On February 17, 2009, President Obama signed into law the "Stimulus Bill," otherwise known as the American Recovery and Reinvestment Act of 2009 (the "Reinvestment Act" or "Act"). The Reinvestment Act includes significant changes to COBRA.
COBRA and the Reinvestment Act. COBRA, the Consolidated Omnibus Budget Reconciliation Act, allows workers and their dependents who lose their health benefits the option to continue their coverage under the health plan for a limited time. Usually, workers who elect this continuation of coverage can pay up to 102% of the premium an employer pays for the coverage. To help alleviate the cost of continued coverage, the Reinvestment Act provides a subsidy to eligible individuals to assist in their premium payments under COBRA.
Who's Eligible to Receive the Subsidy? An employee (and his/her spouse and dependent children) is eligible for the subsidy if the employee was involuntarily terminated from employment between September 1, 2008 and December 31, 2009 and is otherwise eligible for COBRA.
Amount and Duration of the Subsidy. Under the Act, the government will subsidize 65% of the total cost of COBRA premium for the first nine months of continued coverage for individuals who were involuntarily terminated between September 1, 2008 and December 31, 2009. Thus, eligible individuals need only pay 35% of whatever the employer charges the individual to purchase continuation of coverage. Employers can recover their portion of premium (65%) by withholding the payment as a credit against federal payroll taxes.
The premium assistance subsidy is available for nine months. The subsidy will end before the nine months on the date the individual becomes eligible (not enrolled) for other health plan coverage.
Example A:
- Active employee premium is $1,000 per month.
- Employer charges $1,000 per month to purchase COBRA.
- Individual will pay $350 (35%) per month for COBRA coverage.
- Employer will pay $650 (65%) per month for COBRA coverage and be reimbursed via payroll tax credit.
Example B:
- Active employee premium is $1,000 per month.
- Employer subsidizes COBRA and only charges $500 per month for COBRA.
- Individual will pay $175 per month (35% of $500) for COBRA.
- Employer will pay the additional $325 per month (65% of $500), but will be able to be reimbursed for this additional $325 via payroll tax credit.
Subsidy Does NOT Equal Extension of Coverage Period. The premium assistance subsidy and time frames for actual COBRA coverage run on two different tracks. The subsidy will not affect the regular period of COBRA coverage by extending the time of coverage, which generally is 18 months after a qualifying event. Under the normal COBRA rules, an individual loses eligibility for coverage after enrolling in another health plan. An individual will lose the subsidy once he/she becomes eligible for other health plan coverage, even if he/she does not enroll in that coverage. Individuals are under the obligation to report to the employer when their subsidy eligibility is expired.
Special Election Requirement. While the Act does not extend the time of COBRA coverage, it does extend the election period. The Act requires that otherwise eligible employees or dependents who did not elect COBRA or elected it but let it lapse be given a special 60-day period to elect coverage. The 60-day special election period begins on the date the notice to eligible individuals is provided. Employers have until April 18, 2009 to issue notices to individuals, and individuals have 60 days thereafter to elect coverage during this special election period. Should an individual choose coverage, the subsidy would be retroactive to the period of coverage after enactment of the Stimulus Bill (generally March 1, 2009), and COBRA coverage will be retroactive to March 1, 2009. However, the length of time on COBRA (generally 18 months) will be retroactive to the original date of COBRA eligibility.
Example:
9/1/08:
Individual is involuntarily terminated and does not elect COBRA.
10/31/08:
Individual sees doctor and incurs claim for $200.
2/17/09:
Reinvestment Act is enacted into law.
3/1/09:
Plan's first "period of coverage" begins after date of enactment (e.g., if employer requires individuals to pay premium on a monthly basis, the first "period of coverage" would be March 1 in this example).
3/21/09:
Individual goes to hospital and incurs claim for $1,000.
4/18/09:
Employer sends out notice of special election right.
6/15/09:
Individual elects COBRA.
- Individual would receive subsidy beginning March 1, 2009 through December 31, 2009 (9 months).
- Individual's coverage under the plan would begin March 1, 2009.
- The October 31, 2008 $200 doctor's visit claim would not be covered under the plan.
- The March 21, 2009 $1,000 hospital claim would be covered by the plan.
- Individual would have coverage under the plan until March 1, 2010 (18 months after the original termination date of September 1, 2008).
Election Changes Permitted. An employer may permit an eligible individual to enroll in another plan for active employees offered by the employer, but the alternative coverage cannot have a higher premium than the coverage the individual had immediately prior to the termination of employment.
Notice Requirements. Normal continuation of coverage notices must now include information on the premium assistance subsidy, and the Department of Labor will be issuing revised model COBRA notices. Notice of the special election period must be sent by April 18, 2009 to all eligible individuals.
Limits on Availability to High-Income Individuals. Up to a certain income level, the premium assistance subsidy is not taxable to the employee and dependents. Individuals with a modified adjusted gross income of $125,000 ($250,000 for joint filers) will have the subsidy taxed in gradually increasing amounts until income is $145,000 ($290,000 for joint filers), at which point, the individual must repay the entire subsidy. High income individuals have the option to waive the subsidy.
Payroll Tax Credits. For employers, the subsidy will be a refundable payroll tax credit on the employer's tax returns, and employers are allowed to offset any payroll tax liabilities. The Treasury Department/IRS has already amended Form 941 and has issued a FAQ for employers about the tax credit. Both Form 941 and FAQ can be found at
www.irs.gov.
Required Reports.
The Act requires at least three different reports for employers: (1) an attestation of the involuntary termination of employment of each covered employee; (2) the amount of payroll taxes offset for a reporting period and the estimated offsets; and (3) a report containing all social security numbers for all covered employees, the amount of subsidy paid to each person, and whether the subsidy was for one person or more than one person.
More Guidance on the Way. The U.S. Department of Labor and the U.S. Department of Treasury have indicated that more guidance on how to comply with the new COBRA requirements is forthcoming. Employers can monitor issuance of such guidance by visiting the agencies' websites:
www.dol.gov and
www.irs.gov.
This overview is provided for Coventry Health Care's clients as information only and does not constitute legal advice. Please consult an attorney to assess your company's legal obligations.
