65% subsidy for up to nine months
The American Recovery and Reinvestment Act of 2009 includes a new subsidy of COBRA premiums for individuals who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009. Starting March 1, 2009, such former employees and their family members need only pay 35% of the normal COBRA premium. The employer will then get a credit against its payroll taxes for the balance of the COBRA premium for a selfinsured group health plan. (The insurer gets the credit in the case of an insured group health plan.) The IRS will publish instructions for claiming the credit.
The subsidy ends on the earliest of the date:
- the individual’s COBRA premiums have been subsidized for nine months,
- the individual ceases to be eligible for COBRA, or
- the individual becomes eligible for another group health plan. The individual is supposed to notify the group health plan when he or she becomes eligible for another plan. Note that while eligibility for another group health plan ends an individual’s right to the subsidy, it does not end the individual’s right to continue COBRA at his or her own expense. Eligibility for COBRA does not end until the individual actually enrolls in another group health plan.
The subsidy is not available to employees who were terminated for gross misconduct or employees who voluntarily terminated employment. Also, the subsidy is not available for individuals entitled to COBRA due to divorce, loss of dependent status, death, or reduction in hours. The Department of Labor will review disputes as to eligibility for the subsidy.
The subsidy is phased out for individuals with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return) in the year the subsidy is received. If the subsidy is provided to an individual with adjusted gross income over the threshold, it will be recaptured on the individual’s taxes. An individual also has the right to waive the subsidy.
The Department of Labor is supposed to publish model notices by March 19, 2009 (30 days after the bill was signed into law). Employers are expected to use the new notices (or a variation with the same information) for future COBRA qualifying events. Also, employers must send new notices to all employees who were involuntarily terminated on and after September 1, 2008 – regardless of whether those employees elected COBRA when initially eligible for it. Employers have until April 18, 2009 (60 days after the bill was signed into law) to send the new notices.
Involuntarily terminated employees who did not elect COBRA (and involuntarily terminated employees who elected COBRA but subsequently dropped it) have 60 days after the receipt of the new notice to make a new COBRA election. The right also extends to family members. Any new COBRA election does not extend the period of COBRA continuation coverage. Rather, COBRA coverage would start March 1, 2009 and would end 18 months after the termination of employment. There would be a gap in coverage between the termination of employment and March 1, 2009.
You may want to develop a mailing list of employees who were involuntarily terminated on or after September 1, 2008. If you outsource COBRA administration, contact your COBRA administrator to make sure they are aware of the changes and are taking steps to implement the subsidy requirements. You may also want to touch base with your insurers (including any stop loss carriers).