NEW COBRA CHANGES REQUIRE IMMEDIATE EMPLOYER ACTION
Changes in the American Recovery and Reinvestment Act
President Obama signed the economic stimulus bill (a.k.a. the American Recovery and Reinvestment Act of 2009) into law on February 17, 2009. The bill includes significant changes to COBRA, the federal health care continuation law and employers will need to act quickly to ensure compliance.
New Premium Subsidy for COBRA
All COBRA-eligible individuals who lost health plan coverage due to involuntarily terminated employment after August 31, 2008 and before January 1, 2010 (called “assistance eligible individuals” or “AEIs”) are eligible for a 65% COBRA premium subsidy. The subsidy begins March 1, 2009 for AEIs currently on COBRA coverage (or on the first period of coverage for AEIs electing COBRA later) and ends after 9 months or earlier if the individual becomes eligible for other coverage or the continuation coverage period ends. Employers may claim the 65% subsidy as a credit against payroll taxes. If the subsidy is greater than the amounted owed in payroll taxes, employers are entitled to a refund of the excess amount.
Second Chance to Elect COBRA
Assistance eligible individuals who experienced a qualifying event of involuntary termination before February 17, 2009 (the date of passage of the Act) and who were not covered by COBRA on that date must be notified by April 18, 2009 and given another 60-day COBRA election period. The subsidized COBRA coverage will generally begin March 1, 2009. The COBRA coverage period will end when it would have ceased if the individual had elected COBRA when it was originally offered. The period between the individual’s original coverage termination and the time that the late-elected COBRA coverage begins may not be counted toward the 63-day break in determining creditable coverage under HIPAA.
Plan Enrollment Option
Employers may allow assistance eligible individuals to opt into less expensive COBRA coverage and employers who do so must notify AEIs of this option.
Subsidy Generally Not Taxable Income
The premium subsidy is generally not treated as income to the employee. The eligibility for the subsidy begins to be phased out for assistance eligible individuals with adjusted gross incomes of $125,000 (or $250,000 for taxpayers filing jointly) and is phased out entirely for individuals with adjusted gross incomes of $145,000 (or $290,000 for those filing jointly.) Employers are not responsible for determining if someone is ineligible for the subsidy based on income unless the high-income individual informs the employer that they are opting out of the subsidy. The Secretary of Treasury will re-capture the subsidy amount from the high-income individuals in the form of a higher year-end tax payment.
Employer Action Items
- Identify assistance eligible individuals for the period between September 1, 2008 and February 17, 2009 (“Pre-passage AEIs”). Include all involuntary terminations, even those “for cause”. (You may exclude terminations for gross misconduct which make an individual ineligible for COBRA.)
- Develop a process for identifying assistance eligible individuals for the period from February 18, 2009 to December 31, 2009 (“Post-passage AEIs”).
- Create a notice for the Pre-passage AEIs. Include a description of (i) the eligibility for premium reduction; (ii) the extended election period; (iii) the 9 month maximum period of COBRA coverage that is eligible for the premium reduction; (iv) the events that would cause early termination of the premium subsidy; and (v) the AEI’s obligation to notify the employer upon becoming eligible for other group health plan or Medicare coverage. The Department of Labor (“DOL”) is directed to issue model notices by March 19, 2009. To avoid a longer period for an election and therefore a greater chance of adverse selection, employers should consider notification prior to the release of the DOL model notice.
- By April 18, 2009, provide the notice to all Pre-passage AEIs. Employers should consider including all terminated employees, regardless of whether the termination was considered voluntary or involuntary. (The notice must clearly state that eligibility for the subsidy and second chance enrollment are limited to involuntarily terminated employees.)
- Determine the amount of the premium subsidy for Pre-passage AEIs, generally 65% of the full COBRA premium. If the employer has agreed to cover some of the COBRA premium for the AEIs (e.g. pursuant to a severance arrangement) then the determination of the subsidy requires more analysis.
- Effective March 1, 2009, reduce the COBRA premium charge for Pre-passage AEIs by the subsidy amount. If it is not possible to reduce the premium by March 1, the employer may charge the full premium for March and April. The subsidy for March and April must be credited against future premiums or refunded to the AEI.
- Develop a notification for individuals who request AEI status and are denied. Include notice of the individual’s right to an expedited appeal to the Secretary of Labor. Because an employer may be required to certify that an AEI’s termination was involuntary in order to receive a credit for the subsidy, employers must ensure that the subsidy is only given to those that have been terminated involuntarily.
- Calculate the COBRA coverage period for late-electing AEIs (18 months from original termination of employment). Ensure that each late-electing AEI is informed of this end date and employers and administrators have properly captured it.
- Revise HIPAA Notices of Creditable Coverage for late-electing AEIs so that the period between termination and COBRA election is not counted as a break in coverage.
- Review severance and reduction in force policies with respect to Post-passage AEIs. Determine whether revisions are needed for 2009 to any employer-paid medical continuation coverage as a result of the new subsidy.
- Develop notices for Post-passage AEIs which describe the premium subsidy and meet other statutory requirements. This notice may be a supplement to employer’s current COBRA notices. The DOL is directed to issue a model notice by March 19, 2009.
- Provide notice to Post-passage AEIs together with the COBRA election notice.
- Implement 65% premium reduction for Post-passage AEIs who elect COBRA.
- Update Summary Plan Descriptions as necessary. Remember that the subsidy only applies for involuntary terminations on or before December 31, 2009.
- Develop a process for tracking subsidy amounts.
- Develop a process for obtaining credits to payroll taxes for subsidy amounts.
If you have questions about the new COBRA rules or need assistance, please contact a member of Oppenheimer’s Employee Benefits Group.
This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.