Stimulus Act Changes to COBRA
Revised March 31, 2009
President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Stimulus Bill") on February 17, 2009. In addition to the spending and tax cut provisions covered in the press, the Stimulus Bill includes assistance for COBRA health care continuation premium payments for employees who have lost their coverage along with their jobs. Employers play a pivotal role in processing this new benefit, and significant notice and recordkeeping obligations are included with very short compliance periods. Prompt attention is required to meet these deadlines. The major elements are outlined below, including action steps.
I - Premium Assistance for COBRA Benefits - the basics
- A subsidy of 65% of the COBRA premium will be available to assistance eligible individuals.
- An "assistance eligible individual" is a person who suffers an involuntary termination (other than for gross misconduct) occurring between September 1, 2008 and December 31, 2009 and who elects COBRA coverage. The subsidy does not apply to employees who voluntarily resign or who suffer a loss of coverage due to a reduction in hours that is not a termination of employment. Eligibility begins to phase out for those with incomes above $125,000/single and $250,000/family.
- The subsidy will be available for up to nine months of COBRA coverage. The subsidy terminates earlier if the assistance eligible individual becomes eligible for other employer health coverage or Medicare during the subsidy period. Eligibility for only dental, vision, employee assistance programs, Section 125 health care spending accounts, onsite medical care or similar limited coverage will not cause early termination. Early termination of the subsidy is caused by eligibility for other group coverage (i.e. satisfied the waiting period and other conditions of enrollment) or Medicare while early termination of the COBRA coverage is caused by enrollment in other group coverage or entitlement to Medicare. An individual who is eligible for other coverage but refuses to enroll may continue COBRA coverage but will not be eligible for the premium assistance.
- The subsidy applies to the first "period of coverage" after enactment (March 1, 2009 for most plans).
- Premium assistance does not apply to Section 125 health care spending accounts of cafeteria plans.
- COBRA participants access the benefit by tendering their share of the premium (35% of the full COBRA premium) to the employer and filing a claim for assistance eligible individual status. Election forms must be modified or other forms added so that individuals can establish (claim) eligibility for the subsidy. If an individual claims assistance eligible individual status and the employer denies the request, the individual may appeal to the DOL for review.
- The premium subsidy also applies to family members if their qualifying event is the employee's involuntary termination.
II - Premium Assistance for COBRA Benefits - other issues
- Individuals denied assistance eligible individual status (premium assistance and second chance election) have the right to have their denial reviewed by the U. S. Department of Labor (DOL). The DOL will review claims and respond within 15 business days.
- The subsidy is not considered to be gross income to the covered employee but is considered to be an employee contribution to the plan for purposes of determining the gross income of the employer.
- Employers with two or more plan options (e.g. low deductible, high deductible, PPO, HMO, etc.) may offer assistance eligible individuals the option to elect an equal or less costly option (does not apply to Section 125 health care spending accounts, on-site medical facilities, dental only coverage and certain other options). A special 90-day enrollment period applies.
- Individuals who receive a subsidy when they have high income (above $125,000/$250,000) will have the excess amount recaptured on their tax return for the year.
- Individuals receiving a subsidy when ineligible (e.g. while eligible for other group coverage) are subject to a penalty tax of 110% of the excess subsidy.
- Individuals electing ARRA premium assistance are disqualified from participation in the Health Coverage Tax Credit (HCTC) program providing tax credits for COBRA premiums paid under the Trade Adjustment Act of 2002. Individuals eligible for the HCTC program may find its benefits (80% tax credit for COBRA premiums and potentially longer COBRA coverage period) more valuable than the ARRA premium assistance.
III - Funding the Subsidy Amount
- Employers will generally bear the initial cost of the subsidy (65% of the premium), but may obtain reimbursement by offsetting the cost against their withholding and payroll tax obligations or by application to the IRS for a refund of an overpayment of these amounts.
- If an employer claims an offset or reimbursement on payroll taxes when ineligible (e.g. termination was voluntary or claim of offset before employee pays 35% share) the employer will be treated as underpaying its taxes and subject to appropriate penalties.
- Employers are not eligible for the reimbursement for the 65% subsidy until they collect the 35% payment from the individual or from someone other than the employer. The employer is not eligible for reimbursement on any portion of the COBRA premium that it pays, e.g., under a severance plan.
IV - Special Treatment of Qualified Beneficiaries Who Became Eligible from September 1, 2008 to Date of Enactment of Stimulus Bill
- Employers must give notice to assistance eligible individuals who became eligible for COBRA in the period from September 1, 2008 to the date of enactment.
- These individuals have another 60-day election period beginning with delivery of a notice of this right for prospective coverage.
- This special notice must be given within 60 days of the Stimulus Bill enactment (by April 18, 2009) along with any forms necessary to establish eligibility for the subsidy.
