Expansion of COBRA Coverage in Stimulus Package
On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 ("the Act"), an economic stimulus package that includes a COBRA subsidy for involuntarily terminated workers, known as “Premium Assistance for COBRA Benefits.” In short, the subsidy covers 65% of the COBRA premium for a period of nine (9) months for employees of a certain income level who were involuntarily terminated between September 1, 2008 and December 31, 2009. Employers, who are subject to various notice and reporting requirements, may receive an income tax credit to offset the subsidy.
This alert highlights key elements of the legislation related to this broad expansion of COBRA coverage.
- Amount of Subsidy: The COBRA subsidy amounts to 65% of the COBRA premium for a period of nine (9) months for employees who participated in an employer's group health plan at the time of termination, excluding flexible spending accounts. Thus, these "assistance eligible individuals" or AEIs would pay only 35% of the premium under a plan.
Covered Employees: An AEI means any qualified beneficiary if:
- at any time during the period that begins with September 1, 2008 and ends with December 31, 2009, such qualified beneficiary is eligible for COBRA continuation coverage;
- that beneficiary elects such coverage; and
- the qualifying event with respect to the COBRA continuation coverage consists of involuntary termination of the covered employee's employment and occurred during such period. However, neither the legislation nor the accompanying Conference Report defines "involuntary."
- Income Threshold: To the extent that an employee earns an income in excess of $125,000 (or $250,000 in the case of a joint return) and receives any COBRA premium aid, the amount of the aid will be added to the employee's income tax liability for the relevant year. For those employees who earn a gross income of no more than $145,000 (or $290,000 in the case of a joint return), the increase in tax liability is not to exceed the “phase-in percentage” set out in the Act. The high-income individual can opt to waive assistance and avoid recapture.
- Election Issues: The legislation requires that a qualified beneficiary who was terminated as early as September 1, 2008 and who carries no COBRA coverage as of the date of enactment be offered a second chance to elect coverage within 60 days. This coverage is not available retroactively, i.e., when the employee's qualifying event occurred, but begins on the first period of coverage beginning on or after the Act's enactment. The Act also permits employers to let employees who choose COBRA coverage to choose a different coverage level than what the employee had when the qualifying event occurred. However, this change is only permitted when the premium of the coverage elected does not exceed that of the prior coverage.
- Duration of the Subsidy Period: The COBRA subsidy period ends upon the earliest of the following events to occur: (i) the date which is nine (9) months after subsidy payments began; (ii) the date following the expiration of the maximum period of continuation coverage required under the applicable COBRA continuation coverage provision; or (iii) the date on which the participant becomes eligible for coverage under another group health plan. It also appears that COBRA coverage can be terminated for the employee's failure to pay the 35% subsidy, but it also appears that the existing grace period for payment of COBRA premiums continues to apply.
- Employer Tax Credit: Employers (or health plans if they administer COBRA benefits) will receive a credit against payroll taxes (income tax withholding, FICA, etc.) to offset the subsidy. Congress, via the United States Treasury, has established a fund to reimburse employers, insurance carriers, or plans (as applicable) when the COBRA subsidy exceeds the employment tax liability in a given quarter.
- Employee Notice Requirements: An AEI must notify the group health plan in writing if he or she becomes eligible for coverage under any other group health plan.
Employer Notice Requirements: The Act requires immediate changes to an employer's COBRA notice procedures. An employer must give notice of:
- the availability of premium reduction with respect to the subsidy; and
- the option to enroll in different coverage if the employer permits AEIs to elect enrollment in different coverage.
An employer may amend current forms or provide an addendum to those forms to comply with these notice requirements Specifically, an employer should provide:
- the forms necessary for establishing eligibility for premium reduction;
- the name and contact information for the plan administrator or anyone else with information relevant to premium reduction;
- a description of extended election periods;
- a description of the beneficiary's notice obligations;
- a description of a beneficiary's right to a reduced premium and any conditions on entitlement to a reduced premium; and
- a description of the option of the beneficiary to enroll in different coverage if the employer so allows.
Such notice must be issued to participants (including already terminated employees) within 30 days of the date model notices are issued by the DOL. Because it appears that an employer need not wait for the DOL's model notice before amending its COBRA forms to comply with this requirement, it may be possible for employers to abbreviate the election period for previously terminated employees through such earlier notice.
- Employer Reporting Requirements: In order to obtain a tax credit, an employer must submit reports as required by the Secretary of the Treasury including an attestation of involuntary termination of employment for each covered employee for whom reimbursement of premiums is claimed; a report of the amount of payroll taxes offset for the reporting period and the estimated offsets of such taxes for the subsequent reporting period; and a report containing the TINs of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and qualified beneficiaries, and a designation for each covered employee whether the subsidy reimbursement is for one (1) individual or two (2) or more individuals.
These new provisions will have an immediate and far-reaching impact on an employer's obligations and will produce a labyrinth of new regulations. If you have any questions about how these changes may affect your business or personal situation, please contact Michael Furey, Scott Ohnegian, or Daniel Zappo of Riker Danzig's Labor & Employment Group.