The recently enacted American Recovery and Reinvestment Act adds a complex temporary federal subsidy on certain COBRA health care premiums. While the US government pays the subsidy, employers, insurers and plan administrators are responsible for determining which employees benefit, providing notice and administering the new provisions. These rules apply as early as March 1, 2009. Immediate action will be required to meet these requirements, both by plans subject to COBRA and those that may not otherwise be subject to COBRA.
The American Recovery and Reinvestment Act ("Act"), signed into law on Feb. 17, 2009, affects an employer's responsibilities under federal health care continuation provisions, commonly known as COBRA. In effect, the federal government is subsidizing health continuation rights for certain involuntarily terminated employees through the mechanics of private, state and local health plans. Because the Act is generally effective for premium payments on and after March 1, 2009, employers, insurers and multiemployer plan administrators will need to take action promptly to comply with these major and sweeping changes to COBRA rules. This alert summarizes some of the more significant COBRA-related provisions of the Act.
Generally, under COBRA an employer is required to offer health care continuation coverage at the employee's expense if coverage is lost due to the employee's termination of employment. In most cases, an employee's spouse and dependents who would likewise lose coverage as a result of the employee's termination of employment have an independent right to elect COBRA. Major changes added by these rules include:
- Federal Subsidy. Under the Act, the federal government subsidizes 65 percent of the COBRA premiums that a qualified individual (referred to as an "assistance eligible individual") would otherwise pay if: (1) the qualifying event is the employee's termination of employment; (2) the employee was involuntarily terminated (other than for gross misconduct); and (3) the termination of employment occurs between Sept. 1, 2008, and Dec. 31, 2009. There is no requirement that the termination be due to a layoff or reduction in force. Assistance eligible individuals include the employee's spouse and dependents who elect COBRA due to the employee's involuntary termination of employment. As noted below, the subsidy is phased out for certain high income employees.
- Employees Pay Only 35 Percent. Under the Act, assistance eligible individuals are only required to pay 35 percent of the amount they would otherwise be required to pay for COBRA premiums.
- Who is Subject to these Rules? Entities subject to COBRA under ERISA and the Internal Revenue Code are subject to the new rules, as are state and local governments subject to COBRA under the Public Health Service Act. The Act also applies to subsidies for health care continuation under state continuation laws that provide comparable continuation coverage. Although small employers and certain church related entities typically exempt from federal COBRA requirements will themselves remain exempt from federal COBRA, their assistance eligible individuals may be eligible for the subsidy.
- Who Receives the Reimbursement? The person to whom the premiums are payable is reimbursed for the subsidy. Generally, in a health plan that is self-insured or partially self-insured, the employer will be entitled to reimbursement for the subsidy. In a health plan that is subject to federal COBRA continuation requirements and is fully insured, the employer is also entitled to reimbursement for the subsidy. In the case of a fully insured health plan subject only to state continuation requirements, the insurer appears entitled to the reimbursement. For multiemployer health plans, the plan is entitled to reimbursement for the subsidy.
- Recovery of the Subsidy.
- The entity (employer, insurer or multiemployer plan as noted above) entitled to the reimbursement recovers the 65 percent balance of the premiums through a payroll tax credit or, if greater than the payroll tax, a tax refund or credit.
- Because a failure to remit payroll taxes carries penalties, employers should carefully follow the rules for the timing of the credit, as the credit is not available until the assistance eligible individual pays the 35 percent of the premium. Payroll taxes include federal income tax withholding and employee and employer FICA taxes.
- Effective Date and "Grace Period." The subsidy is effective for the first period of coverage beginning on or after Feb. 17, 2009, which, for health coverage billed monthly, would begin March 1, 2009. Because Congress realized that it may be difficult or impossible to implement the new subsidy by the first COBRA period of coverage, the Act provides a two month period for the employer to credit or refund overpaid premiums. Under this "grace period" transition rule, if an assistance eligible individual pays all of his or her COBRA premiums during the first two months of coverage, the employer, insurer or multiemployer plan can either reimburse the employee for 65 percent of the premiums paid or provide a credit (subject to certain restrictions) against future premiums.
