- The New COBRA Subsidy: An Update for Employers
- April 15, 2009 | Authors: Russell E. Isaia; Natascha S. George; Jill L. Weintraub; Eric R. Benson; Rachel Faye Smith
- Law Firms: Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - Office; Bingham McCutchen LLP - New York Office; Bingham McCutchen LLP - Boston Office
The New COBRA Subsidy: An Update for Employers
The American Recovery and Reinvestment Act of 2009 (the “Act”) signed by President Obama on Tuesday, February 17, 2009 includes provisions related to health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) and similar State insurance laws. Under the Act, the Federal government will (indirectly) pay part of the premium otherwise payable for continuation coverage by employees involuntarily terminated between September 1, 2008 and December 31, 2009 and has mandated a new continuation coverage election opportunity for many of those individuals.
The Department of Labor (“DOL”) has issued the model notices required by the Act. The Act requires that certain of these notices be provided no later than April 18, 2009. Employers must take action immediately to ensure that information is delivered timely.
This Alert (1) describes the DOL’s model notices; and (2) addresses questions frequently asked by employers regarding their responsibilities with respect to the new subsidy.
For background and an overview of the COBRA subsidy created by the Act, see our prior Legal Alert, “Employer Action Required to Implement COBRA Changes Made by the Stimulus Legislation.” Note that while this Alert will generally refer to the requirements of COBRA, certain provisions of the Act, including the subsidy, also apply with respect to continuation coverage required by other laws, such as similar State insurance laws.
Model Notices Issued by the DOL
On March 19, 2009, the DOL issued model notices, each designed to address a particular group of qualified beneficiaries or a particular statutory notice requirement. More information is available at http://www.dol.gov/ebsa/COBRAmodelnotice.html.
Notice in Connection with Extended Election Periods
The Notice in Connection with Extended Election Periods must be given by a plan subject to COBRA to any individual eligible for the subsidy (or any individual who would be eligible for the subsidy if a COBRA continuation election were in effect) who: (1) had a qualifying event at any time from September 1, 2008 through February 16, 2009; and (2) either did not elect COBRA continuation coverage or who initially elected COBRA coverage and subsequently discontinued it. This notice must be provided by April 18, 2009.
General Notice (full and abbreviated versions)
The General Notice contains information which must be given by a plan subject to COBRA to all persons who might qualify for COBRA continuation coverage (“qualified beneficiaries”) and who experienced or experience any type of event for which COBRA coverage would have to be provided (a “qualifying event”) between September 1, 2008 and December 31, 2009. The full version of the General Notice contains all of the information generally required to be in a COBRA notice, as well as the premium subsidy information required by the Act. The General Notice must be sent to all qualified beneficiaries who either have not yet been provided a COBRA notice or who were provided a COBRA notice on or after February 17, 2009 that did not include the premium subsidy information required by the Act. The abbreviated version of the General Notice includes only the premium subsidy information but not the general COBRA coverage election information; it may be sent in lieu of the full version to qualified beneficiaries who experienced a qualifying event on or after September 1, 2008 and who elected COBRA coverage that remains in effect currently.
The Alternative Notice is intended to be used as a model for plans subject to continuation coverage requirements under State insurance law rather than Federal COBRA. Because continuation coverage requirements vary, the DOL expects that users will modify the model Alternative Notice to comply with applicable State law.
FAQs Regarding the Subsidy Provided by the Act
Eligibility for the Subsidy
What is the subsidy?
Under the Act, and as described in greater detail in this Alert, an “assistance eligible” individual may be eligible for assistance in paying the otherwise applicable premium for continuation coverage and, in some circumstances, a new continuation coverage election opportunity. An assistance eligible individual is entitled to pay only thirty-five percent (35%) of the otherwise applicable premium for periods of continuation coverage under group health plans (including health, dental and vision coverage, but excluding flexible spending accounts) beginning on or after February 17, 2009 (generally March 1, 2009 for a plan that provides coverage on a monthly basis). The Federal government will bear the remainder of the otherwise applicable continuation coverage premium indirectly, by allowing the person to whom the assistance eligible individual’s premiums are payable (generally, the employer) to offset the balance of the otherwise applicable premium against its Federal payroll taxes.
Who is eligible for the subsidy?
An “assistance eligible individual” is an individual who became, or becomes, eligible for continuation coverage under COBRA or similar State insurance law as a result of an employee’s involuntary termination of employment between September 1, 2008 and December 31, 2009. This includes not only the involuntarily terminated employee, but also the qualified beneficiaries of the involuntarily terminated employee (generally, a spouse and dependent children who were covered by the health plan at the time of the employee’s termination).
