On January 17, 2009 U.S. President Obama signed into law the American Recovery and Reinvestment Act, also known as the “Stimulus Package.” This Act includes some important provisions relating to health plan continuation coverage which, effective March 1, 2009, applies to all employers subject to COBRA, even those that do not request or receive financial assistance from the U.S. federal government under the “Troubled Assets Relief Program.”
Employees who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009 are entitled to a 65% subsidy for their COBRA premiums, paid for initially by the employer, but reimbursed by the U.S. federal government in the form of a payroll tax credit. The purpose of these provisions is to assist unemployed individuals in maintaining some form of health insurance coverage. For employers with group health plans, these new assistance provisions impose additional compliance burdens and include penalties for failure to comply. Prompt action will be required to comply with the new law, including sending notices to those who are affected.
Background: What is COBRA?
“COBRA” is an acronym of the “Consolidated Omnibus Budget Reconciliation Act of 1985.” This particular statute provides that employers of more than 20 employees (employees of related U.S. and foreign affiliates must be counted when determining the 20 employee threshold) who sponsor group health plans in the U.S. must allow individuals (and their family members) who were covered under the employer’s health plan but lost coverage due to certain circumstances to elect to continue their coverage under the health plan for a prescribed period of time, on a self-pay basis. (Employers with fewer than 20 employees may be subject to similar state law requirements.) The individuals may be required to pay up to 102% of the total premium (including the portion formerly paid by the employer) for the coverage. (The extra 2% is intended to cover administrative costs).
Eligibility for the COBRA Subsidy Under the Act
Under the American Recovery and Reinvestment Act (Act), the 65% COBRA premium subsidy is available to employees (and their spouses and dependents) who lose health plan coverage due to involuntary termination of employment between September 1, 2008 and December 31, 2009. The Act does not define “involuntary termination” but does provide that if an individual requests that an employer treat him or her as eligible for the subsidy and the employer refuses, the individual may appeal the decision to the U.S. Department of Labor or to the Department of Health and Human Services. In essence, eligible individuals will only need to pay 35% of the COBRA premium in order to continue their health insurance coverage.
In order to be eligible, involuntarily terminated employees must pay 35% of the COBRA premium. Employers must actually collect the employee’s portion of the premium before requesting the 65% subsidy from the U.S. federal government. The subsidy is not available if the employer pays the entire cost of the coverage.
Individuals with adjusted gross income of more than $145,000 ($290,000 for married couples filing jointly) are not eligible for the subsidy. The subsidy is phased out for individuals with adjusted gross income of more than $125,000 ($250,000 for married couples). Any subsidy they receive for which they are ineligible will be recaptured via additional income taxes. Employers are not required to determine whether former employees fall within the income limits.
The subsidy itself is not retroactive but applies to periods of coverage beginning on or after March 1, 2009 for up to nine months. The subsidy ends before expiration of the nine-month period when the employee is eligible for health plan coverage through another employer or becomes eligible for Medicare, regardless of whether the individual is actually enrolled. Individuals are required to notify the former employer of eligibility for such coverage and could be subject to a penalty equal to 110% of the subsidy if they fail to do so.
Note that the Act does not shorten or extend the actual COBRA period to which an employee is entitled.
Employer Notice Obligations
Since the subsidy takes effect March 1, 2009 employers will need to quickly revise their COBRA notices to reflect the subsidy’s availability and explain how it works. A model notice will be issued by the responsible government agencies by mid-March 2009.
“Second Chance” Election Notice:
Any employees who lost health plan coverage since September 1, 2008 and who did not elect COBRA coverage at that time must be given a second chance to do so, regardless of whether they lost coverage due to involuntary termination or some other reason. A notice and appropriate forms for electing coverage must be sent to them by April 18, 2009. They will then have another 60 days to elect COBRA coverage. Any coverage actually elected is only required to be retroactive to March 1, 2009, not the date the individual lost regular coverage.
Failure to provide these notices is treated as a failure to meet COBRA notice requirements and could result in a potential penalty of up to $110 per day. Such a failure could also result in excise taxes of $100 per day per notice ($200 if more than one individual in the same family is affected), up to specified amounts.
Mechanics of Receiving the Subsidy
The entity that provides the health plan coverage and collects the 35% premium is entitled to receive the subsidy as a credit against the payroll taxes it owes. The IRS will provide guidance on how payroll tax returns are to be completed to reflect the subsidy as well as what and how information needs to be reported to verify the subsidy amounts.
The Act itself requires the following information to be reported:
- An attestation of involuntary termination of employment for each individual for whom the subsidy is received;
- The tax identification number of all covered employees, the amount of the subsidy for each employee and a designation for each employee as to whether the coverage is for one or more individuals; and
- A report of the amount of payroll taxes offset by the subsidy.
What Employers Should Do Now
As a result of the health coverage provisions contained in the Act, employers should:
- Prepare a “Second Chance” Notice;
- Prepare a revised “General” Notice describing the subsidy to be provided to eligible individuals who are involuntarily terminated on or before December 31, 2009;
- Identify all individuals who lost health plan coverage beginning September 1, 2008 and who did not elect COBRA coverage and provide the “Second Chance” Notice (the Notice in #1) to them by April 18, 2009;
- Provide any individuals receiving the “Second Chance” Notice 60 days to make an election for COBRA coverage;
- Begin collecting information (such as the attestation of involuntary termination of employment, the tax identification number of all covered employees and the amount of the subsidy for each employee) to document and report the subsidy in order to receive a credit against payroll taxes; and
- Coordinate with insurers and any third party COBRA administrators to determine how to comply.