll taxes) will be required to submit such reports as the Secretary of the Treasury may require in order to substantiate reimbursement requests. The reports will include an attestation of involuntary termination of employment for each covered employee on the basis of whose termination entitlement to reimbursement is claimed, an accounting of the total payroll tax offset amount, an estimation of offsets for future periods, and a report containing individual specific information (e.g. taxpayer identification numbers, amount of the subsidy for each individual, and information regarding coverage-type (e.g. single or family coverage)). The Secretary is directed to issue regulations and other guidance to clarify these reporting obligations.
Adjust COBRA Procedures to Recognize the Maximum Subsidy Period. The employer also will need to develop processes necessary to end the subsidy when the individual is no longer eligible to claim it and to reinstate the 100% COBRA premium payment charge if the individual continues to be eligible for COBRA. Under the Act, the subsidy will cease to apply as of the earliest of:
- The first date on which the assistance-eligible individual becomes eligible (not actually enrolled) for coverage under another group health plan (other than plans providing only dental, vision, counseling or referral services, health care flexible spending account or health reimbursement arrangements) or eligible for Medicare coverage. Note that the Act requires an assistance-eligible individual who becomes eligible for coverage under another group health plan to notify the plan providing COBRA coverage in writing, and failure to do so could result in a penalty of 110% of the subsidy provided to him or her after the date he or she became eligible for such other coverage.
- Nine months after the first day of the first month to which the subsidy applies.
- The end of the maximum COBRA coverage period required by law (including permissible early terminations [e.g. failure to timely pay premium], and including the end of the maximum COBRA coverage period for those assistance-eligible individuals who elected COBRA during the extended enrollment period).
Determine Whether to Implement Special Coverage Options. The employer needs to decide if it wants to allow assistance-eligible individuals to switch to a different health care option for COBRA purposes. If an employer decides to offer special coverage options, then it must notify assistance-eligible individuals of their right to switch coverage options (such notice should be included in the general notice that the employer otherwise is providing to such individuals regarding subsidy rights under the Act).
Generally, a qualified beneficiary will receive the same coverage he or she had on the date prior to the qualifying event (except as otherwise permitted for open enrollment rights). Even at a 65% discount, many assistance-eligible individuals still may not be able to afford COBRA coverage. As a result, the Act permits, but does not require, an employer to permit an assistance-eligible individual to elect, not later than 90 days after written notice is provided to him or her about this option, a different health care option, but only if:
- the COBRA premium for the different coverage option does not exceed the COBRA premium for the coverage in which the assistance-eligible individual was enrolled when the qualifying event occurred;
- the employer is offering the different coverage option to active employees; and
- the different coverage option cannot provide only dental, vision, counseling or referral services and cannot be a health care flexible spending account plan or an on-site facility primarily providing first aid, preventive or wellness care.
Develop Opt-Out Procedures for High Income Earners. The employer will need to adopt the method, as developed through regulations, for an individual to permanently waive the federal subsidy. Individuals with modified adjusted gross incomes that exceed $250,000 (for joint filers) or $125,000 (for all other filers) will not be eligible for the full premium subsidy. The subsidy will be fully phased out for those individuals with adjusted gross incomes of $290,000 (for joint filers) or $145,000 (for all other filers). Any portion of a subsidy that an individual receives but is not eligible for will need to be reported on the individual’s annual income tax return, and the amount of tax that such individual would otherwise pay will be increased by the amount of such subsidy. Note: Employers and insurers will not be required to determine whether an individual’s income makes him or her ineligible for the subsidy. Rather, the employers and insurers can treat all assistanceeligible individuals as eligible for the subsidy and receive reimbursement for 65% of the COBRA premium payments. However, an assistance-eligible individual can notify the plan, employer or insurer that he or she will not be eligible for the subsidy and thus will pay 100% of the COBRA premium amount.
Determine the Impact on Retiree Health Care Coverage. If the employer maintains a retiree group health plan, the employer needs to determine how the Act will impact such retiree coverage. Under COBRA regulations, an employer may offer an individual a choice between COBRA coverage and coverage under the employer’s retiree health plan. If the retiree health care coverage does not otherwise qualify as COBRA coverage and the employee elects retiree health care coverage, he or she generally is doing so in lieu of COBRA coverage and thus waives COBRA coverage rights. Under these circumstances, the retiree would not be eligible for the federal subsidy under the retiree health care plan. However, a retiree who otherwise would qualify as an assistance-eligible individual but for his or her waiver election, arguably must be offered the extended enrollment rights to elect COBRA coverage. This extended election of COBRA coverage may be attractive for those retirees who are required to pay 35% or more of the cost of retiree health care coverage. The employer will need to decide if after the COBRA period it will allow the retiree to reelect coverage under the retiree group health plan.
Conversely, if the retiree health care coverage runs concurrently with and is treated as COBRA coverage, the federal subsidy would be available for assistance-eligible individuals to the extent they are required to share in the cost of retiree health care coverage.
Modify COBRA Procedures to Reflect Extended COBRA Periods. Pursuant to the Act, the employer also should modify its COBRA procedures and plan language to recognize the following two circumstances under which a qualified beneficiary may extend his or her initial COBRA coverage period:
PBGC Eligible Individuals. If, as of the qualifying event date of termination of employment, a covered employee has a nonforfeitable right to receive any pension benefits directly from the Pension Benefit Guaranty Corporation, the maximum COBRA coverage period for the covered employee ends on the covered employee’s date of death. The maximum COBRA coverage period for the covered employee’s surviving spouse or dependent children ends 24 months after the covered employee’s date of death.
Trade Adjustment Assistance Individuals. If, as of the date COBRA coverage would otherwise end because of the regular 18-month or 36-month COBRA coverage periods, the covered employee is an eligible individual under the Trade Adjustment Assistance Program, the maximum COBRA coverage period ends on the date the covered employee ceases to be an eligible individual under the Trade Adjustment Program.
These provisions apply only to those COBRA coverage periods that would otherwise end on or after February 17, 2009 — provided, however, that they will not require any period of coverage to extend beyond December 31, 2010.
Notably, the Act eliminated the original House provision that would have extended COBRA coverage until Medicare eligibility for individuals who lost coverage as a result of termination of employment when they are 55 years of age or older or have 10 or more years of service with the employer.
Review Health Plan Documents. The employer should review its formal plan documents, summary plan descriptions and employee notices to determine if any changes are needed. In addition to these COBRA changes, there have been a number of other recent laws that may necessitate changes to health plan documents (e.g. Michelle’s Law, 2009 changes to the Mental Health Parity Act and Children’s Health Insurance Program).