In order to be eligible for the subsidy, an individual must be a COBRA qualified beneficiary, which means, among other things, that the individual had group coverage at the time of the employee’s involuntary termination of employment. So if an employee did not actually have coverage at the time of his or her termination, then he or she would not be COBRA eligible and, accordingly, would not be an assistance eligible individual. Similarly, the spouse and dependents of an employee would not be COBRA eligible, and therefore would not be assistance eligible individuals, unless they were actually covered by the employee’s coverage at the time of the employee’s termination (subject to special rules for newborn and newly adopted children).
What constitutes involuntary termination?
The Act does not define what constitutes an “involuntary termination.” The IRS has indicated that it intends to issue additional guidance on this question, and a “Frequently Asked Questions” document released by the House Ways and Means Committee states both that “[i]nvoluntary termination is a termination that is at the direction of the employer,” and that “death is not an involuntary termination of employment.” Note, however, that nothing in the Act disturbs the general rule that employees who are terminated for “gross misconduct” need not be offered continuation coverage.
Until further guidance is issued, an employer should consider treating an employee as having been involuntarily terminated and therefore assistance eligible, unless the circumstances indicate either (1) a voluntary termination initiated by the employee; or (2) termination on account of the employee’s gross misconduct.
If a group health plan administrator determines that an individual is not eligible for the premium subsidy (for example, if it determines that the individual did not become eligible for coverage by reason of an employee’s involuntary termination but rather some other circumstance, or if the involuntary termination did not occur between September 1, 2008 and December 31, 2009), the individual may request an expedited review by the DOL of such denial. The Department of Health and Human Services (“DHHS”) will similarly review such claims in connection with State insurance continuation coverage requirements. Either the DOL or DHHS, as applicable, is required to make a determination on an appeal within fifteen (15) business days of receipt of an individual’s completed application. An application form for such review will soon be available at www.dol.gov/COBRA.
When is the subsidy applicable?
The subsidy applies to periods of continuation coverage under group health plans (excluding flexible spending accounts) beginning on or after February 17, 2009 (generally March 1, 2009 for a plan that provides coverage on a monthly basis). However, the regular premium amount may apply for the first two (2) coverage periods after February 17, 2009, and the subsidy can be provided retroactively for those months (generally March and April of 2009).
When does an individual’s eligibility for the subsidy end?
An individual’s eligibility for the premium subsidy ends on the earliest of (1) nine (9) months after his or her eligibility for the premium subsidy begins; (2) the first date he or she is eligible for coverage under (rather than actually covered by) any other group health plan or Medicare; and (3) the date following expiration of the maximum period of COBRA coverage (generally eighteen (18) months after the termination).
What does “eligible for coverage under any other group health plan” mean?
An individual is eligible for coverage under another group health plan on the date he or she could be covered under such other plan. This includes eligibility for coverage under a spouse’s health insurance plan. The term “other group health plan” does not include flexible spending accounts, limited purpose insurance (e.g., dental only), or limited onsite health care provided by an employer.
Does my business have to monitor when an individual’s eligibility ends due to coverage under another group health plan?
No. The individual is responsible for providing notice when he or she becomes eligible for another group health plan. Individuals who fail to provide this notice will be subject to a penalty.
Is there an income limit on eligibility?
Yes. Individuals with modified adjusted gross incomes of between $125,000 and $145,000 ($250,000 to $290,000 for married couples filing jointly) are subject to a phase-out so that they may be entitled to less than the full subsidy or no subsidy at all.
Is my business responsible for ensuring that only those former employees below the income limit receive the subsidy?
No. The individual is responsible for determining whether his or her income precludes eligibility for the subsidy. Any subsidy to which the individual was not entitled because his or her income exceeded the limit will be added to the individual’s personal income tax liability. An individual who suspects that his or her adjusted gross income will exceed the limit may elect to waive the subsidy, e.g., to avoid having his or her tax bill increase because he or she is not eligible for all or part of the subsidy.
Should the amount of the premium subsidy be treated as additional taxable income to the individual?
The premium subsidy is not included in the individual’s income for Federal tax purposes. Whether it is treated as additional taxable income for State tax purposes is determined under applicable State law.
Does my business have to notify employees that they are eligible for the subsidy?
Yes. The notice provided to a COBRA eligible individual upon the occurrence of a qualifying event must be expanded to include notice of the availability of the premium subsidy. Note that this notice must be provided to all individuals who experience COBRA qualifying events, not just those who are eligible for the subsidy. See the discussion of the General Notice above.
The Subsidy and the Reimbursement Process
How large is the subsidy?
Individuals who are eligible for the subsidy will be responsible for paying only thirty-five percent (35%) of the otherwise applicable COBRA premium for periods of COBRA coverage under group health plans.
Who pays the remainder of the premium?
The Federal government will bear the remainder of the otherwise applicable COBRA premium indirectly, by allowing the person to whom the assistance eligible individual’s COBRA premiums are payable (generally, the employer, but the plan itself in the case of a multi-employer plan and the insurance issuer in the case of a plan subject to State insurance law) to offset the balance of the otherwise applicable COBRA premium against its Federal payroll taxes (including Federal income taxes withheld from employees’ wages).
