August 31, 2009
Previously published on March 11, 2009
On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), a measure designed to stimulate the economy and create and save 3.6 million jobs. The Act includes a provision to subsidize the COBRA premium payments of certain individuals and to offer COBRA to those who refused or dropped it between September 1, 2008 and February 16, 2009. Employers must notify all COBRA-eligible individuals of these new benefits by April 18, 2009.
The Act has two components related to COBRA:
1. Former employees are eligible for a nine month subsidy of 65% of their COBRA premium payment if they were or are involuntarily terminated between September 1, 2008 and December 31, 2009. In that instance, the employer may collect only 35% of the COBRA premium from the former employee and must pay the 65% subsidy up front. The employer may take the subsidy payment as a tax credit. The subsidy ends either nine months after the start of the subsidy payments or on the date COBRA would otherwise expire for the former employee. The subsidy will end earlier if the employee becomes eligible for (not enrolled in): (1) coverage under another group health plan (other than one consisting only of dental, vision, counseling or referral services); (2) a flexible spending arrangement; (3) an on-site medical treatment program; or (4) Medicare/Medicaid.
2. If a former employee was involuntarily terminated between September 1, 2008 and February 16, 2009, but did not elect COBRA coverage, the former employee now has a “second chance” to enroll in COBRA and receive the subsidy. The same is true for former employees who enrolled in COBRA coverage, then dropped it.
How it works:
The employer must pay 65% of the COBRA premium for eligible former employees or dependents. After the employer has collected the 35% payment from the former employee, the employer may take a credit against its quarterly payroll tax. If this results in an overpayment, the employer can either receive a refund or use it as credit against future taxes.
Who is eligible:
Unlike COBRA, the subsidy is only available to those who were involuntarily terminated. Employees who were terminated for gross misconduct or voluntarily separated are ineligible for the subsidy.
“High income individuals,” i.e., those who earn more than $145,000 (or $290,000 filing jointly), must be offered the subsidy, however they will be required to pay it back, dollar-for-dollar, on their income taxes. Individuals who earn more than $125,000 (or $250,000 filing jointly), but less than $145,000 (or $290,000 filing jointly), will be taxed on the subsidy at a prorated rate. Former employees in this group may choose to waive the subsidy.
Required Notice:
By April 18, 2009 (60 days from enactment), employers are required to have notices sent out about the subsidy program. The notice must include: (1) the eligibility rules for receiving the subsidy; (2) a former employee’s opportunity to choose COBRA, even if COBRA was initially declined (and the former employee is otherwise eligible) or dropped; (3) the option to enroll in different coverage, if the employer normally allows former employees to enroll in different coverage; (4) how the subsidy may be chosen; (5) the former employee’s obligation to notify the employer or plan when he or she becomes eligible for other group health coverage or Medicare/Medicaid and the penalty for failure to do so; and (6) a form for electing the subsidy with contact information for the plan administrator or others with knowledge of the subsidy.
The additional election period or “second chance” period expires 60 days after the employer sends out notices. For those terminated on or after February 17, 2009, they are governed by the regular COBRA response period (60 days from the later of when health plan coverage ends or the COBRA election notice is provided by the employer).
To Do List for Employers:
- Start gathering contact information on all COBRA-eligible employees, including those involuntarily terminated, since Sept. 1, 2008;
- Prepare the required notice about the subsidy and special election period or “second chance” for enrollment in COBRA coverage (or use the one drafted by the U.S. Department of Labor available in mid-March 2009);
- Create an enrollment form to accompany the notice;
- Modify Separation Agreements to include information about the subsidy;
- Create a system for recording who has elected the subsidy, who has waived the subsidy, and collecting information for tax purposes;
- Send out notices to all COBRA-eligible employees (even if not eligible for the subsidy) by April 18, 2009.
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