Under the guise of stimulus and recovery, the American Recovery and Reinvestment Act of 2009 (ARRA) includes new COBRA provisions to help eligible unemployed individuals elect and pay for continuation coverage. As if COBRA was not complex enough, these new rules add to the minefield employers must navigate. Rather than simply provide a summary of the new law, the Baker & Daniels benefits and executive compensation group believes that sharing answers to our clients' common questions will provide more practical advice.
To that end, this guide provides our thoughts and advice on a variety of questions raised by ARRA, based upon the statutory language and informal comments from the IRS and DOL. We will regularly update this list of questions and answers on our Web site as we receive more questions from our clients and guidance from government agencies, so please use this link to check back often.
- Do the new rules change which employers are subject to COBRA?
- Who is eligible for the new COBRA subsidy?
- How do I, as plan sponsor, monitor and verify whether someone is over the income limits for the subsidy?
- We just went through open enrollment for January 1, 2009. What if a person elected to drop medical coverage during open enrollment and now he is being terminated?
- Does ARRA provide a subsidy to an employee terminated for gross misconduct or allow that employee to elect COBRA coverage?
- My company's laid off employees are considered "inactive employees," but we do not consider them terminated from employment while they still have recall rights. Are they eligible for this subsidy?
- What if a layoff is offered to employees on a voluntary basis?
- What if a reduction in hours caused the loss of health coverage?
- If we're not sure whether an event constitutes an involuntary termination, isn't it best just to err on the side of caution and offer ARRA COBRA and the subsidy?
Special Election Rights
- What is the special election period?
- Our company terminated an employee in October of 2008 for poor work performance, and he did not elect COBRA within his 60-day election period. Must we now offer him another chance to elect COBRA?
- Not to be morbid, but what if an individual entitled to a special election period was in a car accident on February 2, 2009? Can we apply the pre-existing condition exclusion to any expenses relating to the accident?
- An employee who was involuntarily terminated in September of last year timely elected COBRA coverage but then failed to pay the premium for it, so her COBRA coverage was terminated. Do we now have to offer her a second chance to elect COBRA coverage?
The ARRA COBRA Subsidy
- How is the 65% COBRA provided? Who pays it?
- When can an employer take the tax credit?
- Under our severance plan, our company already subsidizes a portion of the normal COBRA premium for laid off employees. Do we get reimbursed for providing this subsidy?
- Our company has a fully insured health plan. Who fronts the 65% subsidy and who gets the tax credit — our company or our insurer?
- We sponsor a self-funded group health plan. Must we "pre-pay" or advance the 65% subsidized portion of the COBRA "premium" and consider it a plan asset?
- Some terminated employees who will be eligible for the subsidy have already elected COBRA and paid their premiums for March. What do we do with them?
- Does the subsidy apply to dental and vision coverage, as well as medical coverage?
Duration of Subsidy and COBRA Coverage
- How long does the ARRA COBRA subsidy last?
- Does the subsidy end if an individual becomes eligible for other group medical coverage or Medicare but doesn't actually enroll in that coverage?
- Does ARRA extend the length of the COBRA coverage period for an assistance-eligible individual?
- Our severance plan subsidizes 100% of the COBRA premium for the first six months after an involuntary termination for lack of work. How does that six months of subsidized coverage affect the period of coverage subsidized under ARRA?
Do the new rules change which employers are subject to COBRA?
No. If your company was not subject to COBRA before ARRA, the new rules will not change that status.
MINEFIELD GUIDANCE: Now is a good time to confirm whether or not your company is subject to COBRA. Many employers believe, incorrectly, that they are exempt from COBRA if they have fewer than 20 employees covered by their group health plan. In fact, an employer is subject to COBRA for a plan year if it had the equivalent of 20 or more full-time employees on at least 50% of its business days in the prior plan year, even if fewer than 20 of those employees participate in the health plan.
