American Recovery and Reinvestment Act of 2009 Creates New COBRA Rules for Employers
By: DEBRA J. LINDER & JOHN H. MERKLE
February 2009
Under federal law, employers with 20 or more employees must offer continuation coverage (COBRA continuation coverage) to former employees, their spouses and dependents (i.e., qualified beneficiaries) if they lose coverage due to certain qualifying events, such as a termination of employment. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the 2009 Recovery Act) was enacted, which, in part, provides assistance to unemployed workers and their families for obtaining COBRA continuation coverage. Additional guidance is expected in the coming weeks. A brief summary of the new COBRA rules follows.
I. Premium Subsidy. “Assistance eligible individuals” are entitled to a subsidy for 65% of their COBRA premiums. In other words, they may elect COBRA coverage and pay only 35% of the COBRA premium. The subsidy applies to premiums paid for coverage beginning on or after the date of enactment. The subsidy appears to be based on the full 102% premium that would otherwise be charged to the individual. Except for high income individuals, the subsidy is not taxable income to the individual.
- Definition of “Assistance Eligible Individual.” An “assistance eligible individual” is any qualified beneficiary (employee, spouse or dependent) that became eligible for and elects COBRA coverage due to the involuntary termination of the covered employee’s employment, if that termination occurred between September 1, 2008, and December 31, 2009.
- Period of Subsidy. The premium subsidy is available for up to nine months, but may end earlier if:
- The individual becomes eligible for coverage under any other group health plan (other than dental, vision, health reimbursement or health flexible spending arrangement, or certain on-site medical services), or the individual becomes eligible for Medicare. The individual must notify the group health plan if he or she becomes eligible for such group health plan or Medicare coverage. Failure to do so may subject the individual to a penalty of 110% of the premium subsidy, unless the failure is due to reasonable cause.
- The maximum COBRA period expires during the subsidy period; or
- The COBRA period provided under the 2009 Recovery Act (see below) expires during the subsidy period.
- Faster Review of Denial. If the group health plan claims an individual is ineligible for COBRA and denies the individual’s request for treatment as an assistance eligible individual, the individual is entitled to an expedited review of that denial by the Secretary of Labor. The determination must be made within 15 days after receipt of the individual’s application for review.
- Notice Requirement. The COBRA notice provided to qualified beneficiaries must (i) advise the qualified beneficiary that the premium subsidy is available, (ii) include any forms necessary for establishing eligibility for the subsidy, (iii) provide contact information, (iv) describe the extended election period, (v) describe the qualified beneficiary’s obligation to notify the group health plan if he or she becomes eligible for other group health plan coverage or Medicare and the penalty for failing to do so, (vi) describe the qualified beneficiary’s right to a reduced premium and any conditions for receiving the reduced premium, and (vii) describe the qualified beneficiary’s option to enroll in different coverage, if that is permitted by the employer. This notice must also be provided to any assistance eligible individual who had elected COBRA as of the date of enactment. The Secretary of Labor must issue a model notice within 30 days.
- Reimbursement of Subsidy. The person to whom the full COBRA premium should have been paid (i.e., the employer, insurer, or multiemployer health plan) is entitled to reimbursement for the premium subsidy. The mechanism used by the 2009 Recovery Act is the payroll tax system. If the person files a claim for refund (pursuant to rules issued by the IRS), the person will be entitled to a refundable credit against its payroll taxes in the amount of the subsidy. The person will be required to submit verification of the covered employee’s involuntary termination, the payroll taxes offset during the reporting period and an estimate of future credits, and such other information required by the Secretary of Treasury.
- Subsidy is Not Income for Other Assistance Programs. The premium subsidy cannot be considered income or resources for purposes of determining eligibility for any other federal or state assistance programs.
- Refund Available. If an assistance eligible individual has paid the full premium for COBRA coverage, the employer, insurer or multiemployer health plan must either provide the individual with a refund or a credit against future premiums.
