New Economic Stimulus Law Provides a Temporary Subsidy for Certain COBRA Premiums
- United States
- 03/23/2009
Introduction
The American Recovery and Reinvestment Act of 2009 (“the ARRA”), which was signed into law by President Obama on February 17, 2009, provides a temporary federal government subsidy for COBRA premiums for certain employees (and their qualified beneficiaries) who lost or lose coverage under an employer’s group health plan due to an involuntary termination of employment between September 1, 2008 and December 31, 2009. This subsidy is equal to 65% of the COBRA premium and is provided for up to 9 months of COBRA coverage. The ARRA also allows (but does not require) employers to give individuals who are eligible for the subsidy the opportunity to switch to other group health coverage. These provisions impose significant new COBRA notice, reporting, and premium payment responsibilities that require immediate action.
COBRA Premium Subsidy
Under the ARRA, eligible individuals are provided a federal subsidy of 65% of their premiums for COBRA coverage (excluding flexible spending accounts) for up to 9 months. This means that these individuals will only have to pay 35% of the cost of their premiums for COBRA coverage during this period. The employer (or the plan in the case of a multiemployer plan) is entitled to reimbursement from the federal government for the remaining 65% of the premium.
Eligible Individuals
The individuals eligible for this COBRA subsidy, referred to as “assistance eligible individuals” (or “AEIs”), are those employees and other qualified beneficiaries (i.e., covered spouses and dependent children) who became or become eligible for COBRA coverage between September 1, 2008 and December 31, 2009 due to an involuntary termination of employment and elect COBRA coverage. The statute does not define what will be considered an “involuntary termination” for this purpose, but individuals terminated for gross misconduct would not be eligible for COBRA coverage or the subsidy.
Employees or other qualified beneficiaries who became eligible to elect COBRA coverage due to an involuntary termination of employment between September 1, 2008 and February 17, 2009 (the date of enactment of the ARRA) but did not have a COBRA election in effect on February 17, 2009 (i.e., because they declined COBRA coverage or could not afford to continue paying the premiums) are given a second chance to elect COBRA coverage. This special enrollment period begins on February 17, 2009 and ends 60 days after the date the individual is notified of this special enrollment right.COBRA coverage elected during this special enrollment period is effective with the first COBRA coverage period beginning on or after February 17, 2009; however, this special election does not extend the individual’s COBRA coverage period beyond the original maximum period (generally 18 months from the involuntary termination).
A special, expedited appeals procedure is provided for individuals who believe they were wrongly denied the COBRA subsidy. Such individuals may appeal directly to the Department of Labor, and the Department of Labor is to make its decision on review within 15 business days.
Certain “high-income individuals” are not eligible for the COBRA subsidy. These are individuals whose modified adjusted gross income (“AGI”) (as defined in the ARRA) exceeds $145,000 ($290,000, if filing jointly) for the year the subsidy is received. Individuals whose modified AGI for the year the subsidy is received is between $125,000 and $145,000 ($250,000 and $290,000, if filing jointly) are eligible only for a portion of the subsidy. If an individual receives a subsidy he or she is not entitled to because of this income limit, the excess subsidy must be re-paid as an additional tax on the individual’s federal income tax return. Alternatively, an individual may elect to permanently waive the subsidy instead of having to report it on his or her tax return.
Duration of the Subsidy
The COBRA subsidy applies to COBRA coverage periods beginning on or after February 17, 2009, the date of enactment of the ARRA. So, for example, if a plan charges COBRA premiums on a monthly basis, the COBRA subsidy applies beginning March 1, 2009. AEIs who had a COBRA election in effect on February 17, 2009 in connection with an involuntary termination on or after September 1, 2008 are eligible to receive the subsidy on a prospective basis, beginning with the first COBRA coverage period beginning on or after February 17, 2009.
The COBRA subsidy ends with the first month on or after the earliest of (i) the date which is 9 months after the first day of the first month for which the COBRA subsidy applies; (ii) the first date the AEI is eligible for Medicare or coverage under another group health plan (other than plans providing only dental, vision, counseling and/or referral services, flexible spending accounts, and certain worksite programs); and (iii) the day following expiration of the AEI’s COBRA coverage.
The ARRA requires an AEI who becomes eligible for Medicare or coverage under another group health plan to notify the plan providing the COBRA coverage in writing. An AEI who fails to provide this notice is subject to a penalty of 110% of any excess COBRA subsidy he or she receives.