Who is eligible for the new COBRA subsidy?
ARRA provides a 65% subsidy of the COBRA premium for "assistance-eligible individuals," generally defined as COBRA qualified beneficiaries (employees and dependents eligible to elect COBRA continuation coverage because of a qualifying event) who meet the following requirements:
- The qualifying event that makes the qualified beneficiary eligible to elect COBRA is an involuntary termination of employment (for a reason other than gross misconduct) that occurred between September 1, 2008 and December 31, 2009. The qualified beneficiary could either be an employee involuntarily terminated during this period or a dependent of the employee who becomes eligible for COBRA due to the employee's involuntary termination; and
- The qualified beneficiary timely elects COBRA during the initial election period or the new special election period required by ARRA.
Individuals making more than $145,000 (single filers) or $290,000 (joint filers) for the taxable year in which they pay the COBRA premium are not eligible for the subsidy and must repay to the government any subsidy they receive. Those making more than $125,000 (single) or $250,000 (joint) are eligible for a portion of the subsidy.
MINEFIELD GUIDANCE: A person making more than the above amounts is still eligible to elect COBRA continuation coverage during the special election period discussed in Question C.1.
How do I, as plan sponsor, monitor and verify whether someone is over the income limits for the subsidy?
You don't. Employers and their health plans are not responsible for enforcement of the income limits. The employer must provide the subsidy to any individual who is otherwise eligible, and if the individual is not entitled to the subsidy because of the income limits, the individual has the responsibility either to decline the subsidy or to report the ineligibility on his or her federal tax return and repay the government for any ineligible subsidy received.
We just went through open enrollment for January 1, 2009. What if a person elected to drop medical coverage during open enrollment and now he is being terminated?
We do not believe this person will be eligible for ARRA COBRA rights because he dropped health coverage during open enrollment and, therefore, won't be a qualified beneficiary eligible to elect COBRA coverage at the time of his termination.
Does ARRA provide a subsidy to an employee terminated for gross misconduct or allow that employee to elect COBRA coverage?
No. ARRA COBRA rights do not apply to someone who is not otherwise eligible to elect COBRA. A plan does not have to offer COBRA coverage to an employee (or the employee's dependents) if the employee was terminated for gross misconduct. ARRA does not change this rule.
MINEFIELD GUIDANCE: In light of ARRA, employers may be tempted to re-evaluate whether the reason for an employee's termination constituted gross misconduct. If an employee was offered COBRA at the time of termination, we would caution against trying to avoid ARRA COBRA rights under the gross misconduct exception.
My company's laid off employees are considered "inactive employees," but we do not consider them terminated from employment while they still have recall rights. Are they eligible for this subsidy?
ARRA does not define "involuntary termination," but we expect the Department of Labor's forthcoming guidance to be very liberal in defining what constitutes an involuntary termination for purposes of eligibility. If an employee is "laid off" as part of a reduction in force, restructuring, downsizing or similar event and thereby loses regular health coverage (and can elect COBRA), we expect that the employee will be considered "involuntarily terminated" and eligible for ARRA's COBRA rights, even if the employee's employment status is technically classified as "inactive" rather than "terminated."
What if a layoff is offered to employees on a voluntary basis?
The answer likely turns on the particular facts and circumstances. Informal guidance from the DOL indicates that under some facts and circumstances, individuals volunteering for a layoff may be considered "involuntarily terminated" and, therefore, eligible for ARRA COBRA rights. That said, employers should wait, if possible, until further guidance is issued before offering ARRA COBRA rights to employees who volunteer for layoff or termination (such as employees who voluntarily terminate in exchange for enhanced severance benefits under a "window" or "buyout" program).
What if a reduction in hours caused the loss of health coverage?
