Recovery Act Includes COBRA Subsidy

Congress passed and President Obama signed the economic stimulus bill, known as the “American Recovery and Reinvestment Act of 2009” (the “Act”). Title III of the Act provides for premium assistance for COBRA benefits and COBRA-type benefits required under state law. The Act significantly scales back the subsidy originally approved by the House and reported to you in our previous newsletter, “Changes to COBRA Included in Stimulus Bill.” Nevertheless, the Act requires action by employers and plan administrators with respect to their group health plans.

Under the Act, the federal government will subsidize, for up to nine months from termination of employment or enactment (if later), 65% of the COBRA premium for involuntarily terminated employees and their families who elect COBRA coverage under an employer-sponsored group healthcare plan. The subsidy covers any employee involuntarily terminated from September 1, 2008 through December 31, 2009. Any such employee who has elected COBRA coverage prior to enactment must have his or her premium reduced by 65% generally beginning March 1. Employees who were terminated during this period but prior to enactment, and did not elect COBRA coverage, are given an additional 60 days to elect COBRA and to receive the premium subsidy, with such COBRA coverage effective generally beginning March 1. Employers are responsible for notifying all individuals who experienced a qualifying event pre-enactment who did not elect COBRA coverage (and their families) of their rights to subsidized COBRA premiums within 60 days after enactment. The Department of Labor will issue a model notice within 30 days.

The subsidy is delivered by the employers, who must reduce COBRA premiums by 65% for involuntarily terminated employees and their families. The entity that receives the COBRA premiums, which will generally be the employer but in limited cases will be the insurance company, will be reimbursed by the government through a payroll tax credit or directly. The agencies that oversee COBRA are directed to issue regulations to provide guidance on this process.

The Act limits eligibility for the COBRA subsidy to individuals with modified adjusted gross incomes not exceeding $145,000 and families with incomes not exceeding $290,000 in the year of the subsidy. Employers and health plans do not have to monitor their former employees’ incomes. If the premium subsidy is provided during a taxable year in which an employee’s modified adjusted gross income exceeds $145,000 (or $290,000 for joint filers), then the employee must repay the premium subsidy. This is effected by an increase in the employee’s income taxes, payable on the employee’s Form 1040. For employees with adjusted gross incomes between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the premium subsidy is reduced proportionately.

Unlike the House bill, the final law does not include any provisions offering former employees over age 55, or those with at least 10 years of service with the employer, the ability to elect and retain COBRA continuation coverage, at their own expense, until becoming eligible for Medicare or until securing coverage through another employer. Accordingly, the present rule under which laid-off employees are generally entitled to COBRA continuation coverage only for 18 months regardless of age or years of service with the employer, remains in effect.

As a result of the new law, employers and health plan administrators should gear up for the following actions:

• Make sure records of involuntary terminations since September 1, 2008 are and continue to be accurate. Only involuntary terminations are eligible for the subsidy. Those claiming the payroll tax credit will have to demonstrate their entitlement to it.
• Make sure records of COBRA premium payments are and continue to be accurate. The subsidy is available only for employees and family members who actually pay 35% of the actual premium.
• Make arrangements for COBRA premium invoices that reflect the new premium structure as soon as possible. If not practical, employers/plan administrators may reimburse the excess premium later or credit it against future premium payments.
• Following the DOL’s publication of model notices, prepare notices for any individual who had a qualifying event since September 1, 2008.
• For qualifying events post-enactment and before 2010, revise the standard COBRA notices to reflect the subsidy.
• Follow procedures to claim the payroll tax credit or to seek reimbursement for the subsidy.

If you have any questions about how to implement the COBRA subsidy with respect to your group health plan, contact a member of Blank Rome’s Employee Benefit and Executive Compensation Group.