Significant Changes to COBRA Take Effect Immediately Under the New Recovery Act
February 26, 2009
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 ("Recovery Act"). The Recovery Act radically changes the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") by temporarily (1) providing a federal government subsidy of 65% of the applicable COBRA premiums for certain eligible individuals; (2) establishing reimbursement procedures for employers to receive the premium subsidy amount from the government; and (3) imposing new notice obligations relating to these changes.
1. Does It Affect You?
Yes. The Recovery Act applies to continuation coverage under both federal COBRA and state laws ("mini-COBRAs"). Mini-COBRAs cover employers who are not subject to the federal COBRA because they have fewer than 20 employees. In Oregon, these employers must provide continued coverage for six months after a qualifying event. This means that regardless of the size of your workforce, you must comply with the Recovery Act's temporary amendments to COBRA and state laws.
2. What Does the Recovery Act Do? a. Premium Subsidy.
The Recovery Act provides that certain "assistance eligible individuals" may pay only 35% of COBRA premiums for coverage periods beginning on or after February 17, 2009. The remaining 65% of the premiums will be subsidized by the federal government. The 65% premium subsidy will initially be paid by the employer and then the employer will receive reimbursement from the government in the form of payroll tax credits.
"Assistance eligible individuals" ("AEIs") are defined as individuals who:
b. Extended Period to Elect COBRA Coverage.
were or become eligible for COBRA any time between September 1, 2008 and December 31, 2009, due to an involuntary termination; and
elect COBRA continuation coverage.
The Recovery Act provides an extended election period for three groups of individuals who were or will be involuntarily terminated between September 1, 2008, and December 31, 2009:
individuals who did not elect COBRA within the regular election period;
individuals who elected COBRA but did not have coverage as of February 17, 2009 (for example, because they stopped paying the premium); and
individuals who did not have an election in effect as of February 17, 2009.
The extended election period continues for 60 days after delivery of the notice of the extended election period, as discussed below. Note that the extended period of time to elect COBRA coverage does not extend the maximum 18-month coverage period.
c. Option to Allow Employees to Elect Less Expensive Coverage.
The Recovery Act permits, but does not require, employers to give AEIs the option to elect coverage under COBRA that is less expensive than the coverage the AEI had while employed. 3. How Long Does the Subsidy Last?
The subsidy lasts for up to nine months, generally starting on the first day of the first month of the coverage period that begins after February 17, 2009. However, the subsidy will end before the end of the nine-month period if:
4. How Will the Government Pay the 65% Premium Subsidy to Employers?
the maximum coverage period (18 months for COBRA; 6 months for mini-COBRA) ends before the nine-month subsidy period ends;
the AEI fails to pay the 35% share of the premium;
the AEI becomes eligible for Medicare; or
the AEI becomes eligible for an alternative group health care or medical plan. Alternative coverage includes eligibility to enroll in a spouse's group health plan. However, the subsidy does not terminate if the alternative coverage consists only of dental, vision, counseling, or a flexible spending arrangement.
Under the Recovery Act, employers will initially pay the subsidy. They will be reimbursed for the 65% share of the premium through the federal payroll tax system. The reimbursement will be treated as a tax credit. If the premium payment exceeds the employer's payroll tax liability, the government will credit or refund the employer directly. The employer is not eligible for reimbursement unless and until the AEI has first paid his or her 35% share of the premium amount.
To obtain reimbursement, the employer must comply with the following requirements:
5. Are There New Notice Requirements Under the Recovery Act?
attest to and document the involuntary termination of employment;
report the tax identification number for all AEIs;
report the amount of the offset of payroll taxes for the current payroll period and estimate the offset for the next period;
report the amount of subsidy received for each AEI and qualified beneficiary; and
report the number of the individuals to whom coverage is applied.
Yes. The Recovery Act imposes several notification requirements on employers and AEIs.
Notice requirements for employers
Employers must provide additional notification of (1) the availability of the premium reduction; and (2) the option to enroll in less expensive coverage, if that option is permitted by the employer. The additional notification must be given to all individuals who became entitled to elect COBRA on or after September 1, 2008 (regardless of the reason for COBRA eligibility).
The additional notification must include:
the necessary forms for establishing eligibility for the premium reduction;
the name, address, and telephone number necessary to contact the plan administrator and any other relevant person;
a description of the extended period for electing coverage;
a description of the obligation of an AEI to notify the plan of his or her eligibility to obtain alternative subsequent coverage and the penalty for failure to so notify;
a description (displayed in a prominent manner) of an AEI's right to a reduced premium and any conditions on that entitlement; and
a description of an AEI's option to enroll in less expensive coverage, if the employer permits it.
In the case of individuals who may become AEIs because they are eligible to use the extended election period, the employer must give notice within 60 days after February 17, 2009. In this case, the notice must include:
a notification of the premium assistance; the availability of the extension; and
the option to enroll in a less expensive coverage, if the employer permits it.
These notice requirements may be satisfied by either amending the existing notice forms or by including a separate document with the existing notice.
The Recovery Act directs the Department of Labor to provide model notices no later than March 19, 2009. However, because the extended election period for potential AEIs runs for 60 days after delivery of notice, employers may wish to draft and send their own notices as soon as possible.
Notice requirements for AEIs
AEIs must notify the plan in writing if they are no longer eligible for premium assistance. The model and form of such notices will be provided by the Department of Labor. If AEIs fail to give such notice, the Recovery Act imposes a penalty equal to 110% of the premium reduction after termination of eligibility.
6. Does the Recovery Act Impact Severance Policies?
In some cases, yes. Reimbursement of the subsidy is only available when the employee, or a third party other than the employer, pays the employee's share of the premium. The employer is not eligible to receive reimbursement when it has agreed to pay the entire COBRA premium as part of a severance agreement. However, if the employer has agreed to pay only part of the premium, the employer may still be able to claim the 65% subsidy, making this an important consideration in structuring separation agreements.
7. Are There Any Limits on the Availability of the Subsidy?
Yes. The subsidy is not available to individuals who have an adjusted gross income that equals or exceeds $125,000 or $250,000 if filing jointly. The employer does not need to track these individuals. If a high-income individual receives the subsidy, the federal government may recapture the subsidy amount by imposing an additional tax when the individual files his or her annual tax return.
8. What Should You Do Next?
We suggest that you take the following steps as soon as possible to comply with the new requirements for employers under the Recovery Act:
Identify all AEIs who have been terminated since September 1, 2008, including individuals who did not elect coverage or who did not have coverage on February 17, 2009.
Decide whether you will draft new notices (or amend the existing ones) immediately (which we recommend) or wait for the Department of Labor to issue model notices.
Develop a procedure to determine, track, and record AEIs and eligibility and coverage periods. Review and revise all remaining COBRA administration procedures to ensure that they comply with the Recovery Act, especially notices and forms.
Review and revise severance agreements that offer payment of COBRA premiums as part of the severance package.
We will apprise you of any updates relating to the Recovery Act, including the forms or model notices that the Department of Labor will issue in the upcoming weeks.
If you have any questions regarding