ARRA's COBRA rights do not apply to COBRA qualifying events other than an involuntary termination of employment, but the DOL has not yet spoken (either formally or informally) on whether a reduction in hours might in some cases constitute an involuntary termination. Based upon the DOL's responses to other questions, it would not surprise us if the DOL concludes that, in at least some circumstances, a reduced schedule, unpaid leave or furlough constitutes an "involuntary termination," particularly where the reduction, leave or furlough immediately precedes termination of employment. At this point, however, this is a "wait and see" issue.
If we're not sure whether an event constitutes an involuntary termination, isn't it best just to err on the side of caution and offer ARRA COBRA and the subsidy?
Although an employer may certainly provide greater COBRA rights than required by statute, we strongly advise against a blanket application of ARRA rights for the following reasons:
- If you do not provide the subsidy where required, then you'll violate the new COBRA rules. On the other hand, if you provide a subsidy to an individual who turns out to be ineligible, you will not be able to receive a tax credit for the subsidy. That's why the risks of each "close call" situation must be assessed on a case-by-case basis.
- More importantly, we expect that many insurers and stop-loss carriers will audit whether an individual was "involuntarily terminated." A blanket offer of ARRA COBRA rights could result in a denial of coverage and expose the employer to unexpected liability.
Special Election Rights
What is the special election period?
ARRA creates a second COBRA election period for individuals who involuntarily terminated on or after September 1, 2008, and before ARRA's enactment, but who are not currently enrolled in COBRA coverage. ARRA's premise is that at least some individuals terminated since September 1, 2008 did not elect COBRA because of the cost, so ARRA gives those individuals (and dependents who are also qualified beneficiaries) another chance to elect COBRA and take advantage of the newly available subsidy.
ARRA requires employers to notify eligible individuals of their new COBRA rights by April 17, 2009, and allow them a new 60-day period, running from the date the new notice is sent, within which to elect COBRA coverage. The DOL is required to issue a model notice for this purpose on or before March 17, 2009.
MINEFIELD GUIDANCE: As noted, the new 60-day election period runs from the date the new ARRA notice is sent. We continue to believe that best practice is to mail the notice as soon as possible to start the election period sooner rather than later.
Our company terminated an employee in October of 2008 for poor work performance, and he did not elect COBRA within his 60-day election period. Must we now offer him another chance to elect COBRA?
Yes. Because this employee was involuntarily terminated after September 1, 2008, and did not enroll in COBRA (and poor work performance doesn't constitute "gross misconduct"), you will need to offer him (and any of his dependents who became qualified beneficiaries due to his termination) the opportunity to elect COBRA during the special election period. Any COBRA coverage elected during the special election period will be effective as of the first coverage period on or after February 17, 2009 (March 1 for plans with monthly coverage periods).
Not to be morbid, but what if an individual entitled to a special election period was in a car accident on February 2, 2009? Can we apply the pre-existing condition exclusion to any expenses relating to the accident?
No, but you don't have to cover expenses incurred before the effective date of COBRA coverage.
As background, the HIPAA portability rules significantly curtailed the use of pre-existing condition exclusions. ARRA provides that any coverage gap since September 1, 2008, cannot be counted towards a break in coverage under HIPAA, which essentially negates any pre-existing condition clause.
If the individual timely elects COBRA coverage during the special election period and your plan has monthly coverage periods, his COBRA coverage would be retroactively effective as of March 1, 2009 (the first coverage period beginning on or after February 17, 2009). Your plan would not be required to pay claims incurred prior to March 1, 2009, but would be required to process and pay eligible claims incurred on and after March 1, 2009, including claims arising from the accident.
An employee who was involuntarily terminated in September of last year timely elected COBRA coverage but then failed to pay the premium for it, so her COBRA coverage was terminated. Do we now have to offer her a second chance to elect COBRA coverage?
