On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“the Stimulus Act”), which includes important changes to the health continuation rights of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). The following are some highlights of the Act:
Subsidy
The Stimulus Act provides for a government-provided subsidy of 65% of the required COBRA premium for eligible individuals for a maximum of 9 months, or until the occurrence of one of the events described in the section below entitled “End of Subsidy.” Eligible individuals remain responsible for paying 35% of the COBRA premium. Without this subsidy the employer could charge COBRA beneficiaries 102% of the employer cost. (Note that the 2% administrative fee which employers are permitted to charge COBRA recipients is included when calculating the 65% COBRA subsidy and the 35% individual cost.)
Eligible Individuals
This subsidy is only available for those employees who (1) are/were involuntarily terminated between September 1, 2008, and December 31, 2009, and (2) are/were eligible to elect COBRA between September 1, 2008 and December 31, 2009. Qualified beneficiaries (i.e., an employee’s spouse and dependent children) are also eligible for the subsidy.
Reimbursement
The 65% subsidy is reimbursed through a credit against payroll taxes to the appropriate entity as follows:
- For single-employer plans covered by federal COBRA, the employer is reimbursed.
- For single-employer plans only covered by state mini-COBRA laws (e.g., New York Insurance Law § 3221 which applies to employers with less than 20 employees), the insurance company is reimbursed.
- For multiemployer plans, the plan is reimbursed.
This credit can only be taken after the eligible individual’s 35% COBRA premium is received, and entities will be required to submit reports to the IRS verifying their claims for reimbursement and setting forth certain specified information. Any excess subsidy that exceeds the employer’s payroll tax liability will be treated as a payroll tax overpayment and refunded to the employer.
Limitations
The Stimulus Act places several limitations on the availability of this subsidy:
Individual filers with an adjusted gross income of over $145k per year, and joint filers with adjusted gross income over $290k per year, are ineligible for the subsidy. These high-income employees can either make a one-time election to waive the subsidy, or repay the subsidy dollar-for-dollar through an income tax payment.
Individuals with an adjusted gross income of between $125k and $145k and joint filers with adjusted gross incomes between $250k and $290k are “phased out,” with their subsidy reduced proportionally.
Note for Employers Who Subsidize COBRA
Many employers (especially in today’s economy) offer to subsidize COBRA payments for a period of time for those employees who are terminated or laid off in exchange for a signed release, waiver or severance agreement. Employers, however, must now re-think these strategies as the Stimulus Act makes clear that employer-subsidized COBRA premiums are not rewarded with the 65% government subsidy.
Special Enrollment
The Stimulus Act provides special enrollment opportunities for those individuals who (1) were eligible to elect COBRA between September 1, 2008 and February 16, 2009 due to an involuntary termination but declined, or (2) elected COBRA between September 1, 2008 and February 16, 2009 due to an involuntary termination but dropped coverage before February 17, 2009, unless covered under another group health plan. (Those who elected and are currently receiving COBRA will of course benefit from the subsidy.)
Under the special enrollment opportunity, the individual has 60 days to elect COBRA coverage from the notice of their special enrollment rights. In the event such individual elects coverage, the coverage is prospective from February 17, 2009, and does not go back before the effective date of the Stimulus Act. The maximum 18-month COBRA coverage period, on the other hand, begins to run on the date of the qualifying event/loss of coverage and does not get extended.
This special enrollment opportunity does not apply to coverage sponsored by employers with less than 20 employees that are subject to state Mini-COBRA laws.
Switching Benefit Options
If an employer offers multiple health coverage options to active employees, the employer may (but is not required to) allow eligible individuals to switch the coverage options they had while employed, and where such switch is elected, the beneficiary may retain such options beyond the subsidy period. The alternative coverage must have the same or lower premiums as the individual’s original coverage. The different coverage cannot be coverage that provides only dental, vision, a health flexible spending account, or coverage for treatment that is furnished in an on-site facility maintained by the employer, and election for these benefits must be made within 90 days of notice.
In addition, a logical reading of the law would appear to permit individuals eligible for the special enrollment opportunity described above who elect COBRA coverage within the prescribed 60 days and who subsequently decide to elect the alternative coverage within the 90 day period to apply the COBRA subsidy to the alternative coverage.
Notice
The Stimulus Act states that notice of the COBRA subsidy and enrollment right (if applicable) must be provided to all individuals who become/became entitled to elect COBRA coverage between September 1, 2008 and December 31, 2009. The obvious implication of this language is that all individuals who become/became eligible for COBRA, regardless of the qualifying event, must be provided with the notice – even those not eligible for the subsidy who became eligible for COBRA due to a qualifying event other than involuntary termination.
Individuals who became eligible for COBRA between September 1, 2008 and February 16, 2009, must be provided with notice within 60 days of February 17, 2009. Individuals who become eligible for COBRA between February 17, 2009 and December 31, 2009, must be notified of the subsidy in accordance with the “normal” COBRA notification procedures (generally within 44 days of the qualifying event).
In accordance with the Stimulus Act, the U.S. Department of Labor (DOL) is directed to issue a “model notice” within 30 days of February 17, 2009.
Transition Rule
The Stimulus Act allows plans to charge eligible individuals the full COBRA premium for up to two billing periods following February 17, 2009, provided the plan provides such individuals with reimbursement of the overcharge or (in limited circumstances) a credit for subsequent billing periods.
End of Subsidy
An individual’s eligibility for the subsidy ends when the first of one of the following events occurs:
- The individual becomes eligible for (but not necessarily enrolled in) Medicare or another group health plan;
- The subsidy has been provided to the individual for 9 months;
- The maximum COBRA coverage period (generally 18 months) has ended; or
- COBRA coverage is no longer required (for example, the individual fails to pay his/her premium payments).
In the event an individual receiving the COBRA subsidy becomes eligible for other coverage, the individual must notify the plan in writing. Failure to do so may result in a penalty equal to 110% of the subsidy.
What to Do: In light of the Stimulus Act, plan administrators should take the following steps:
- Update COBRA notices as soon as possible (in any event, no later than 60 days after February 17, 2009);
- Put in place the subsidy for eligible individuals who have elected COBRA as soon as possible (but in no event later than the third billing cycle);
- Review and reconsider any releases, waivers or severance agreements which provide for employer-subsidized COBRA premium payments; and
- Update and implement your COBRA administrative procedures as necessary.
Last week, the DOL issued some guidance on the new COBRA subsidy, including a “COBRA Premium Reduction Fact Sheet” which can be found on the DOL’s website. In addition, the Internal Revenue Service has issued guidance on the COBRA subsidy, including “Questions and Answers” for employers, a revised Form 941 (which employers should use to report their COBRA subsidy payments), and Form 941 instructions, all of which can be found at IRS website.
Stay tuned as we will be notifying our clients and friends as soon as the DOL issues its “model notice.”