On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”). This economic stimulus package includes the following three new rights for qualified beneficiaries who become eligible for COBRA coverage following an involuntary termination of employment which occurs at any time during the period from September 1, 2008 through December 31, 2009:
- a temporary 65% subsidy of COBRA premiums;
- a second COBRA election period for subsidy-eligible individuals who did not elect COBRA when initially eligible or who initially elected COBRA but no longer have coverage (e.g., because the person stopped paying premiums); and
- at the discretion of the plan sponsor, the right to enroll in a less expensive health plan option.
This article describes this new subsidy, which applies to periods of COBRA coverage for months beginning on or after the date of the Act’s enactment, generally March 1, 2009.
Eligibility for the Subsidy and Related Notice Requirements
The subsidy is available to a qualified beneficiary who becomes eligible for COBRA coverage as a result of an involuntary termination from employment which occurs at any time during the period from September 1, 2008 through December 31, 2009. The subsidy is not available with respect to involuntary terminations that occur prior to or after this period. While the Act does not define what constitutes an “involuntary termination,” presumably the subsidy would be available to employees whose employment is terminated following a lay-off or plant shutdown, or employees who are simply involuntarily terminated by their employer, if the termination occurs during the specified period. It is unclear whether a termination due to death or disability is considered an involuntary termination. However, if the involuntary termination occurred in August 2008 (prior to the coverage date of the Act), the affected employees would not be eligible for the subsidy. Moreover, the subsidy is not available to any qualified beneficiary whose COBRA coverage is triggered by a voluntary termination, a reduction in hours of employment or as a result of any other qualifying event (e.g., divorce, legal separation, loss of dependent status, etc.). This means that a plan must distinguish among qualified beneficiaries by qualifying event, and the date of the qualifying event, to determine who is eligible for the subsidy. This may pose issues for multiemployer plans that generally do not receive information regarding the circumstances relating to an individual’s loss of coverage. These plans may be required to impose a notice obligation on contributing employers which obligates them to identify those employees whose employment was terminated involuntarily during the specified period.
We note that because the Act extends the subsidy to “qualified beneficiaries”, the subsidy is available to the employee, the employee’s opposite-sex spouse and the covered dependent children of the employee whose coverage was also lost following the employee’s involuntary termination. These family members may take advantage of the subsidy even if the employee does not elect COBRA for himself or on behalf of his spouse and/or all of his dependent children. For example, if an employee, his spouse and his dependent children lost coverage following the employee’s termination of employment after a plant shut-down that occurred on January 15, 2009, the employee’s spouse and dependent children could take advantage of the subsidy if they elect COBRA, even if the employee does not elect COBRA. [Note: Because the subsidy is limited to “qualified beneficiaries” as defined by ERISA, it is not available to any individuals for whom a plan provides “COBRA-like” coverage, such as domestic partners and same-sex spouses, unless they qualify as an Internal Revenue Code section 152 dependent.]
The COBRA subsidy does not apply to Health Flexible Spending Accounts.
Enrollment in Less Costly Plan Option
The Act allows plan sponsors to permit eligible individuals to switch medical plan options or to enroll in a medical plan option other than option the individual was enrolled in on the day before the qualifying event. The option must be:
- less expensive than the option in which the individual was enrolled on the day before the qualifying event; and
- available to all other active employees.
The option may not be:
- dental, vision or counseling-only coverage;
- a health flexible spending account; or
- an onsite medical facility that primarily furnishes first-aid services, prevention and wellness care or similar care.
The Act provides for a 90-day enrollment period following the plan sponsor’s provision of notice of this right.
Extended Election Period
Because the subsidy is available to eligible individuals who were involuntarily terminated on or after September 1, 2008, and who may not have elected COBRA, the Act provides for a second election period for those individuals. The Act requires plans to provide a second 60-day election period to eligible individuals who would have qualified for the subsidy as of March 1, 2009, but for the fact that they did not elect COBRA when first eligible. This second election period must also be provided for individuals who were involuntarily terminated on or after September 1, 2008 and initially elected COBRA coverage but have since lost it. Those individuals may elect COBRA at any time during the period beginning on February 17, 2009 and ending 60 days after the date the individual is notified of the availability of the subsidy and their right to elect COBRA.