- Special "Second Chance" Period. Employees whose employment is terminated on or after Sept. 1, 2008, and prior to Feb. 17, 2009, will have another period to elect COBRA if: (1) they declined coverage; or (2) they allowed such coverage to lapse due to nonpayment. This special election applies to spouses and dependents as well. Under the Act, coverage elected under this special election applies for the first period of coverage after the date of enactment, which for monthly premium plans would be March 1, 2009. Although unclear, it appears this special election window does not apply to plans subject only to state continuation requirements.
- New Rule Permitting Choice of Less Expensive Options. The Act also permits employers to allow assistance eligible individuals to elect other coverage options available to current employees so long as they are less costly. The replacement coverage cannot include coverage limited to vision, dental or counseling or referral benefits.
- Types of Plans Covered. All group health plans subject to COBRA (federal and state) are eligible for the subsidy, including medical, hospitalization, vision and dental plans. Flexible spending accounts, however, are not eligible.
- Period of the Subsidy. The subsidy is available for nine months, but not longer than the maximum period under COBRA. In addition, the subsidy ends when: (1) the assistance eligible individual is eligible (actual coverage is not required) for coverage under another group health plan or Medicare; or (2) such individual no longer pays the 35 percent share of the premium. The individual must notify the group health plan in writing if he or she becomes eligible under another plan. Failure to do so results in a penalty against the individual of 110 percent of any subsidy paid after that date.
- Penalties for Non-Compliance. Penalties for non-compliance for employers subject to federal continuation requirements are generally the same as those for other failures to provide required COBRA notices. Even if an employee does not qualify for the subsidy because his employment was not involuntarily terminated, he must receive a COBRA notice. As noted above, there are penalties for failures to remit payroll taxes as well.
Required Action by Employers
These rules will require employers to take immediate action, even before the government agencies have issued model notices or interpretations. Employers will need to actively coordinate efforts with internal benefits and payroll departments, as well as external insurers and COBRA administrators. Here are some important things to keep in mind:
- There will be several types of notices required within 60 days after the Act was enacted:
- First, employees whose employment terminated between Sept. 1, 2008, and Feb.17, 2009, and who are not currently covered by COBRA have 60 days to elect COBRA after receiving notice. Employers should use this time: (1) to consider whether they want to issue a notice before the DOL provides a model notice (to start the clock on the terminated employee's right to choose COBRA); and (2) identify which employees were "involuntarily terminated."
- Second, employees currently on COBRA must receive notices of their right to the subsidy. Employers should use this time to identify which employees were "involuntarily terminated" and consider how to return or credit the amount of the subsidy during the 60-day "grace period."
- Third, employees who are currently employed will have a right to a different COBRA notice if their employment is terminated.
- Employers should immediately coordinate with their insurers or third party administrators to allocate responsibility for recordkeeping and notices, and to ensure that those parties meet the requirements of the Act. Employers and administrators will need to determine with insurers whether the plan or plans are insured, self insured or a combination, under the terms of the Act. For plans subject only to state continuation requirements, employers should contact the insurer to confirm it will be responsible for the Act's notice requirements.
- The employer and insurer should consider whether changes to the summary plan description or a summary of material modifications are necessary to reflect these new requirements.
- If the employer is considering offering a lower cost option, work with actuaries to determine the impact on the overall cost of the program. Any addition of a lower cost option enrollment window must be agreed upon by the plan's insurer or stop loss carrier.
- It is important for employers to take these rules into account when structuring termination and severance agreements or reductions in force, especially in cases in which alternative health coverage might be offered or where the employer subsidized a portion of the COBRA premium. The Act is an opportunity to shift a portion of the employer's subsidy to coverage under the Act, reducing employer costs. In addition, any employer subsidy does not count towards the Act's subsidy, thus requiring special attention when processing credit or refund requests.
- The employer or the insurer must also submit reports required by the Secretary of Treasury at the time the payroll taxes would have been remitted to the government.
- Employers are required to report the amount of COBRA continuation coverage paid for (or in the case of a spouse and dependent, on behalf of) each terminated employee. This report is likely to be required to be made on the employee's Form W-2 for 2009.
As written, the Act leaves many unanswered questions. As with many other provisions of the Act, many of the issues are left to government agencies to answer. Hopefully, the government agencies will quickly issue required notices and guidance interpreting and offering practical help. This will be especially important as employers, insurers and multiemployer plans put procedures into place to make sure that they comply with the Act and receive reimbursement credit as quickly as possible.