- Recapture for High Income Individuals. If the premium subsidy is provided for COBRA coverage for the former employee, his or her spouse or dependents, and the individual has modified adjusted gross income over $125,000 ($250,000 for a joint return), the individual’s income tax is increased by the amount of the subsidy, subject to a graduated phase out.
- No Health Coverage Tax Credit. Under the Trade Act of 1974, taxpayers who lose their jobs due to increased imports from, or a shift in production to, a foreign country may be eligible for a refundable tax credit equal to 65% of their COBRA premiums. In any month in which an assistance eligible individual receives the premium subsidy, he or she cannot claim this refundable tax credit.
II. Election of Different Coverage. An employer may permit an assistance eligible individual to enroll in group health coverage that is different from the coverage he or she had at the time of the qualifying event. However, once the change is made, the individual must keep that same coverage for the remainder of the COBRA coverage period, even though the subsidy expires after nine months.
- Notice Requirement. Within 60 days of the date of enactment, the employer must inform the individual that he or she may, within 90 days after such notice, elect different coverage. This notice must also be provided to individuals who had already elected COBRA coverage as of the date of enactment. The Secretary of Labor must provide a model notice within 30 days.
- Premium Cannot Be Higher. The individual may elect different coverage only if the premium is not higher than the premium for the coverage he or she had at the time of the qualifying event.
- Same Coverage Offered to Active Employees. The different coverage must be coverage that the employer offers to its active employees, and cannot be dental, vision, a health reimbursement or health flexible spending arrangement or certain on-site medical services.
III. Extension of Election Period. If, as of the date of enactment, a qualified beneficiary who would be an assistance eligible individual does not have a COBRA election in effect, the qualified beneficiary has a second opportunity to elect COBRA continuation coverage. In addition, a qualified beneficiary who elected COBRA coverage before the date of enactment but who is no longer enrolled on that date (e.g., because the premiums were too expensive) also has another opportunity to elect COBRA continuation coverage. If elected, the COBRA coverage must begin with the first period of coverage (e.g., first of the month) beginning on or after the date of enactment.
- Notice Requirement. Within 60 days of the date of enactment, the employer must notify the qualified beneficiary of the new election opportunity. In turn, the qualified beneficiary’s election must be made within 60 days after the notice is provided. The Secretary of Labor must provide a model notice within 30 days.
- No Extension of COBRA Period. The new election will not extend the COBRA period that would have applied if COBRA had been elected at the time of the qualifying event. Thus, the qualified beneficiary will only be entitled to 18 months of COBRA coverage, measured from the date of the covered employee’s involuntary termination.
- Break in Coverage Ignored. Any break in coverage between the qualifying event and the date that coverage begins is ignored for purposes of the 63-day break for purposes of imposing pre-existing conditions under the group health plan.
IV. Extension of COBRA Period for Certain Individuals. An extension of the regular COBRA continuation coverage period applies if a covered employee’s qualifying event was termination of employment or reduction in hours and, at that time, he or she has a vested pension benefit, all or a portion of which is payable by the Pension Benefit Guaranty Corporation (the PBGC). In that case, the COBRA coverage period is extended to the later of (i) the death of the covered employee, or (ii) for the spouse and dependent children, 24 months after the covered employee’s date of death. However, this provision will not require any COBRA continuation coverage period to extend beyond December 31, 2010.
In addition, for a covered employee whose qualifying event was termination of employment or reduction in hours and who is eligible for the health insurance tax credit under the Trade Act of 1974 as of the date COBRA coverage would otherwise end, the COBRA coverage period cannot end before the end of the later of (i) 18 months after the qualifying event (or 36 months if another qualifying event occurs), or (ii) the date on which the covered employee is no longer eligible for the health insurance tax credit. Again, this provision will not require any COBRA continuation coverage period to extend beyond December 31, 2010.
For more information, contact one of the following:
Debra J. Linder
Direct Dial: 612-492-7163
Email: dlinder@fredlaw.com
John H. Merkle
Direct Dial: (612) 492-7027
Email: jmerkle@fredlaw.com