On February 17th, President Obama signed the “American Recovery and Reinvestment Act of 2009” (the “Act”) into law. Under the Act, employees who are involuntarily terminated from employment between September 1, 2008 and December 1, 2009 (and their qualified beneficiaries), will benefit from reduced COBRA premiums for up to nine months. The federal government will subsidize 65% of the premium and individuals will be responsible for the remaining 35%. The subsidy applies to just about all employers providing group health plans, including private and governmental employers that are subject to federal COBRA rules, and small employers subject to state mandated coverage rules. While the idea of a 65% subsidy seems fairly simple and straightforward, the notice, disclosure, and reporting requirements imposed upon employers, COBRA administrators, and the individuals receiving the subsidies, are rather complicated and require employers to take immediate action.
The following highlights several of the key definitions and provisions pertaining to the implementation of the COBRA premium subsidy:
Effective Date. The new rules were effective as of the date of enactment -- February 17, 2009. The premium subsidies become available for periods of coverage beginning on and after the date of enactment, which for most plans will be March 1, 2009.
Eligibility for Subsidy. Only individuals satisfying the definition of “assistance eligible individuals” (“AEIs”) are eligible for the subsidy. An AEI is any individual who becomes a qualified beneficiary under COBRA between September 1, 2008 through December 31, 2009, who elects coverage, and for whom the qualifying event giving rise to the qualified beneficiary’s right to elect coverage is an involuntary termination of employment. Thus an AEI is not only the terminated employee, but may also be any qualified beneficiary who has coverage through the employee, such as a spouse or dependent.
§ High Income Taxpayers Excluded. There is a gradual phaseout of the subsidy allowance for individuals with modified adjusted gross incomes between $125,000 and $145,000 (single) and between $250,000 and $290,000 (couples). If ineligible individuals receive the premium subsidy, that individual's income tax for the tax year is increased by the amount of the disallowed premium assistance. AEIs are permitted to permanently opt out from eligibility for the subsidy via notice to the COBRA administrator in order to avoid potential tax problems.
Duration of Subsidy. The 65% subsidy continues for nine months or until the AEI becomes eligible for another group health plan or Medicare, the maximum COBRA period expires, or the AEI fails to pay the premium, whichever is earlier.
COBRA Subsidy Amount. The subsidized premium amount is determined based upon the COBRA premium that the AEI is actually required to pay. For most group health plans this is 100% of the premium plus a 2% administrative fee. However, if the employer is already subsidizing the COBRA payment by paying some portion of the premium, the AEI is required to pay 35% of the remaining premium, not 35% of the entire premium.
Notice Requirements. Terminated workers must be notified of their right to the COBRA continuation benefits subsidy. The notice to be provided must be fairly detailed in that it must explain not only the availability of the subsidy, but also the eligibility requirements, the election procedures, coverage options, and the qualified beneficiaries’ notification responsibilities.
This notification requirement may be met either by amending existing COBRA notice forms, or by including a separate document with the required subsidy information. The U.S. Department of Labor is to issue model notices by March 19th that can be used by employers in satisfying this additional notice requirement. These notices will also need to be given on an ongoing basis to all new qualified beneficiaries through December 31, 2009.
Second Chance COBRA Elections. Many individuals who would be AEIs due to an involuntary termination between September 1, 2008 and February 16, 2009, did not elect COBRA when it was initially offered, or else failed to continue paying COBRA premiums for the entire coverage period, and so lost coverage. These AEIs now have a second chance to elect COBRA coverage prospectively. The election period begins on February 17, 2009 and ends 60 days after the date on which a notice regarding the extended election period and premium subsidy is received. These second chance election notices must be sent by April 18, 2009. Failure to distribute these notices will be treated as a failure to comply with the ordinary COBRA notice requirements. The COBRA election period will run for 60 days after the second chance election notice is received. Consequently, every employer should consider preparing and sending its own notice as soon as possible instead of waiting for the model notices to be issued, to shorten the length of the election period and to reduce the risk of adverse selection.
Reimbursement Procedure. There are specific procedures that must be followed in order to receive reimbursement for the 65% of the COBRA premium not paid for by the AEI. The AEI will pay 35% of the COBRA premium to the appropriate recipient, which depending upon the circumstances, is either the plan, employer, or insurer. The recipient must immediately cover the 65% premium shortfall, and obtains reimbursement by reducing payroll tax deposits by an amount equal to the subsidy amount. Those seeking to obtain reimbursement of the subsidy amounts will need to submit reports to the Internal Revenue Service with information verifying the identity and eligibility of each AEI for the subsidy, along with a detailed accounting of the payroll taxes offset and the amount of subsidy reimbursements.
The Internal Revenue Service and the U.S. Department of Labor will be issuing further guidance and regulations concerning many aspects of the premium subsidy. However, since the subsidy rules are effective immediately, employers are advised to consider what steps can and should be taken now, in order to comply with the new requirements.
UNEMPLOYMENT BENEFITS EXTENDED
In addition to the COBRA changes, the stimulus package also extends the length of time that unemployed workers can receive benefits – up to 33 weeks of extended benefits. In addition, recipients will see an increase of $25 per week in their benefits. Plus, the bill allows for additional aid to those states that administer their unemployment compensation system in a manner which broadens eligibility requirements to include persons who would not normally qualify. As a result, many states have already begun considering expansion in order to obtain this federal funding. The broader coverage could mean higher unemployment taxes for employers in order to maintain this level of coverage in the future. As many commentators have theorized, once unemployment eligibility is expanded it will not be easily reduced when the recession is over.