Yes. She is an assistance-eligible individual (a COBRA qualified beneficiary involuntarily terminated from employment between September 1, 2008 and December 31, 2009) whose qualifying event preceded the enactment of ARRA and who is not currently enrolled in COBRA. The informal guidance available to date indicates that her previous failure to pay on time does not disqualify her from ARRA's special election rights. (This would be consistent with the premise for the special election rights — that some eligible individuals previously able to obtain COBRA couldn't afford to elect or maintain it absent the subsidy.)
The ARRA COBRA Subsidy
How is the 65% COBRA provided? Who pays it?
Essentially, the employer (or, in some cases, an insurer) fronts the cost of providing the 65% subsidy and then collects it from the federal government in the form of a credit against payroll taxes (income, FICA and Medicare taxes). If an eligible individual elects ARRA COBRA rights, he or she can only be required to pay 35% of the COBRA premium otherwise charged by the employer. ARRA requires that employers fund the difference.
The employer can then recover its cost for the subsidy by taking a tax credit against the employer's wage withholding and FICA payroll taxes (or by a direct payment from the Department of Treasury, if the amount of the credit for a quarter exceeds the payroll taxes due for that quarter).
When can an employer take the tax credit?
An employer can only take a credit for the cost of the subsidy after the individual pays his or her 35% of the COBRA premium (the unsubsidized portion).
Under our severance plan, our company already subsidizes a portion of the normal COBRA premium for laid off employees. Do we get reimbursed for providing this subsidy?
Based upon the statutory language and initial guidance from the Department of Treasury, no. Under the language of the statute, the subsidy is based upon the amount the individual is required to pay for COBRA, not the actual "applicable premium" for COBRA coverage.
As an example, let's say the monthly COBRA premium for a laid off employee and his family is $1,000, and under your severance plan, the employer subsidizes 70% of that premium ($700), so that the laid off employee only has to pay $300 for COBRA coverage. Under ARRA, the subsidy and tax credit will be based on the $300 that the employee is required to pay absent the ARRA subsidy, not the full amount of the COBRA premium. Under ARRA, the employee will pay 35% of $300 ($105) and the government will subsidize 65% of $300 ($195). Your company is still on the hook for the $700 it agreed to pay under the severance plan, and it cannot take any tax credit for it.
In contrast, an employer that does not otherwise subsidize COBRA fares far better under ARRA. The individual's required COBRA premium is $1,000 and so his 35% cost is $350. The employer initially absorbs the remaining $650, but then recovers all of it from the government through the payroll tax credit.
MINEFIELD GUIDANCE: Employers should re-evaluate any COBRA subsidy offered to terminated individuals (such as through a severance plan or individual severance agreements) and determine whether it can contractually stop subsidizing COBRA for employees involuntarily terminated between now and December 31, 2009. Such a change in approach would effectively shift to the government the cost of subsidizing 65% of the COBRA premium. An employer should review its current plan documents, severance agreements, collective bargaining agreements, etc. to evaluate what the employer currently does, and what it can and should change in light of ARRA.
Our company has a fully insured health plan. Who fronts the 65% subsidy and who gets the tax credit — our company or our insurer?
If your company is an employer subject to federal COBRA requirements under ERISA, then your company must pay 65% of an eligible individual's COBRA premium to your insurer, and then your company (not the insurer) is entitled to claim the tax credit for providing the subsidy. The only time an insurer fronts the subsidy and claims the tax credit is when the employer is a small employer exempt from the federal COBRA continuation requirements but subject to similar ("mini-COBRA") continuation requirements under a state law.
We sponsor a self-funded group health plan. Must we "pre-pay" or advance the 65% subsidized portion of the COBRA "premium" and consider it a plan asset?
No. Under a self-funded plan, benefits are funded from the employer's general assets — so the employer doesn't actually "pay" the 65% subsidy to the plan as a "premium" on behalf of eligible COBRA recipients. Instead, the employer just absorbs any costs of the plan that exceed the contributions collected from employees and COBRA beneficiaries. The employer needs to be able to demonstrate, however, that it only charged assistance-eligible individuals 35% of what they would otherwise have to pay for COBRA coverage during the subsidized period, and that the employer paid all valid claims for benefits under its plan.