How does my business claim the tax credit?
To claim the credit against payroll taxes, a business must file IRS Form 941, which has been amended to include information about the COBRA subsidy. To obtain the credit, the business may either reduce the amount of payroll taxes that it remits or claim a refund for overpayment at the end of each quarter.
What if my business’s credit is larger than its payroll tax liability?
A business which is eligible for a credit that is larger than its payroll tax liability may apply the excess as an overpayment, reducing its payroll tax liability for the next quarter, or it may request a refund of the excess.
Does my business have to submit any additional information with the Form 941 in order to get the credit?
What recordkeeping obligations are there in connection with the credit?
The IRS requires businesses that claim the credit to keep records of the following:
- Information on the receipt, including dates and amounts, of the assistance eligible individuals’ thirty-five percent (35%) share of the premium.
- In the case of an insured plan, a copy of the invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
- 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, 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, and election of COBRA coverage.
- A record of the social security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for an individual or for more than one individual (e.g., the employee and his or her spouse).
- Other documents necessary to verify the correct amount of reimbursement.
Can my business claim the credit if the covered individual’s share of the premium has not yet been paid?
No. Your business cannot claim the credit until after the covered individual (or a third party other than your business) pays his or her share of the premium.
Can my business claim the credit if it pays one hundred percent (100%) of the covered individual’s COBRA premiums?
No. But if the period during which your business pays one hundred percent (100%) of the premiums is shorter than the period of the individual’s eligibility for the subsidy, then, after your business stops paying one hundred percent (100%) of the premium, the individual may claim the subsidy and your business may claim the credit for the remainder of the period during which the individual is eligible for the subsidy.
Can my business claim the credit if it is self-insured?
Can my business claim the credit if it purchases insurance? Who pays the remaining sixty-five percent (65%) to the insurer?
Yes. Your business pays the remaining sixty-five percent (65%) of the premium to the insurer, but may take that amount as a credit against your payroll taxes.
Can my business claim the credit if the insurance is provided by a multi-employer plan?
No. In that case the multi-employer plan claims the credit.
Can my business claim the credit if it is subject to State insurance laws instead of Federal COBRA?
No. In that case, the insurance issuer claims the credit.
New Election Period
What happens to those assistance eligible individuals who became eligible for COBRA before the Act took effect, but declined COBRA?
An individual who became eligible for COBRA coverage as a result of an employee’s involuntary termination of employment between September 1, 2008 and February 16, 2009, but who had not elected coverage by February 17, 2009 or had elected coverage but discontinued it prior to February 17, 2009, must be given a new election opportunity. Note that this special election opportunity is not required to be provided with respect to continuation coverage required under applicable State insurance laws rather than COBRA. However, a State may choose to provide a similar additional election period.
Does my business have to provide notice to them?
Yes. Notice of this new election opportunity must be provided by April 18, 2009, and the individual has sixty (60) days after the Notice is provided to elect coverage. See above for a discussion of the Notice in Connection with Extended Election Periods.
If they elect COBRA, when does their coverage begin?
If elected, an individual’s coverage will begin with the first period of health plan coverage beginning on or after February 17, 2009 (generally March 1, 2009); the coverage will not be retroactive to an employee’s termination date prior to February 17, 2009.
Does this delayed start date change the length of the individual’s period of COBRA eligibility?
No. The period of COBRA coverage will not be extended as a result of the “late start.” This means that the COBRA coverage of an assistance eligible employee who was terminated and lost coverage on September 1, 2008 and who takes advantage of the new election opportunity to start COBRA coverage on March 1, 2009 will expire by March 1, 2010 (which is eighteen (18) months after September 1, 2008), not eighteen (18) months after March 1, 2009.
Option to Change Enrollment
What does the Act say about allowing changes in enrollment elections?
The Act also permits (but does not require) an employer to allow an assistance eligible individual to elect a different health plan option for his or her COBRA continuation coverage than the health plan option in which the individual was enrolled prior to the termination of employment.
Does my business have to allow eligible individuals to change their enrollment elections?
If my business does allow enrollment changes, what plans can eligible individuals select?
The individual’s choice of new coverage is limited to only those plans that are available to current employees and have premiums that are less than or equal to the premiums for the plan the individual was enrolled in prior to the termination. Additionally, the new plan cannot be a flexible spending account, limited purpose insurance (e.g., dental only) or limited onsite health care provided by an employer.
If my business does allow enrollment changes, when does the eligible individual have to change enrollment?
The eligible individual must elect to change enrollment within ninety (90) days of receiving notice of the option to change enrollment.
If my business does allow enrollment changes, do we have to provide additional notice?
Yes. If your business allows enrollment changes, the notice to individuals must also discuss the option to change enrollment elections.