The American Recovery and Reinvestment Act of 2009 (the "Act"), signed into law by President Obama on February 17, 2009, includes a provision that helps millions of recently-unemployed workers continue their health insurance coverage under the COBRA continuation coverage rules. The Act does this by expanding election and enrollment rights and heavily subsidizing the amount an "assistance eligible individual" pays for up to nine months of COBRA continuation coverage for the individual and his or her eligible plan-covered dependents.
The new provision is effective immediately. Accordingly, employers that sponsor group health plans need to understand how the new rules apply and what actions need to be taken.
Who Qualifies For the Subsidy -- Assistance Eligible Individuals
An employee whose employment is involuntarily terminated (for reasons other than gross misconduct) on or after September 1, 2008, and before January 1, 2010, and who is eligible for COBRA continuation coverage is eligible for the COBRA premium subsidy (i.e., is an "assistance eligible individual"). An employee's family members are also assistance eligible individuals if they become eligible for COBRA continuation coverage due to the employee's involuntary termination of employment (for reasons other than gross misconduct) on or after September 1, 2008 and before January 1, 2010. Individuals who become eligible for COBRA continuation coverage on or after September 1, 2008 and before January 1, 2010 as a result of a "qualifying event" other than involuntary termination of employment (e.g., because of a divorce or loss of dependent status) are not eligible for subsidized COBRA continuation coverage. Special rules prevent high-income individuals from benefiting from the new subsidy by requiring all or part of the subsidy provided to an individual, for the taxable year in which the subsidy is provided, to be recaptured by the IRS through increased tax liability. A high-income individual is an individual with modified adjusted gross income exceeding $125,000 ($250,000 in the case of a joint return). The rules also contain waiver provisions, which should be carefully considered by a high-income individual.
How the Subsidy Works
An "assistance eligible individual" will have the right to pay no more than 35% of the premium being charged for the COBRA continuation coverage for a period of up to nine months. The nine month subsidy period may end sooner if the individual becomes eligible for coverage under another group health plan or Medicare, the maximum period for COBRA continuation coverage expires, or certain other events occur.
It is vital to note that this right takes effect as of the first coverage period beginning on or after February 17, 2009, so its effect is immediate. Of equal importance, the Act includes special provisions to ensure that this right is protected and can be promptly enforced. The Act creates a new appeal procedure for an individual who is denied the COBRA premium subsidy. Specifically, an individual who is denied the COBRA premium subsidy may appeal to the Department of Labor ("DOL") through a newly created appeal process. The DOL will have 15 days to review the denial of the individual's subsidy. The DOL has a new website dedicated to the COBRA provisions under the Act. According to the website, the DOL "is currently developing a process and an official application form that will be required to be completed for appeals." Presumably, the DOL will update their website with additional information regarding the appeal process once it is developed.
Recovery of the COBRA Premium Subsidy
In general, the 65% "subsidy" (i.e., the 65% of the premium which the assistance eligible individual no longer must pay) can be recovered by the sponsoring employer, as a dollar-for-dollar reduction in the employer's federal payroll tax obligation as the former employee pays the subsidized portion of the premium. (The Act contains specific provisions for certain kinds of plans, such as multiemployer plans.) To do so, however, an employer will have to comply with certain record-keeping and reporting requirements. Further, the employer will want to retain documents which support its ability to take the credit against its federal payroll tax obligation.
The Internal Revenue Service ("IRS") recently updated the form on which an employer reports its payroll tax obligations, Form 941, to take into account the COBRA premium subsidy. According to the recently updated instructions to Form 941 , an employer reports on its Form 941 the COBRA "premium assistance payments [the employer has] made for the assistance eligible individuals who have paid their reduced premiums." The amount reported should be 65% of the total premium for the assistance eligible individuals and is subtracted from the amount of the employer's payroll tax liability. The U.S. Treasury Department is expected to provide additional guidance, indicating what employers (and others) must do to qualify to recoup the premium subsidy through the payroll tax system.
All individuals who become entitled to elect COBRA continuation coverage during the applicable time period (i.e., between September 1, 2008, and December 31, 2009) must be provided a notice that contains certain information, including:
- A description of the COBRA premium subsidy and who is eligible for the subsidy;
- The ability to elect a different coverage option if offered by the employer (discussed below);
- The forms necessary to establish eligibility for the subsidy;
- The name, address, and telephone number necessary to contact the plan administrator and anyone else with relevant information regarding the subsidy;
- A description of the second election period for assistance eligible individuals who are eligible for such (described below); and
- The requirement to notify the group health plan if he or she becomes eligible for any other group health coverage and the penalty associated with the failure to provide such notice.
An employer can modify its regular COBRA continuation coverage election notice to include the information required by the Act or provide the information in a separate, supplemental notice along with the regular COBRA election notice. The required notice must be distributed by April 18, 2009. Failing to distribute the required notice by such date will be treated as a failure to comply with the COBRA notice requirements (i.e., could subject the employer or a plan to a penalty of up to $110 per day under ERISA and an excise tax under the Internal Revenue Code). A model notice that will satisfy the Act's notice requirements is expected to be issued by March 19, 2009.
Individuals who became eligible for COBRA continuation coverage due to an employee's involuntary termination of employment on or after September 1, 2008, but who did not elect COBRA continuation coverage or are no longer enrolled in COBRA for reasons such as a failure to pay the required premiums, must be offered a second chance to elect COBRA continuation coverage and receive the 65% COBRA premium subsidy. Such individuals will have a second chance to elect COBRA continuation coverage for 60 days after they are provided the notice described above (and the applicable election forms). If such an individual elects COBRA continuation coverage, the coverage would begin effective March 1, 2009 (assuming that such individuals pay for COBRA continuation coverage under the group health plan on a calendar month basis). However, the Act does not extend the maximum COBRA continuation coverage period otherwise available to an individual.
Electing a Different Coverage Option
The Act permits, but does not require, an employer to allow assistance eligible individuals to change their health plan coverage option to an option with the same or lower premiums. The election change must be made within 90 days of receipt of the required notice described above.
Impact on Pre-Existing Condition Limitations
A group health plan may generally refuse to cover the pre-existing conditions of an individual who has a 63-day break in coverage. If an individual who became eligible for COBRA continuation coverage due to an employee's involuntary termination of employment on or after September 1, 2008, but who did not elect COBRA continuation coverage or who has lost COBRA continuation coverage due to a failure to pay the required premiums elects COBRA coverage during the second election period, the period of time beginning with the involuntary termination of employment and ending on the effective date of the COBRA continuation coverage will not be counted as a break in coverage for purposes of this 63-day rule.
The Act is effective February 17, 2009. The COBRA premium subsidy is effective for an assistance eligible individual's first "period of coverage" beginning on or after February 17, 2009. Thus, for employers who bill COBRA continuation coverage premiums on a monthly basis, the subsidy applies to COBRA continuation coverage on and after March 1, 2009. However, the Act allows a grace period for employers who cannot modify their billing systems in time to reflect the subsidy for assistance eligible individuals in March or April. Specifically, the Act allows an employer to continue to accept the full COBRA premium for two billing periods, and credit the subsequent billing period in an amount equal to the missed subsidy or reimburse the individual for the missed subsidy.
Guidance from the DOL and the IRS
Both the DOL and the IRS have issued informal guidance on their respective websites. Additionally, the DOL has created posters and flyers regarding the Act available for download.