Some terminated employees who will be eligible for the subsidy have already elected COBRA and paid their premiums for March. What do we do with them?
If an individual who is entitled to the subsidy pays the full amount of the COBRA premium for March or April, you, as the sponsoring employer, have the option to either (1) refund the overpayment to the individual, or (2) apply the amount of the overpayment as credit toward future COBRA premiums.
Does the subsidy apply to dental and vision coverage, as well as medical coverage?
Yes. The subsidy applies to all group health plans that are required to offer COBRA continuation coverage except health flexible spending accounts.
Duration of Subsidy and COBRA Coverage
How long does the ARRA COBRA subsidy last?
It lasts for up to nine months. It ends upon the earliest of (a) nine months from the date the assistance-eligible individual first becomes eligible for the subsidy; (b) when the individual ceases to be eligible for COBRA coverage; or (c) when the individual become eligible for other group medical coverage or Medicare.
Does the subsidy end if an individual becomes eligible for other group medical coverage or Medicare but doesn't actually enroll in that coverage?
Yes. The subsidy ends upon eligibility for, rather than entitlement to or enrollment in, other group medical coverage or Medicare.
MINEFIELD GUIDANCE: The standard for early termination of the ARRA COBRA subsidy is different from the standard for early termination of COBRA coverage. To lose eligibility for COBRA coverage before the end of the maximum coverage period, a qualified beneficiary must actually become entitled to that coverage by enrolling in it. An assistance-eligible individual will lose eligibility for the subsidy, however, simply by becoming eligible for other group medical coverage or Medicare, irrespective of whether the individual actually enrolls. Note, however, that eligibility for other coverage will only terminate eligibility for the subsidy if the other coverage is Medicare or group medical coverage. Eligibility for the subsidy does not end upon eligibility for a flexible spending account, health savings account, health reimbursement account, or limited scope dental or vision coverage.
Does ARRA extend the length of the COBRA coverage period for an assistance-eligible individual?
No. ARRA does not add to the duration of continuation coverage a qualified beneficiary may elect; it simply provides premium subsidy for any "assistance-eligible individual" for up to nine months. Eligibility for the subsidy ends whenever COBRA coverage ends.
Our severance plan subsidizes 100% of the COBRA premium for the first six months after an involuntary termination for lack of work. How does that six months of subsidized coverage affect the period of coverage subsidized under ARRA?
According to informal IRS guidance, the period of ARRA-subsidized coverage runs concurrently with the period of employer-subsidized coverage — so that the six-month period during which your company pays 100% of the COBRA period offsets and reduces the nine-month period during which the ARRA subsidy would be available. This means that a terminated employee entitled to severance benefits under your plan would get six months of fully paid COBRA coverage from the employer (for which your company cannot claim a payroll tax credit) and then three months of coverage subsidized at 65% under ARRA (for which the company can receive a payroll tax credit).
What should employers subject to COBRA do now?
- Review all employees offered COBRA since September 1, 2008, and identify which ones were involuntarily terminated and need to receive notice of the subsidy and special election period.
- Update regular COBRA notices and election forms to include information about the subsidy and prepare the special COBRA notice and election form for individuals entitled to the special election rights.
- Make arrangements for the special notices to be sent to qualified beneficiaries who may be eligible for the subsidy and special election rights.
- Work with your COBRA administrator and other vendors to develop procedures for tracking assistance-eligible individuals and the eligibility periods for those who enroll during the special election period.
- Develop procedures for providing the subsidy and claiming the tax credit.
- Review and update health plan documents to reflect and incorporate the new COBRA rules.
- Review current severance plans and arrangements and evaluate whether any changes should be made in light of ARRA (for example, to ensure that your company can obtain the maximum tax credit available for subsidizing COBRA coverage).