- The period from the date of the loss of coverage until the date of the notice is disregarded (tolled) for purposes of the 63-day gap in coverage applicable to pre-existing condition limitation enforcement.
- Coverage elected pursuant to the special election begins on the first period of coverage beginning after the date of enactment (usually March 1, 2009).
- The 18-month COBRA duration begins at the date of the original involuntary termination, not the date of the new election period.
V - Impact on Individuals with COBRA Elections currently in effect
- Individuals with COBRA continuation coverage in effect on February 17, 2009 are entitled to the reduced premium rate if their involuntary termination of employment occurred from September 1, 2008 through February 16, 2009 and they are assistance eligible individuals.
- These individuals must claim or apply for the assistance eligible individual status and reduced premium rates.
- If an assistance eligible individual pays the unsubsidized premium in the first two periods (months), the employer must either reimburse the overpayment or credit the overpayment against subsequent payment obligations. Offset is an acceptable response if it is reasonable to believe that the credit will be used up within 180 days
VI - Notices and Reports
- The employer must provide a notice of the special subsidy provisions to individuals who become COBRA qualified beneficiaries from September 1, 2008 through December 31, 2009. This notice must give all qualified beneficiaries the opportunity to elect COBRA continuation coverage and to claim assistance eligible individual status (eligibility for the reduced premium). This is the general notice. The most recent information from the DOL concludes that no additional notice needs to be given to qualified beneficiaries who have COBRA rights for reasons other than an involuntary termination of employment if they were provided a notice prior to February 17, 2009 that satisfied the COBRA rules at the time of the notice..
- Employers must provide a special notice to all individuals who became qualified beneficiaries due to an involuntary termination from September 1, 2008 through February 16, 2009. This must include all the information from the general notice as well as their right to the special second chance election. This is known as the special "second chance" or "extended election" notice.
- Employers must provide a notice describing premium assistance to individuals with a COBRA election relating to a qualifying event occurring on or after September 1, 2008 that is currently in effect and provide a form on which they can claim assistance eligible status.
- Individuals who have COBRA elections in effect and who terminated employment from September 1, 2008 to the date of the notice and who are assistance eligible individuals must be given information about the reduced premium and the forms necessary to claim assistance eligible individual status.
- The DOL published model notices on March 19, 2009.
- See www.dol.gov/ebsa/COBRA.html at "COBRA ARRA Model Notices."
- If the employer chooses to offer elections for a lesser cost option, then it must provide notice of this option to affected individuals.
- Assistance eligible individuals must notify employers in writing if their eligibility for the subsidy lapses prior to the expiration of the nine month subsidy period.
Employers must retain records necessary to file reports with the IRS describing their activity with the special subsidy. New Code Section 6432 requires employers to file "such reports as the Secretary may require." These reports may require the following information:
- the social security numbers of participants
- attestation of involuntary termination of all covered employees
- the amount of payroll taxes offset to recover the subsidy
- amount of subsidy reimbursed for each qualified beneficiary
- whether coverage for each qualified beneficiary was single coverage or for two or more individuals.
VII - COBRA Coverage Period Extension
- If a covered employee's pension becomes payable by the PBGC, the COBRA period extends to the date of death.
- If a covered employee is a Trade Adjustment Assistance (TAA) eligible individual, COBRA coverage may continue until the employee ceases to be TAA eligible.
- The COBRA coverage period cannot be extended beyond December 31, 2010 under the above provisions.
- The TAA subsidy is increased from 65% to 80% through December 31, 2010.
VIII - Employer Responses Required
- Identify individuals who had qualifying events from September 1, 2008 through February 16, 2009. Identify those whose qualifying events were involuntary terminations of employment and therefore must be give the additional information about their special second chance election. Also identify those individuals who have COBRA elections in effect and who must be given the opportunity to claim assistance eligible individual status.
- Prepare revised COBRA election forms and prepare the supplemental forms for claiming assistance eligible individual status and for notifying the employer of eligibility for other coverage. Prepare and send the special notice for all individuals who had a qualifying event resulting from an involuntary termination of employment from September 1, 2008 through February 16, 2009. Because this benefit is available to all qualified beneficiaries, address the notices to all in the household (e.g. Dear Mr. & Mrs. Smith) or send to qualified beneficiaries not in the household. Use your standard COBRA procedures for these notices. E.g., certificate of mailing
- Establish rules for determining difference between voluntary and involuntary termination of employment.
- Amend plans in a manner consistent with the new, temporary COBRA rules.
- Coordinate new offsetting payroll tax and withholding procedures with payroll department.
If you need assistance with compliance with these new employer obligations, contact Nancy Farnam at 248/567-7426 or other members of Varnum's Employee Benefits group.