COBRA Complications Arise From Economic Stimulus Law

(Published February 23, 2009)

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA). A centerpiece of this law is a 65% subsidy for employees who are involuntarily terminated between September 1, 2008, and December 31, 2009, and who are eligible to continue health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). As under regular COBRA law, qualified beneficiaries have an independent right to elect COBRA, and the subsidy will apply to them, as well.

Subsidy Details

Under the 2009 American Recovery and Reinvestment Act, also called the economic stimulus law, employees who are involuntarily terminated between September 1, 2008, and December 31, 2009, and who are otherwise eligible to elect COBRA, may qualify for a 65% premium subsidy for up to nine months. Just like under regular COBRA law, employees' qualified beneficiaries (QBs) have an independent right to elect subsidized COBRA coverage. Employees and their QBs, therefore, will pay only 35% of the regular COBRA premium. The entity to which they make their checks out (otherwise known as the COBRA-payable entity) will account for the subsidies when they make their payroll tax deposits. COBRA-payable entities can't credit anything against their payroll tax deposits until they actually receive checks from assistance-eligible individuals.

To ensure that the subsidy is targeted to workers who are most in need, employees must attest that their same-year modified adjusted gross income won't exceed $125,000 ($250,000 for families). The subsidy is completely phased out for taxpayers whose modified adjusted gross income exceeds $145,000 ($290,000 for families). Employees can make a one-time permanent election out of the subsidy.

The federal government is generally not directly picking up 65% of the tab, however. Instead, COBRA-payable entities (note that this may or may not be the terminating employer) take a credit in the form of reduced payroll tax deposits. Therefore, it's imperative that you work with your Payroll department or payroll service bureau to ensure that the following information flows between the terminating employer and the COBRA-payable entity:

the names of employees who are involuntarily terminated;
the names of employees who elect the subsidy;
the total monthly subsidy for all employees;
the dates employees make their subsidized COBRA payments; and
the dates employees' subsidies end.

Prior to taking the 65% credit, COBRA-payable entities must first actually receive employees' reduced payments.

Employers that pick up COBRA payments for employees who were voluntarily separated (a common experience that occurs during termination negotiations) will have to separate those individuals from COBRA-subsidy-eligible employees, since they're not eligible for the subsidy.

The subsidy is extended to employees with comparable COBRA coverage under state laws. This primarily impacts employers too small for Federal COBRA coverage. What's comparable: To be comparable,one must have the right to continue substantially similar coverage as was provided under the group health plan at a monthly cost that's based on a specified percentage of the group health plan's cost.

Subsidy Periods

The standard 18-month COBRA coverage period doesn't change. The subsidy begins with coverage periods beginning on or after February 17, 2009. So, for most employees, the subsidy begins with COBRA checks they write in March. Employees' eligibility for subsidized premiums ends with the first month beginning with the earlier of the following events.

The date that's nine months after the first month for which the subsidy applies. Employees are still entitled to the remainder of the regular COBRA coverage period, provided they once again pick up 102% of the cost.
The end of the maximum COBRA period.
The date employees become eligible for Medicare or become eligible to be covered under another group health plan (including a spouse's plan). However, eligibility for coverage under another group health plan won't terminate subsidized COBRA coverage if the new plan is limited to dental or vision benefits, to counseling or referral services, or is a flexible spending account or a health reimbursement arrangement.

Group health plans may permit employees eligible for subsidies to elect any health plan options that their former employers offer to current employees, which have the same or lower premiums than their previous health benefits options. Employees have 90 days to make their elections.

Employees must notify the COBRA-payable entity of their eligibility for new group health benefits. Those who don't notify that entity may be penalized 110% of the premium. Penalties won't apply if employees simply stop paying their COBRA premiums.

What Is Meant By An Involuntary Termination

The IRS has indicated that the determining factor is who initiated the termination. If it was based on employer action, then it would usually be considered to be an involuntary termination and they intend to interpret this broadly. For example, employees who are laid off or furloughed would be considered to be involuntarily terminated. Voluntary retirements in anticipation of a lay off, where the employer solicits employees to resign, would also be considered to be involuntary terminations. Another example would be if an employer is closing one office and offers jobs to everyone in another state. Employees who don't go will be considered to be involuntarily terminated.

If an employee has a military call-up, this won't be considered to be an involuntary termination because the action wasn't initiated by the employer.

Special Enrollment Rights

Again, the length of the COBRA coverage period doesn't change. However, employees who originally elected not to take COBRA, and employees who originally elected COBRA but dropped it because they stopped paying their premiums, have a 60-day special enrollment period during which they may decide to take the subsidized premium. The 60-day period begins on the date they receive notice of their special enrollment rights. This notice must be sent by April 18, 2009. So, for example, if an employee could have elected COBRA in December 2008, but failed to do so at that time, and he elects COBRA in March 2009, his COBRA coverage runs out 18 months from December 2008, not 18 months from March 2009.

Overpayment Credits

Employees who are eligible for the subsidy, but who pay the normal 102% of their COBRA premiums for any month during the 60-day period beginning on the first day of the first month after February 17, 2009, may have those overpayments credited toward their future subsidized payments. Hitch: The COBRA-payable entity must be reasonably certain that the credit will be used within 180 days of the overpayment. If the COBRA-payable entity isn't reasonably certain, it must reimburse employees for the amount of their overpayments within 60 days.

Notice Requirements

Current COBRA election notices must be revised to include information on the subsidy and special enrollment rights. The DOL has prepared forms that you can use to comply with your notice obligations. All four model DOL notices are available on the COBRA free forms page (www.legalworkplace.com/cobra-free-forms.aspx).

The General Notice (full version) is to be sent to all QBs who haven't been sent a COBRA notice yet or were sent a COBRA notice on or after February 17, 2009 that didn't discuss the subsidy. It replaces the model election notice that you were sending out before the changes due to ARRA. This needs to be sent out under existing COBRA notice timing regulations.

The abbreviated version of the General Notice is should be sent to all QBs who had a qualifying event after September 1, 2008 AND elected COBRA. This will cause some confusion because not all of the QBs who are currently on COBRA will be eligible for the subsidy. The form that they need to fill out to collect the subsidy should help eliminate some of the confusion but probably not all of it. It is recommended that it is sent out as soon as possible so that QBs can take advantage of the subsidy. Failure to send this out could result in a determination that an organization did not fulfill its notice obligations.

The Notice in Connection with Extended Election Periods is only to be sent to any individual who could qualify as an AEI (i. e. be able to claim the subsidy) who had a qualifying event between September 1, 2008 and February 16, 2009 AND either did not elect COBRA or subsequently dropped it. It does not need to be sent to anyone who can't qualify as an AEI (i. e. divorced spouses). It needs to be sent by April 18, 2009.

The Alternate Notice is only used by insurance companies for organizations not covered under COBRA but covered under a state COBRA law. It appears that small employers do not have to send out this notice since the subsidy is available only to insurance companies not employers.

This means you don't have to send any notice to someone who was terminated after September 1, 2008, declined COBRA coverage and would not be eligible for a subsidy because the employee wasn't involuntarily terminated. For example, if someone got divorced on October 15, 2008 were offered COBRA coverage and declined it, then they do not need to get any notice at all.