New COBRA Requirements for Premium Subsidies in the American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (Recovery Act), signed by President Obama on February 17, 2009, provides for subsidies for the cost of COBRA health care continuation coverage and places new administrative responsibilities on employers relating to terminated employees.

COBRA Subsidy
The Recovery Act includes a 65% subsidy for the cost of premiums for continuation coverage for up to nine months for an "assistance eligible individual" (AEI). To qualify as an AEI, an individual’s employment must be involuntarily terminated (other than for gross misconduct) during the period beginning September 1, 2008, and ending December 31, 2009. This means that an employer must look back at all employee terminations since last September 1 as well as all 2009 employee terminations and follow the new rules for each such employee.

The subsidy itself is not retroactive. It applies to periods of coverage beginning after the February 17, 2009 enactment of the Recovery Act (which, since insurance premiums are typically paid on a calendar month basis, generally means commencing as of March 1, 2009) regardless of whether an AEI’s former employer is subject to COBRA. Generally, employers with fewer than 20 employees are not subject to COBRA. If an AEI’s former employer is subject to COBRA, the AEI’s former employer pays 65% of the COBRA premium. If an AEI’s former employer is not subject to COBRA and the AEI is entitled to continuation coverage under State law, the insurance company providing continuation coverage for the AEI pays 65% of the premium. The Federal government then reimburses each employer and insurer by treating the amount paid towards AEI COBRA or State continuation coverage (collectively referred to as COBRA) as a payroll tax payment. If the amount paid for AEI COBRA exceeds the amount of payroll taxes due, the excess will be credited or refunded as if payroll taxes were overpaid.

The subsidy is for a limited period, and is only available to the AEI until the first to occur of the date:

a.  the AEI becomes eligible for coverage under another group health plan,

b.  9 months after the first day of the first month in which the AEI’s COBRA premium is subsidized,

c.  the AEI’s COBRA coverage terminates, or,

d.  the AEI’s COBRA coverage would have terminated if he or she had made a timely COBRA election upon the termination of his or her employment.

Notice Requirements
Employers will be required to provide notices to two groups of individuals by April 18, 2009. First, AEIs who currently have COBRA continuation coverage must be notified of the availability of the subsidy and the requirements to qualify for the subsidy. Second, a person who was entitled to COBRA coverage but did not have a COBRA election in effect on February 17, 2009, must be notified of the availability of the subsidy, the requirements to qualify for the subsidy and the availability of a special COBRA election period during the 60 days after the notice to elect coverage is provided to him or her. Failure to provide the notice will be treated as a failure to satisfy the COBRA notice requirements that may result in penalties and other liability.

In addition, certain changes must be made to the COBRA general notice.

The DOL is required to provide model notices by March 19, 2009.

Recapture Tax for High Income Individuals
The amount of the premium subsidy is gradually phased out for a taxpayer with a modified adjusted gross income of between $125,000 ($250,000 for married filing jointly) and $145,000 ($290,000 for married filing jointly) for the taxable year. Any amount of the premium subsidy that is received but phased out will be added to the taxpayer’s Federal income taxes. Taxpayers may waive the premium subsidy to avoid recapture.

Governmental Plans
These provisions also apply to governmental plans pursuant to changes made to the Public Health Service Act.