Stimulus Act Changes to COBRA Requires Immediate Action
February 26, 2009
Congress passed The American Recovery and Reinvestment Act of 2009 (the "Act") on February 13, 2009 and President Obama signed it into law on February 17, 2009 ("Enactment Date"). The Act includes significant changes to COBRA and similar state continuation provisions that are effective for most group health plans on March 1, 2009, thus requiring immediate action on the part of employers and plan administrators. The Act applies to most group health plans subject to these health care continuation laws, but does not apply to health care flexible spending accounts.
The Act includes four major changes to COBRA: (1) a new COBRA subsidy; (2) changes to COBRA enrollment provisions; (3) additional notice requirements for plan administrators; and (4) new filing requirements for employers. This article summarizes these changes to COBRA and provides some initial compliance steps for employers and plan administrators. For purposes of this article, the term "COBRA" includes continuation coverage provided under federal or state continuation coverage laws.
Overview of Act's Changes to COBRA
The Act provides a COBRA subsidy to any "assistance eligible individual" or "AEI" (which includes any qualifying dependents) who became or becomes eligible for COBRA coverage due to an employee's involuntary termination of employment between September 1, 2008 and December 31, 2009.
What is an "involuntary termination"?
The Act does not define "involuntary termination." The Internal Revenue Service ("IRS") and the Department of Labor ("DOL") may provide clarification on this term in the future. However, we believe this term is broad enough to include those employees who experienced an involuntary termination due to performance issues as well as employees terminated as part of a reduction in force or layoff. Employers should establish a consistent approach on how to apply this term until further guidance is issued.
The Act provides that an individual who is denied eligibility for the COBRA subsidy may appeal the determination to the DOL or the Department of Health and Human Services. Additional guidance regarding the appeal process is expected.
Important Note: An employer must attest that each AEI for whom the employer takes the subsidy credit was involuntary terminated.
How much is the subsidy?
An AEI will have to pay only 35% of the COBRA premium otherwise charged to the AEI, with the employer (in most cases) paying the remaining 65%. Eligible entities will be able to recapture the subsidy amount by taking a corresponding credit against payroll taxes due. An entity may not take a credit, however, before actually receiving the AEI's portion of the COBRA premium. If the credit exceeds the payroll tax liability, the IRS will credit or refund the excess as if it were an overpayment of taxes.
Different entities are eligible to recapture the subsidy depending on the type of plan involved. Employers sponsoring fully or self-insured plans subject to federal COBRA must pay the balance of the premium when due. Employers will then be able to recapture the subsidy amount from the government. For insured plans not subject to federal COBRA (such as a small employer plan), but subject only to comparable state continuation requirements, the premium paid to the insurer will be reduced. The insurer will be the entity entitled to recover the subsidy amount from the government. For a multiemployer plan, regardless of whether fully or self-insured, the plan must advance the balance of the premium due. After advancing the balance, the plan will then recapture the subsidy amount from the government.
Any subsidy received under the Act is excluded from an eligible AEI's gross income (but see next Q&A below) and is not treated as income or resources for determining eligibility for federal or state public benefits.
Important Note: Employers sometimes subsidize employees' COBRA premiums under certain circumstances (e.g., as part of a severance arrangement). Under the Act, the subsidy applies to the portion of the COBRA premium amount charged to the employee.
Are all AEIs eligible for the subsidy?
Yes, technically, but the Act requires that AEIs with modified adjusted gross incomes above $145,000 and joint-filers with incomes above $290,000 in the year of the subsidy repay the subsidy as an additional tax when filing their income tax returns for that year. The tax would be repaid on a dollar for dollar basis. However, if an AEI made between $125,000 and $145,000 (or a joint-filer made between $250,000 and $290,000) in the year of the subsidy, the amount of additional income tax owed would be reduced proportionately. Employers must provide these "high-income individuals" with the option to permanently waive their right to the subsidy (in a manner to be prescribed by the Secretary of the Treasury). If waived, these "high-income individuals" would pay the full COBRA premium charged by the group health plan.
