NEWSLETTER

In This Issue

Economic Stimulus Bill Expands Cobra Requirements

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA), which, among other things, dramatically affected employers whose group health plans are subject to COBRA. Virtually all employers with group health plans and 20 or more employees must now provide a nine-month subsidy of COBRA premiums for employees who are involuntarily terminated.

The COBRA Subsidy

The subsidy for COBRA coverage (excluding health FSAs) is available to individuals who were involuntarily terminated from employment between September 1, 2008 and December 31, 2009. The COBRA subsidy also extends to spouses and dependents who are qualified beneficiaries.

Under the subsidy, which took effect March 1, 2009, eligible individuals are only required to pay 35% of the COBRA premium for coverage under a prior employer's health plan instead of the full amount. Depending on how the plan is funded, the employer or health plan (payor) pays the remaining 65% of the premium. The payor is reimbursed for its payment of 65% of the premium by taking a credit for those premiums against its federal payroll taxes for current employees. If the credit is insufficient to cover the payor's COBRA expense, then the remainder is reimbursed directly from the Treasury Department.

An individual's eligibility for the subsidy terminates on the earlier of 1) the individual becoming eligible for coverage under another group health plan or Medicare or 2) the end of the 9-month period of subsidy. The ARRA does not extend COBRA coverage beyond the original maximum required period, which is generally 18 months after an employee's termination of employment.

Employer Notice Requirement for Present and Past Employees

The ARRA provides eligible individuals a special 60-day period to elect subsidized COBRA continuation coverage. Notice of this right must be sent to otherwise-eligible individuals no later than April 18, 2009, even if they declined COBRA coverage in the past. This notice may be supplied via a modified COBRA notice, or in a separate document. The Secretary of Labor is charged with issuing form notices for this purpose within 30 days.

This special 60-day election period starts the day the eligible individual is provided notice regarding the availability of the COBRA subsidy. If an eligible individual who terminates prior to March 1, 2009 elects COBRA coverage after receiving the special 60-day election notice, then coverage begins on March 1, 2009, not on the date of the individual's initial qualifying event. The extended election period does not extend the period of COBRA continuation coverage beyond what would have been available if COBRA had been initially elected.

Electing a Change in Coverage

Generally, a COBRA qualified beneficiary is permitted only to elect COBRA continuation coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event. Under the ARRA, eligible individuals may be able to elect a different type of coverage in conjunction with electing COBRA if 1) the employer permits such a change in enrollment, 2) the premium for the different coverage is not more than the premium for the coverage in which the individual was enrolled at the time of the qualifying event and 3) the coverage option is one that is offered to the employer's active employees.

If an employer provides eligible individuals with an option to enroll in different coverage, eligible individuals must make their election to change coverage options within 90 days after being given notice of the option to change coverage.

Employee Notice Requirement of New Health Plan

Recipients of the COBRA subsidy are required to notify the group health plan providing subsidized COBRA coverage of their eligibility for other health coverage under another group health plan or Medicare. Failure to provide proper notice may result in a penalty of 110% of the subsidy provided.

Elimination of Subsidy for High-Income Individuals

Employees who were involuntarily terminated between September 1, 2008 and December 31, 2009, with annual incomes less than $125,000 (single) or $250,000 (couples) are eligible. There is a phase-in to full income inclusion of the subsidy for taxpayers whose MAGI is between $125,000 and $145,000 (between $250,000 and $290,000 for a joint return). Additionally, the employee, not the employer, will be responsible for abiding by the salary cap that determines eligibility. Should an employee accept COBRA coverage when they are ineligible, they will have to remit the subsidy to the federal government through their tax returns.

What You Should Do Now

In addition to reviewing the new model COBRA notices and adapting their notices accordingly, employers should take the following steps:

• Compile a list of all assistance eligible individuals who will need to be notified, which generally includes all former employees who were involuntarily terminated on or after September 1, 2008 and any eligible spouses and dependents who were enrolled in coverage prior to the termination;
• Reconfigure payroll systems to identify eligible individuals in order to report the tax credit to the government and receive the subsidy;
• If a plan is insured, check with the insurance carrier to determine the appropriate procedures for enrolling assistance eligible individuals who are not currently enrolled in COBRA continuation coverage;
• If a plan is self-insured, review stop-loss contracts to determine whether coverage applies to assistance-eligible individuals who are not currently enrolled in COBRA continuation coverage;
• Modify applicable COBRA premium billings to take into account the 65% subsidy; and
• Stay tuned for more information from the government regarding the details, including updated employment tax forms for taking the subsidy credit.

All employers and plan administrators should begin responding to these new rules immediately. Employers using a third party COBRA administrator should contact their COBRA administrator to coordinate a response. Employers who self-administer COBRA should consult with their human resource advisors or seek counsel from their employment law attorneys.

KIMERLY J. KISNER, ESQ.