• New COBRA Continuation Coverage Rules
  • March 25, 2009 | Authors: Denny F. Wong; Clemens H. Barnes; Judith A. Endejan
  • Law Firm: Graham & Dunn PC - Seattle Office
  • On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Act") into law. The Act made changes to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") that will impact many employers. It provides a government subsidy for a portion of the COBRA premium payments that employees losing their jobs would otherwise have to pay in order to maintain medical insurance coverage. In addition, it provides a special COBRA extended election period for COBRA coverage so that employees who were involuntarily terminated from employment on or after September 1, 2008, but did not originally elect COBRA continuation coverage, can take advantage of the subsidy. The subsidy is available for periods of coverage beginning on or after March 1, 2009.

    COBRA Premium Subsidy

    COBRA provides that employers generally must offer "qualified beneficiaries" (generally, an individual covered by a group health plan, and the spouse and dependents of such individual) the option to elect to continue health coverage following involuntary termination of employment. Premiums for coverage must be paid by the qualified beneficiary. Under the Act, the federal government will subsidize 65 percent of the premiums for a period of up to nine months, if the qualified beneficiary is an "assistance eligible individual." An “assistance eligible individual" is a qualified beneficiary who:

    • Is eligible for COBRA continuation coverage at any time during the period beginning September 1, 2008 and ending December 31, 2009;
       
    • Elects COBRA coverage (when first offered or during the additional election period); and
       
    • Has a qualifying event for COBRA coverage that is the covered employee’s involuntary termination of employment during the period beginning September 1, 2008 and ending December 31, 2009.

    Extended Election Period

    The Act provides a special extended election period for COBRA coverage for an individual who does not have COBRA continuation coverage in effect as of February 17, 2009, the date of enactment of the Act, but who would have been an assistance eligible individual if such election were in effect. Such individuals may elect to receive COBRA coverage and participate in the subsidy program during the period that begins on February 17, 2009 and ends 60 days after the individual receives notice of the special extended election period. So, for example, an individual who was involuntarily terminated from employment after September 1, 2008 but did not elect COBRA continuation may now enroll in his former employer's health plan and receive the government's subsidy for the premiums. In the case of individuals who elect coverage during this special extended election period, coverage begins with the first period of coverage beginning on or after February 17, 2009 and not from the date of termination. Coverage will not extend beyond the period of coverage originally required had COBRA coverage been elected at the time of termination (generally 18 months from the date of termination).

    Reimbursement of Premium Subsidy Through Payroll Taxes

    The premium subsidy provision of the Act is implemented through the payroll tax system. The Act treats the 65 percent of premium amount otherwise payable by an assistance eligible individual as payroll taxes that were previously paid by the employer. The employer is allowed to credit that amount against its payroll tax obligations. If the amount treated as previously paid payroll taxes exceeds the employer’s actual payroll tax obligations, the employer can claim a refund.

    High-Income Individuals Not Eligible For Subsidy

    An individual is not eligible for the premium subsidy if his modified adjusted gross income for the taxable year in which the subsidy is provided exceeds $145,000 ($290,000 for a joint return). In addition, the subsidy is phased out incrementally for individuals with modified adjusted gross income between $125,000 ($250,000 for a joint return) and $145,000 ($290,000 for a joint return). An individual who receives the premium subsidy, but is not entitled to all or part of it because his modified adjusted income exceeds a threshold amount, is subject to income taxes on the excess.

    Notice Requirements

    The Act imposes new notice requirements on employers, including the requirement to provide notice to those entitled to elect COBRA continuation coverage of the subsidized premium program; the option to enroll in a less expensive plan, if the employer permits this option; the extended election period; and the individual's requirement to notify the plan sponsor of his or her becoming eligible for health coverage under another plan. The Act requires the Secretary of Labor to publish model notices by March 19, 2009.

    What You Need To Do

    The notice described above must be given to the following individuals:

    • In the case of involuntary terminations of employment of a covered employees between February 17, 2009 and December 31, 2009, all assistance eligible individuals; and
       
    • In the case of involuntary terminations of employment of a covered employees between September 1, 2008 and February 17, 2009,
      • assistance eligible individuals who are currently receiving COBRA; and
         
      • individuals who did not elect COBRA continuation coverage, by are otherwise assistance eligible individuals.

    Although model notices are not required to be published until March 19, 2009, employers should begin now to identify those individuals to whom notices must be sent. In the case of individuals who did not elect COBRA continuation coverage, but are otherwise assistance eligible individuals, the notice must be given by April 18, 2009, so prompt action is required.