When does the subsidy begin?
The subsidy applies to periods of COBRA coverage beginning after the Enactment Date. For the many plans that treat each calendar month as a period of coverage, the subsidy will apply beginning March 1, 2009.
When does the subsidy terminate?
AEIs are entitled to the subsidy for up to nine months. Specifically, the subsidy terminates and a plan administrator may charge an AEI the full COBRA premium on the earliest of:
- the date the AEI becomes eligible (even if not actually covered) for coverage under another group health plan (other than plans providing only dental, vision, counseling or referral services, a health care flexible spending plan, or a health reimbursement arrangement) or for Medicare coverage;
- 9 months after the first date of the first month to which the subsidy applies (March 1, 2009 for most plans);
- the end of the maximum COBRA coverage period required by law (including permissible early terminations); or
- for an AEI who elects COBRA coverage during the special enrollment period (as discussed below), the end of the maximum COBRA coverage period that would have applied had the AEI elected COBRA coverage when first entitled to do so.
Important Note: An AEI who becomes eligible for other coverage must provide written notice to the plan providing COBRA coverage. Failure to timely notify the plan will subject the AEI to a penalty of 110% of the subsidy provided after the date the AEI became eligible for other coverage. The DOL is to issue rules specifying the applicable time and manner for an AEI to provide such notice.
Changes to COBRA Enrollment Provisions
The Act provides certain AEIs a second chance to elect COBRA coverage.
What is the special election notice requirement?
Many AEIs who experienced a loss of coverage on and after September 1, 2008 due to an involuntary termination did not elect COBRA, or elected it and let the coverage lapse. These AEIs must be provided with a special election notice within 60 days of the Enactment Date and be given 60 days following the date of that notice to elect coverage. Failure to provide these special election notices subjects plan administrators to the same penalties applicable to failures to send other required COBRA notices.
If an AEI elects COBRA coverage during this special election period, when does coverage begin?
An AEI who elects COBRA coverage under this special election right will receive coverage beginning with the first period of coverage that begins under the plan after the Enactment Date (March 1, 2009 for most plans). An election of coverage under this special election is not retroactive to the date the AEI originally lost coverage.
If an AEI elects COBRA coverage during this special election period, when does coverage end?
The COBRA coverage period for an AEI who elects coverage during the special election period terminates when COBRA coverage otherwise would have ended had the AEI elected COBRA when initially eligible. This special election does not extend the total period of available COBRA coverage which is measured from the date the AEI lost coverage as an active employee (generally, 18 months from date of termination). Rather, it simply allows them to enroll and pay the reduced premium rate for up to a maximum of 9 months.
How does a special election affect pre-existing condition provisions?
The gap in time between the date of the initial qualifying event and an election made during the special election period is not considered a "gap in coverage" for purposes of HIPAA's pre-existing condition rules.
Does the Act permit the AEI to elect different coverage than the coverage the AEI had at the time of the qualifying event?
Yes, the Act also allows (but does not require) an employer to permit AEIs to elect group health plan coverage different from the coverage in effect when the COBRA qualifying event occurred. In order for a different plan option to be available, the following conditions must be met: (i) the COBRA premium for the different coverage cannot exceed the COBRA premium for the coverage in which the AEI was enrolled when the COBRA qualifying event occurred; (ii) the different coverage must be coverage the employer offers to active employees when the AEI elects the different coverage; and (iii) the different coverage cannot provide only dental, vision, counseling or referral services and cannot be a health care flexible spending account, or an on-site facility primarily providing first aid, prevention or wellness care.
Important Note: An employer that wishes to allow AEIs to elect different coverage must provide them with written notice and a 90 day period in which to elect the different coverage. If an AEI enrolls in different coverage, the different coverage is still considered COBRA coverage.
