The American Recovery and Reinvestment Act of 2009 ("ARRA"), which President Obama signed into law on February 17, 2009, created a federal subsidy of the premiums payable by certain terminated employees for continuation coverage provided under employer-sponsored group health plans pursuant to the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (also known as "COBRA"). The premium subsidy and new notification requirements under COBRA that apply to employers and plan administrators as a result of this legislation are summarized below.
The COBRA Premium Subsidy
The subsidy covers 65% of the COBRA premiums that would otherwise be payable by "assistance eligible individuals" (defined below), which is paid by the employer and then generally recouped from the federal government via a credit against the employer's federal payroll taxes, or, alternatively, through a direct payment from the government . The COBRA premium subsidy is available to assistance eligible individuals for up to nine months and will generally apply to premiums paid for periods of coverage beginning on and after March 1, 2009. It is important to note that the COBRA premium subsidy is based on the premium actually charged to the assistance eligible individual, and thus, does not include amounts that a former employer has agreed to pay on behalf of the individual. The COBRA premium subsidy is no longer available once an assistance eligible individual becomes eligible for coverage under another group health plan or Medicare or otherwise is no longer eligible for COBRA continuation coverage. The subsidy applies to group health plans, but does not apply to plans that provide only dental, vision, counseling or referral services or health care flexible spending arrangements.
For purposes of this discussion, an "assistance eligible individual" means any qualified beneficiary (within the meaning of COBRA) that experiences an involuntary termination of employment (but not for reasons of gross misconduct) at any time during the period that begins with September 1, 2008 and ends with December 31, 2009, and that elects COBRA continuation coverage. A special election period is available for those individuals who do not have a COBRA election in effect on the date of ARRA's enactment but who would be assistance eligible individuals if such election were so in effect (the "Special Election Group"). The special election period for these individuals runs from February 17, 2009 (ARRA's enactment date) and ends sixty days after the plan administrator sends out the newly required notice of the new special election period. This means that the Special Election Group will have a new 60-day window in which to elect COBRA continuation coverage that will be effective with the first period of coverage beginning on or after February 17, 2009. Thus, for plans that provide and charge for COBRA continuation coverage on a monthly basis, such coverage will commence for the Special Election Group on March 1, 2009.
The subsidy begins to phase out for individuals and couples with annual adjusted gross income in the amounts of $125,000 and $250,000, respectively. The subsidy is completely phased out for individuals with an annual adjusted gross income of more than $145,000 and couples with an adjusted gross income of more than $290,000. Any individual that receives the subsidy during the year whose income exceeds the foregoing limits is required to repay the subsidy.
New Notice Requirement
Employers must provide notice to employees/former employees who experience a qualifying event during the period that begins with September 1, 2008 and ends with December 31, 2009 of the availability of the COBRA premium subsidy. This notice must include the following information:
- A description of the qualified beneficiary's right to the premium subsidy and any conditions on the entitlement to the subsidy.
- The forms necessary for establishing eligibility for the premium subsidy.
- The name, address and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the premium subsidy.
- A description of the special election period that is available for those individuals who do not have a COBRA election in effect on the date of ARRA's enactment but who would be assistance eligible individuals if such election were so in effect.
- A description of the qualified beneficiary's responsibility to notify the plan if he or she becomes eligible for coverage under another group health plan or for Medicare, and the penalties imposed under Section 6720C of the Internal Revenue Code for failure to do so.
- A description of alternative COBRA coverage options, if the employer elects to provide them.
ARRA requires the Department of Labor to publish a model notice within 30 days from ARRA's enactment for purposes of this new notice requirement.
Action Items For Employers and Plan Administrators
With the March 1, 2009 effective date fast approaching, the following is a list of action items that employers and plan administrators may find helpful in preparing for their new obligations under COBRA as amended by ARRA.
- Identify employees/former employees (including their eligible spouses and/or dependents) that are eligible to elect COBRA continuation coverage who experienced involuntary terminations on or after September 1, 2008.
- Review and update existing COBRA communications and notices. In particular, employers and plan administrators should focus on preparing a new notice meeting the requirements described above to be furnished to the Special Election Group.
- Review and revise existing payroll systems and procedures to track and facilitate the COBRA premium subsidy payments.
- Establish processes and procedures within the employer's human resources department and payroll system that will gather the information needed to accompany the employer's claim for the tax credit.
- Determine the impact the COBRA premium subsidy will have on existing arrangements where the employer pays for all or a portion of a former employee's COBRA premiums.
- To the extent applicable, coordinate with third-party COBRA administrators to clearly define the roles of each party with respect to the new responsibilities under COBRA.