Employers’ obligations under COBRA have been significantly increased by the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA is commonly known as the economic stimulus legislation recently passed by Congress and signed by President Obama.
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COBRA Obligations Expanded
Economic Stimulus Bill
Adds Premium Subsidy
Employers Given Immediate Obligations
By Christopher W. Olmsted
Employers’ obligations under COBRA have been significantly increased by the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA is commonly known as the economic stimulus legislation recently passed by Congress and signed by President Obama.
In a nutshell, ARRA entitles employees involuntarily terminated between September 1, 2008 and December 31, 2009 to continue health care coverage through COBRA by paying only 35 percent of their premiums for up to nine months. The remaining 65% is paid by employers, who may deduct the cost from federal payroll taxes. Employers must immediately comply with the law by providing notice to eligible individuals, collecting 35% of the premiums from the employees, paying 65%, and filing quarterly tax returns claiming a credit for the 65% subsidized amount.
Eligible Employees
An Employee and her covered dependents is eligible if: (1) she is involuntarily terminated (2) at any time from September 1, 2008 to December 31, 2009; (3) she elects COBRA coverage; (4) she does not earn more than $145,000 (or $290,000 for joint filers); and (5) is otherwise eligible for COBRA.
Involuntary termination. Recall that under COBRA, there are a number of qualifying events. Under ARRA, there is only one qualifying event: involuntary termination. This means that the employee must be laid off or terminated. Voluntary quits do not count. Note that the employee need not be part of a reduction in force; the termination could be a solo event or even a for cause firing. The only exception is where the employee is terminated for gross misconduct. (COBRA already included this exception.)
Date of termination. For an employee to become eligible for the ARRA premium reduction, he must be terminated on a date on or after September 1, 2008 and no later than December 31, 2009. This sixteen month window is intended to help employees through what is expected to be the worst of the current recession.
Election. The employee must elect COBRA coverage. More on that below.
Income limits. ARRA does not subsidize high income-earners, presumably because they can afford to pay regular COBRA premiums. Therefore, individuals earning adjusted gross income of more than $145,000 ($290,000 for joint filers) are not eligible. Further, the benefits begin to phase out at $125,000 of adjusted gross income. Note that employers do not deny coverage to high-income earners should they elect coverage. The employee is responsible for making this determination, and will face a tax liability for the subsidy.
Otherwise eligible for COBRA. Under COBRA, an individual is not eligible, or loses eligibility, upon becoming covered under another health plan (e.g. spouse’s plan, new job), becomes eligible under a flexible spending arrangement, or becomes eligible for Medicare. These limitations apply under ARRA as well. ARRA, however, specifies that upon becoming eligible for coverage under another plan, the subsidy ends.
Premium Subsidy Period
The premium subsidy for employees and dependents continues for up to nine months from the date of election. Coverage can end early if the individual loses COBRA eligibility (e.g. covered under another group health plan, Medicare eligible).
What if the employee becomes ineligible for the subsidy? Employees receiving the premium subsidy are required to notify the former employer providing premium assistance of events causing the subsidy to cease. Failure to do so may subject the non-complying employee to penalties equal to 110 percent of premium subsidies paid after the employee ceased being eligible for the subsidy.
Employer Notice Obligations
Employers already provide COBRA notices upon the happening of a qualifying event. Notice must be given within 30 days of a termination. ARRA modifies the notice obligations so that employees are informed that they may elect to receive COBRA with the premium reduction.
There are two aspects to this new notice obligation: (1) notice regarding the right for already terminated employees to retroactively elect COBRA with premium reduction; (2) notice regarding prospective rights.
Special Retroactive COBRA Election Opportunity: Individuals involuntarily terminated from September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled (for example because they were unable to continue paying the premium) have a new 60 day election opportunity. Employers must provide notice of this eligibility within 60 days following February 17, 2009 (April 17, 2009).
When is the election period? It depends on when the employer provides notice of the new rights. This election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice. Thus employers should immediately send the required notice to employees involuntarily terminated between September 1, 2008 and February 16, 2009.
Does the retroactive election extend the coverage period? No. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's involuntary termination). Thus, if an employee terminated on September 1, 2008 elects coverage on March 1, 2009, his COBRA rights extend only 12 more months, because six months of eligibility have already passed.
When can special coverage begin? COBRA coverage elected in this special election period begins with the first period of coverage beginning on or after February 17, 2009. Most employers are on a monthly plan, and thus coverage will typically begin on March 1, 2009. Coverage is not retroactive; it begins from the election date forward.
Does the retroactive election apply to small employers? No. This special election period opportunity does not apply to coverage sponsored by employers with fewer than 20 employees that is subject to State law. (Note: Aside from the retroactive provision, ARRA does otherwise apply to small employers.)