The ARRA includes a limited transition rule for implementing the COBRA subsidy with respect to AEIs who had a COBRA election in effect on February 17, 2009. If such an individual pays the full COBRA premium for the first and/or second periods of COBRA coverage beginning on or after February 17, 2009 (for plans with monthly COBRA coverage periods, this means the premiums for March and April 2009), the plan administrator must either (i) reimburse the AEI for the amount of the overpayment within 60 days, or (ii) offset the amount of the overpayment against future COBRA premiums. The offset method can only be used if it is reasonable to expect the overpayment to be fully applied against future COBRA premiums within 180 days. If during the 180-day period, it is no longer reasonable to believe that the excess will be applied against COBRA premiums within such period (i.e., the individual’s COBRA coverage ceases), the plan administrator must pay the remainder of the overpayment to the AEI within 60 days.
Notice Requirements
The ARRA requires that COBRA notices be revised to include additional information relating to the COBRA subsidy and, if applicable, the option to switch to other group health coverage. This additional information can either be included in existing COBRA notices or included in a separate notice sent together with existing COBRA notices. The Department of Labor is required to develop a model notice by March 19, 2009.
This new information must be provided to all individuals who had or have a COBRA qualifying event during the period between September 1, 2008 and December 31, 2009. For those individuals who had a COBRA qualifying event on or after September 1, 2008 and before February 17, 2009, the notice must be provided by April 18, 2009 (i.e., within 60 days after the date of enactment).
The new information to be provided must generally include (i) the forms necessary for establishing eligibility for the COBRA subsidy; (ii) the name, address and telephone number of the plan administrator and any other person maintaining relevant information in connection with the COBRA subsidy; (iii) a description of the special enrollment period for AEIs whose COBRA qualifying event was before February 17, 2009; (iv) a description of the individual’s obligation to notify the plan in writing if he or she becomes eligible for coverage under another group health plan or Medicare, and the penalty for failure to do so; (v) a description, displayed in a prominent manner, of the individual’s right to the COBRA subsidy and any conditions on entitlement to the subsidy; and (vi) if applicable, a description of the individual’s option to enroll in a different coverage option.
A violation of these new notice requirements will be considered a violation of the general notice requirements under COBRA and will be subject to the same penalties.
Reimbursement of Employer or Plan
The employer (or the plan, in the case of a multiemployer plan) is entitled to reimbursement for the COBRA subsidy (i.e., 65% of the premium that would otherwise have been paid by the employee) from the federal government. The employer (or multiemployer plan) can claim this reimbursement only after the AEI has paid the reduced COBRA premium.
An employer entitled to reimbursement credits the amount of the reimbursement to which it is entitled against its payroll taxes (including wage withholding and the employee and employer portions of FICA). To the extent this credit exceeds the employer’s payroll taxes, the employer will be credited or refunded the difference as if it was an overpayment of payroll taxes. To the extent the employer overstates the amount of the subsidy for which it is entitled to be reimbursed, the excess will be treated as an underpayment of payroll taxes.
An employer claiming the reimbursement will be required to report certain information to the Internal Revenue Service at the time its payroll taxes are paid. Information that will either have to be reported to the Internal Revenue Service or maintained to verify compliance will include (i) an attestation of involuntary termination for each covered employee with respect to whom it is claiming reimbursement; (ii) the amount of payroll taxes offset for the reporting period and an estimate of the amount to be offset for the next reporting period; (iii) the tax identification numbers of all covered employees; and (iv) the amount of the subsidy reimbursed for each covered employee and qualified beneficiary and a designation of whether the subsidy is for individual or family coverage. The Internal Revenue Service may also prescribe additional reporting requirements to verify that the proper amounts were reimbursed.
New Plan Enrollment Option
Under current law, coverage under COBRA is the same as the coverage the individual had on the date of the COBRA qualifying event and may generally be changed only during an open enrollment period. The ARRA provides that an employer may (but is not required to) permit AEIs to enroll in different coverage. The different coverage must have the same or lower premiums than the coverage the AEI had at the time of the qualifying event; must also be available to the employer’s active employees; cannot be coverage for only dental, vision, counseling and/or referral services; and cannot be a flexible spending account or one of certain specified worksite programs. If an employer allows AEIs to change coverage options, the AEIs must be notified of this right and given no more than 90 days after the notice is provided to elect to change their coverage.
Next Steps
These new rules require immediate changes to COBRA materials and procedures and payroll systems. Although further guidance from the Internal Revenue Service and Department of Labor is expected, including a model notice, employers should immediately contact their COBRA administrators, payroll vendors and insurance carriers to begin to address these new rules.
IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Originally published on 2009 Hughes Hubbard & Reed LLP