If COBRA is elected during this extended election period, COBRA coverage must commence as of the first period of coverage beginning on or after the date of the enactment of the Act, i.e., March 1, 2009. The Act neither requires retroactive COBRA coverage nor extends the maximum COBRA coverage period available to such individuals. In other words, the maximum COBRA coverage period available to such an individual runs from the date that the individual’s coverage was initially lost. [Note: This could be a few months after the date of the employee’s termination for hour bank plans.]
HIPAA Break in Coverage Rules
Generally, under the Health Insurance Portability and Accountability Act of 1993, as amended (“HIPAA”) a group health plan may impose a preexisting condition limitation, subject to several strict limitations. One of those limitations is that the maximum preexisting condition limitation is limited to 12 months (or 18 months for late enrollees) and the maximum preexisting condition exclusion must be reduced by the period of creditable coverage that the individual has as of the enrollment date. In general, creditable coverage does not include periods of health coverage that are followed by a significant break in coverage (a period of 63 days consecutive days without creditable coverage). However, under the Act, the period from the qualifying event (i.e., the involuntary termination of employment) and ending on the new period of coverage is disregarded for purposes of the 63-day break in creditable coverage. Accordingly, if a participant was involuntarily terminated on or after September 1, 2008 and either did not elect COBRA or lost COBRA coverage, and now elects COBRA under these new rules, any break in coverage will be disregarded for HIPAA preexisting condition exclusion purposes.
Revised COBRA Notices
The Act requires plans to provide all individuals who become entitled to elect COBRA between September 1, 2008 and December 31, 2009 with a notice of these new COBRA rights, not just those employees who were involuntarily terminated. This notice must include:
- a description of the availability of the subsidy;
- the forms necessary for establishing eligibility for the premium reduction;
- contact information for the plan administrator and any other person maintaining relevant information in connection with the subsidy;
- a description of the second election period;
- a description of the obligation to notify the plan of the individual’s eligibility for coverage under another group health plan or Medicare (see below); and
- a description of the right to enroll in a less expensive medical plan option, if applicable (see above).
The Act directs the Secretary of Labor to prescribe model notices no later than 30 days after the enactment of the Act, or on or around March 19, 2009.
Appeal Procedure for Individuals Who Are Not Determined to Be Subsidy-Eligible
If a plan determines that an individual does not qualify for the subsidy, the Act permits such individual to bypass the plan’s appeal procedure and to seek an expedited review of the denial by the Secretary of Labor. The Act directs the Secretary of Labor to determine such appeals within 15 days after receiving a request for review.
Exclusion for High-Income Individuals
The subsidy is not available to taxpayers whose modified adjusted gross income for the applicable taxable year exceeds $145,000, or $290,000 in the case of taxpayers who file joint returns. If such an individual takes advantage of the subsidy, his or her tax liability will increase by the amount of the subsidy and will be recaptured by the IRS dollar-for-dollar. A limited subsidy is available to a taxpayer whose modified adjusted gross income is between $125,000 and $145,000 (between $250,000 and $290,000 for joint returns). Instead of a dollar-fordollar increase in tax liability, the level at which the subsidy may be recaptured for these individuals is capped. High-income individuals may avoid recapture by making a permanent election to waive the right to the subsidy in the form and manner prescribed by the Secretary of Treasury and notifying the plan of the waiver.
Administration of the Subsidy
A plan must treat an eligible qualified beneficiary as having paid the entire COBRA premium due if the plan receives 35% of such premium from or on behalf of that qualified beneficiary. With regard to the first two months during which the subsidy is available (generally, March 2009 and April 2009), the Act provides for a grace period during which plans may continue to receive the full COBRA premium due from eligible individuals. For these months, the Act permits plans to reimburse eligible individuals for the amounts paid in excess of the amount required to be paid. Alternatively, a plan may apply a credit in the amount of the excess for premiums due in subsequent months.