Additional Employer Notice Requirements
COBRA election notices now must include information about the subsidy and if applicable, an AEI's ability to elect different health plan options. Under the literal language of the Act, it appears that notices with the additional information must be sent to any person who became or becomes a qualified beneficiary during the period beginning September 1, 2008 and ending December 31, 2009. The Act requires the DOL to issue model notices within 30 days of the Enactment Date.
For those individuals who experience a COBRA qualifying event¹ during the period from September 1, 2008 through December 31, 2009, the plan administrator must provide a notice that includes the following information:
- the forms necessary to establish eligibility for the reduced premium;
- the name, address and phone number of the plan administrator;
- a description of the special extended election period;
- a description of a qualified beneficiary's obligation to notify the plan when the individual becomes eligible for coverage under a different health care plan or Medicare and the penalty for failure to do so;
- a prominent description of the subsidy and any conditions to entitlement; and
- a description of the right to enroll in different coverage (if the employer chooses to allow it).
What happens if required notices are not sent before March 1, 2009?
The Act anticipates that it will not be feasible to send notices immediately, particularly since many employers and administrators will wait to use the model notices to be issued by the DOL. If an AEI submits the full payment for the first or second period of coverage after the date in which the subsidy applies to a group health plan, the entity to which the AEI paid the premium must either reimburse the AEI within 60 days, or credit the amount toward future payments due as long as it is reasonable to believe that the credit will be applied within 180 days.
Changes to Filing Requirements for Employers
Employers now must file three different reports relating to the COBRA subsidy. The specific reports necessary and their deadlines will be determined by the Department of Treasury, but the following reports were expressly identified in the Act:
- an attestation that each qualified beneficiary is receiving the subsidy as a result of an employee's involuntarily termination;
- an accounting to report the payroll tax credit taken for the reporting period and the estimated credits to be taken during the following reporting period; and
- a listing of all covered employees, the amount of subsidy treated as a payroll tax credit for each employee and a designation as to whether the subsidy is for one individual or two or more individuals.
Action Steps: What Employers and Plan Administrators Should Be Doing Now
As discussed above, employers and plan administrators need to prepare for the numerous duties imposed by the Act's changes to COBRA. Listed below are some of the initial steps that employers and plan administrators should take to comply with the new requirements:
- Identify all qualified beneficiaries who became eligible for COBRA since September 1, 2008 and within that group, identify all potential AEIs (i.e., all employees involuntarily terminated) since September 1, 2008.
- Identify AEIs who have already elected COBRA coverage and must receive the premium subsidy starting with the next COBRA payment period (for most plans, March 1, 2009).
- Determine the correct premium subsidy that applies to AEIs who are currently not required to pay the maximum permissible COBRA premium.
- Determine whether or not to allow AEIs to change their coverage to a different health plan.
- Decide if you prefer to wait for the DOL model notices or to prepare your own notices.
- Develop a waiver election form for "high-income individuals" who wish to waive the subsidy permanently.
- Determine whether to reimburse or provide a credit for those AEIs who submit a full premium payment for the first or second month after the first payment period eligible for the premium subsidy. If you decide to provide a credit, develop a procedure for refunds if the credit is not or will not be used within 180 days.
- Contact your third-party COBRA administrator (if applicable) to communicate your choices with respect to the Act and ensure a coordinated response.
- Modify payroll or other administrative systems to accommodate the new requirements, including to provide information regarding subsidy-eligible individuals, bill the AEIs appropriately, provide the required information for offsetting payroll tax payments, and provide the necessary information to file reports regarding the subsidy.
- Review plan, SPDs and employee communication materials to determine whether amendments are necessary due to the Act's requirements.
¹ The statute refers to all qualified beneficiaries, but the legislative history seems to suggest only potential AEIs should receive the new information. This could lead to confusion as many individuals who would receive the revised notice will not be eligible for the premium subsidy.
If you have any questions about this Client Alert, or would like assistance in complying with these new COBRA provisions, please contact your Parker Poe attorney, or any member of our employee benefits practice group.