Employers Beware – new mandatory COBRA payment and notice requirements
March, 2009
Included in the American Recovery and Reinvestment Tax Act of 2009 (ARRA), signed into law on February 17, 2009, are a variety of provisions impacting employers and designed to assist individuals who, in the midst of the current economic climate, find themselves unemployed. The focus of this notice is on the Federal funded, employer-paid COBRA subsidy.
Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), qualified beneficiaries (i.e., covered employees and their eligible dependents) who lose coverage under large (20 or more employees) employer-provided group health insurance have a right, upon a "qualifying event," to continue benefits for up to 18–36 months. An employee must elect to participate in COBRA continuation coverage after termination of employment, or other "qualifying events" in which health benefits are lost, and the employee is responsible to make the premium payments to continue the benefits unless the employer expressly agreed to make some or all the premium payments (i.e., as a result of a severance package). If a qualified beneficiary fails to timely make an election, his or her health insurance coverage will end.
The 65% COBRA Subsidy
For a family facing layoffs and mortgage payments, this additional expense often proves to be overwhelming. The ARRA seeks to temporarily relieve this financial burden on qualified beneficiaries by providing a 65% federal subsidy for COBRA premiums for up to nine (9) months in connection with employees who are "involuntarily terminated." This federal subsidy applies even if Federal COBRA does not apply but a comparable state-COBRA is available (i.e. Cal-COBRA or comparable state continuation laws). This means that many group health plans governed by comparable state law but not subject to federal COBRA are affected by ARRA.
ARRA reduces the COBRA premium that an "assistance eligible individual" has to pay. An "assistance eligible individual" is a qualified beneficiary who becomes eligible for COBRA continuation coverage because of an "involuntary termination" of employment between September 1, 2008, and December 31, 2009. Unfortunately, the Act does not define "involuntary termination;" however, the DOL has stated on its website that the subsidy will not apply to employees who are terminated "for cause" and the IRS has stated on its website that the subsidy will not apply to employees who leave employment voluntarily. This means the COBRA subsidy will probably not be available to employees who participate in employer-sponsored voluntary severance programs.
The new legislation also provides for an extended COBRA election period for "assistance eligible individuals." Each "assistance eligible individual" (i) without a COBRA election in effect but qualified for COBRA continuation coverage (as an "assistance eligible individual") as of February 17, 2009, or (ii) who had COBRA in effect but later dropped it before February 17, 2009, must be given an opportunity to elect coverage. This extended election period ("special election") ends 60 days after the required notice is provided. The DOL has noted on its website that if the federal subsidy applies under a state-COBRA law and not federal COBRA, a state may choose, but is not required, to provide this special election period.
The "assistance eligible individual" cannot be required to pay more than 35% of the COBRA premium. The employer, the plan, or the insurer (as applicable) must initially subsidize the remaining 65% of the premium. However, ARRA provides a method for reimbursing the person to which premiums are payable (the employer, the plan, or the insurer, as applicable). For example, if an employer is required to pay the 65% subsidy because there is no multi-employer plan involved and no insurer is otherwise responsible for premium payments, then the employer is entitled to receive a payroll tax credit against certain employment taxes equal to the 65% COBRA premiums made by such employer for the "assistance eligible individuals." If the amount of the subsidized COBRA premiums paid surpasses the payroll tax liability of that employer, a refund (direct reimbursement) will be made to that employer.
ARRA places limits on who can benefit from the subsidy. There is a proportionate reduction in the premium for those individuals with an adjusted gross income between $125,000 and $145,000 ($250,000 and $290,000 for joint filers).
What this means for Employers
During this temporary period, all employers, plans, or insurers (as applicable) that maintain a group health plan subject to the federal COBRA (or comparable state-COBRA) continuation coverage requirements are required to pay 65% of the applicable COBRA premium if an eligible employee has elected COBRA coverage and timely pays 35% of the premium.
In addition to the federally-mandated COBRA Initial Notice and Election Notice, plan administrators (usually the employer) have additional notice requirements relating to the new federal subsidy program. An updated notice must be provided to each qualified beneficiary who becomes entitled to COBRA continuation coverage between the dates of September 1, 2008 and December 31, 2009 (not just "assistance eligible individuals"). The specific notice requirements include:
- forms necessary for establishing eligibility for the subsidy;
- the name, address, and telephone number necessary to contact the plan administrator or other person with information relevant to the COBRA premium assistance benefits;
- a description of the extended election period;
- a description of the "assistance eligible individuals" obligation to notify the employer of eligibility for subsequent coverage under a group health plan or Medicare (and the penalty associated with failing to do so);
- an explanation of the right to a reduced premium; and
- the option to elect different coverage, if the employer permits the election to enroll in different coverage.
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 (by April 18, 2009).
The new law directs the Department of Labor to issue a "model notice" within 30 days of ARRA to assist employers in complying with these provisions and the DOL has posted information on http://www.dol.gov/ebsa/cobra.html. The Internal Revenue Service also recently posted "Answers for Employers" on its web site at http://www.irs.gov/newsroom/article/0,,id=204708,00.html
If you are interested in learning about the provisions in the American Recovery and Reinvestment Tax Act of 2009 or would like assistance in implementing any aspect of the COBRA subsidy program please contact the Employment or Tax Group at Bullivant Houser Bailey PC.
Circular 230 Compliance: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.