Newsletter from Demark Kolbe Brodek

The American Recovery and Reinvestment Act of 2009 materially altered the Consolidated Omnibus Budget Reconciliation Act (COBRA) and imposed new rules that will require employers and plan administrators to take certain actions before April 18, 2009. Some important aspects of the new COBRA laws are as follows:

-       The Act gives "assistance eligible individuals" a 65% subsidy towards the cost of their COBRA premiums. Thus, they will be treated as if they paid the full cost of their COBRA coverage so long as they pay the other 35% portion. Employers must front the cost of the 65% subsidy, but they can recoup that cost by taking a dollar for dollar credit against their payroll taxes. If the COBRA subsidy exceeds the employer's payroll taxes, an employer can obtain a refund of its payroll taxes. Please note that if the employee does not pay his/her 35% share of the COBRA premium, the employee does not receive the subsidy nor can the employer claim the payroll tax credit/refund.

-       This 65% subsidy applies to periods of health coverage beginning on or after February 17, 2009 and will end upon the first of the following to occur: (1) the individual becomes eligible for other group health coverage; (2) the maximum period of COBRA coverage ends; or (3) after nine (9) months. This February 17, 2009 coverage period actually begins on March 1, 2009 for plans that charge for COBRA coverage on a monthly basis.

-       An "assistance eligible individual" is an employee or a member of the employee's family who is eligible for COBRA coverage at any time between September 1, 2008 and December 31, 2009 as a result of the employee's involuntary termination during that period and who elects COBRA coverage when first offered or during the additional election period provided under this new Act. Two important components of the definition of an "assistance eligible individual" is that the termination must be involuntary and the individual must have been receiving employer health insurance coverage on the date of termination.

-       Individuals who were terminated involuntarily between September 1, 2008 through February 16, 2009 who did not elect COBRA when first offered (but were receiving employer health insurance coverage on the termination date) or did elect COBRA but are no longer enrolled (failure to pay premiums) are provided a new election opportunity under this Act. They must be issued a new COBRA notice and provided sixty (60) days from the date of this new notice to elect new COBRA rights.

-       The Department of Labor has issued four new model notices, one or more of which must be provided to each individual involuntarily terminated depending on each particular employment situation.

-       If an "assistance eligible individual" pays the full COBRA premium for the first two periods to which the 65% subsidy applies (March and April, 2009) an employer must either reimburse the assistance eligible individual for the 65% paid or provide a comparable credit against future premiums within the next 180 days.

-       Employers can secure a payroll tax credit or payroll tax refund equal to the amount of the 65% subsidy the employer provides by completing the new Form 941 issued by the IRS. The new Form 941 issued by the IRS also has revised instructions which explain what lines must contain the COBRA subsidy information and what additional COBRA information must be provided to the IRS.

-       Finally, these new COBRA rules could effect separation agreements in place currently and also impact negotiations with respect to subsequent terminations. If your separation pay arrangement provides that the employer will pay all or a portion of the employee's COBRA premium, this will preclude the employer from claiming a tax credit for the 65% of the COBRA premium because the Act requires the employee to pay his/her 35% share of the premium. Remember that if the employee is not paying his/her share of the COBRA premium, the employer will not receive the 65% credit.

I reiterate that these COBRA notices must be provided to all employees who involuntarily terminated employment from September 1, 2008 through December 1, 2009 and must be provided before April 18, 2009 to those employees who were already terminated involuntarily and whom were receiving health insurance coverage at the time of termination.

For further information on these new COBRA laws, your COBRA responsibilities or to obtain the necessary COBRA notice forms, please contact Mark Brault.