The subsidy is available to an eligible individual until the earliest to occur of the following:
- nine months after the date the individual becomes eligible for the subsidy;
- the date continuation coverage under COBRA expires;
- the date the individual is eligible for coverage under any other group health plan [other than coverage consisting of only dental, vision, counseling, or referral services (or a combination thereof), coverage under a flexible spending arrangement, coverage of treatment that is furnished in an on-site medical facility maintained by the employer that consists primarily of firstaid services, prevention and wellness care, or similar care (or a combination thereof)];
- the date the individual becomes eligible for Medicare; or
- the date the individual fails to remit at least 35% of the premium due.
If an eligible individual becomes eligible for coverage under another group health plan or for Medicare, the individual must provide written notice of such eligibility to the plan. The Act directs the Secretary of Labor to issue guidelines regarding the time and manner of these notices. We note that the Act does not require actual enrollment in another group health plan or Medicare for the subsidy to be lost. Furthermore, a penalty of 110% of the premium reduction may be imposed on individuals who fail to timely notify the plan of their eligibility for such coverage.
Reimbursements are available for the amount of premiums not paid by eligible qualified beneficiaries because of the subsidy. The reimbursement scheme is structured as an offset against an employer’s payroll tax liability (i.e., wage withholding under Internal Revenue Code section 3402 and FICA tax liability under Internal Revenue Code sections 3102 and 3111). That is, whenever an employer receives an eligible individual’s 35% premium payment, the employer will be treated as having paid payroll taxes in an amount equal to the portion of the reimbursement that relates to such premium payment (i.e., 65% of the premium cost). If the amount of reimbursements owed to an employer is greater than the employer’s payroll tax liability, the employer will be entitled to a credit or refund of the excess and will be treated as though it made an overpayment of payroll taxes.
To obtain the reimbursements, plan sponsors must submit reports to the Secretary of the Treasury in the time and manner required by the Secretary which:
- attest to the involuntary termination of each of the covered employees for whom the employer is claiming the reimbursement;
- specify the amount of payroll taxes that have been offset for the reporting period and an estimate of the offset for the next reporting period; and
- list the tax-ID numbers of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and qualified beneficiary, and whether the subsidy reimbursement is for single coverage or for two or more individuals.
Effect of Employer Subsidy of COBRA Premiums
Many employers subsidize a qualified beneficiary’s COBRA premiums. This practice may adversely effect those employers. For example, assume that the employer’s group health plan charges $1,000 for COBRA. As part of a severance package or plan, the employer pays $500 of the COBRA premium so that the qualified beneficiary is charged only $500. In order for the COBRA subsidy to apply, the qualified beneficiary must pay 35% of the $500 (or $175) and the subsidy for the employer is for 65% of the $500 (or $325). While the above example is not contained in the Act, this appears to be the interpretation by applicable federal regulators. Due to this limitation, an employer may want to rethink its policy on subsidizing COBRA coverage.
Multiemployer Plan Reimbursement
With multiemployer plans, the plan — not the contributing employers — is the entity that must front the initial cost of the subsidy and is the entity that has a right to reimbursement. How this subsidy will be paid to a multiemployer plan that utilizes a third party administrator and has no employees is not clear; this will be taken up in regulations that should be forthcoming soon. However, because the subsidy is effective immediately, until those regulations are issued, multiemployer plans will be forced to shoulder the cost of the COBRA subsidy without understanding how they will be reimbursed.
Although further guidance and regulations are expected to be issued by the Department of the Treasury and the Department of Labor to implement the Act, plan sponsors may want to take immediate action to ascertain which individuals may be eligible for the subsidy, develop appropriate notices required by the Act and coordinate with the plan’s COBRA administrator, payroll department and other applicable vendors to ensure that the subsidy is applied appropriately and payments are tracked for reimbursement purposes. If you have any questions or would like assistance in determining how to comply with the Act, please contact us.