Notice Requirement: Employers must provide the ARRA notice about the premium reduction to individuals who have a COBRA qualifying event during the period from September 1, 2008 through December 31, 2009. As with regular COBRA, notice must be given within 30 days of termination. Plan administrators may provide notices separately or along with notices they provide following a COBRA qualifying event. This notice must go to all individuals, whether they have COBRA coverage or not, who had a qualifying event from September 1, 2008 through December 31, 2009.
Individuals eligible for the special COBRA election period described above also must receive a notice informing them of this opportunity. This notice must be provided within 60 days following February 17, 2009.
Accordingly, employers and their group health plan administrators must update their COBRA notices for use through December 31, 2009. It is expected that most group health plans will provide the updated forms; employers should inquire with their plans. Alternatively, the U.S. Department of Labor has published model forms, which can be found by following this link.
The notices must include the following:
Forms and information necessary for establishing eligibility for the premium subsidy
Contact information for the plan administrator
Notice to eligible employees who previously declined COBRA coverage, regarding their new 60-day special election period to select COBRA continuation coverage.
Information about the employee’s obligations to notify the plan if the employee becomes eligible for coverage that would cause the premium subsidy to end;
Information about the employee’s option to enroll in different coverage under the plan, if applicable (e.g. where employer offers additional/different coverage to existing employees)
A description of the beneficiary’s right to the reduced premium and any conditions on such right, “displayed prominently” in the notice (e.g. large print, bold, etc.)
Employee Election
After receiving notice of COBRA/ARRA rights, the employee has 60 days to choose whether or not to elect continuation coverage.
Reporting/Reimbursement of premium assistance payments
Employers must begin (1) collecting the employee’s 35% contribution, and (2) paying the 65% subsidy for any coverage periods starting on or after February 17, 2009. Typically this means beginning March 1, 2009.
Employers are reimbursed for paying 65% of the health care premium by way of a tax credit. Employers should use the updated IRS Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments. The Form 941 Instructions explain how to complete lines 12a and 12b, which address the COBRA premium assistance payments.
As referenced above, the premium subsidy continues for a maximum of nine months. After that period, the employee can continue under regular COBRA (without the subsidy).
What if the premium subsidy exceeds the employer’s payroll tax liability? Employers whose premium subsidy reimbursements exceed their payroll tax filings will be entitled to a direct payment from the federal government.
What if the employee pays more than his 35% portion of the premium? Eligible employees who inadvertently pay more than their 35 percent portion of the premium while employers or group health plan administrators implement ARRA-compliant procedures may be entitled to a credit against future premiums or reimbursement of the overpayments.
Supporting documentation
Employers claiming the credit must maintain supporting documentation for the credit claimed. According to the IRS, such documentation includes, but is not limited to:
Information on the receipt, including dates and amounts, of the employee’s 35% share of the premium.
In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage.
A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
Other documents necessary to verify the correct amount of reimbursement.
Switching Benefit Options
If an employer offers additional coverage options to active employees, the employer may (but is not required to) allow assistance eligible individuals to switch the coverage options they had when they became eligible for COBRA. To retain eligibility for the ARRA premium reduction, the different coverage must have the same or lower premiums as the individual’s original coverage. The different coverage can not be coverage that provides only dental, vision, a health flexible spending account, or coverage for treatment that is furnished in an on-site facility maintained by the employer.
Cal-COBRA and Other “Mini-COBRA”
Many states, including California, mandate COBRA for employers under 20 employees. These employers must also offer the ARRA premium subsidy. They are not, however, required to offer the special retroactive election discussed above.
Resources:
Department of Labor Fact Sheet: COBRA Premium Reduction
http://www.dol.gov/ebsa/newsroom/fsCOBRApremiumreduction.html
http://www.dol.gov/ebsa/pdf/fsCOBRApremiumreduction.pdf
DOL Model Notice Forms
IRS Summary
IRS FAQs for Employers
Read the legislative text of ARRA
http://www.dol.gov/ebsa/pdf/COBRAPremiumReductionProvision.pdf
To Do List:
Obtain notice forms from group health provider, or obtain model notice forms from the Department of Labor.
Identify any terminated employees who may be eligible for the special retroactive election period (September 1, 2008 through February 17, 2009. Provide notice to any identified employees by April 17, 2009.
Determine correct premium subsidy amounts
Provide ARRA notice to henceforth terminated employees, up through December 31, 2009.
Allow 60 days for individuals to elect coverage.
For individuals electing coverage, begin paying the subsidy for employees as of March 1, 2009 (in most cases).
Track subsidy period to ensure maximum of nine months coverage.
File IRS Form 941 (as amended) to claim a tax credit.
Develop accounting and other recordkeeping processes to maintain data required by IRS to support subsidy credits.
More Legal Update articles.
Download entire March Legal Update in PDF format.
COBRA Webinar
Join us for a complimentary webinar on March 23, 2009 covering the new COBRA requirements. Follow this link: https://www2.gotomeeting.com/register/219649398 for more information and to register.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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