- Stimulus Act Changes to COBRA
- March 10, 2009
- Law Firm: Varnum - Grand Rapids Office
President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Stimulus Bill") on February 17, 2009. In addition to the spending and tax cut provisions covered in the press, the Stimulus Bill includes assistance for COBRA health care continuation premium payments for employees who have lost their coverage along with their jobs. Employers pay a pivotal role in processing this new benefit, and significant notice and recordkeeping obligations are included with very short compliance periods. Prompt attention is required to meet these deadlines. The major elements are outlined below, including action steps.
I - Premium Assistance for COBRA Benefits
- A subsidy of 65% of the COBRA premium will be available to assistance eligible individuals.
- An "assistance eligible individual" is a person who suffers an involuntary termination (other than for gross misconduct) occurring between September 1, 2008 and December 31, 2009 and who elects COBRA coverage. Eligibility begins to phase out for those with incomes above $125,000/single and $250,000/family.
- The subsidy will be available for up to nine months of COBRA coverage. The subsidy terminates earlier if the assistance eligible individual becomes eligible for other employer health coverage or Medicare during the subsidy period. Eligibility for only dental, vision, employee assistance programs, Section 125 health care spending accounts, onsite medical care or similar limited coverage will not cause early termination.
- The subsidy applies to the first "period of coverage" after enactment (March 1, 2009 for most plans).
- Premium assistance does not apply to Section 125 health care spending accounts of cafeteria plans.
- The subsidy is not considered to be gross income to the covered employee but is considered to be an employee contribution to the plan for purposes of determining the gross income of the employer.
- COBRA participants access the benefit by tendering their share of the premium (35% of the full COBRA premium) to the employer. Election forms must be modified so that individuals can establish (claim) eligibility for the subsidy. If an individual claims assistance eligible individual status and the employer denies the request, the individual may appeal to the DOL for review.
- Employers will generally bear the initial cost of the subsidy (65% of the premium), but may obtain reimbursement by offsetting the cost against their withholding and payroll tax obligations or by application to the IRS for a refund of an overpayment of these amounts.
- If an assistance eligible individual pays 100% of the premium in the first two periods (months), the employer must either reimburse the overpayment or credit the overpayment against subsequent payment obligations.
- Employers with two or more plan options (e.g. low deductible, high deductible, PPO, HMO, etc.) may offer assistance eligible individuals the option to elect an equal or less costly option (does not apply to Section 125 health care spending accounts, on-site medical facilities, dental only coverage and certain other options). A special 90-day enrollment period applies.
- An earlier proposal for extended coverage for long-service (10-year) employees and employees terminating after attaining age 55 (super-COBRA) was not adopted in the Stimulus Bill.
II - Special Treatment of Qualified Beneficiaries Who Became Eligible from September 1, 2008 to Date of Enactment of Stimulus Bill
- Employers must give notice to assistance eligible individuals who became eligible for COBRA before the date of enactment. The statute states that the notice must be giving to "...an individual who does not have a COBRA election in effect on the date of enactment but who would be an affected eligible individual if such election were in effect." The conference report states that the notice must be given "to all individuals who terminated employment during the applicable time period, and not just to individuals who were involuntarily terminated."
- These individuals have another 60-day election period for prospective coverage beginning with delivery of a notice of this right.
- This special notice must be given within 60 days of the Stimulus Bill enactment (by April 18, 2009).
- The period from the date of the loss of coverage until the date of the notice is disregarded (tolled) for purposes of the 63 day gap in coverage applicable to pre-existing condition limitation enforcement.
- Coverage elected pursuant to the special election begins on the first period of coverage beginning after the date of enactment.
- The 18-month COBRA duration begins at the date of the original involuntary termination, not the date of the new election period.
III - Notices and Reports
- The employer must provide a notice of the special subsidy provisions to all COBRA qualified beneficiaries, whether voluntarily or involuntarily terminated.
- Employers must provide a special notice to employees terminated after August 31, 2008, but who become entitled to COBRA continuation coverage before the date of enactment of the Stimulus Bill.
- The DOL is directed to prepare model notices within 30 days of enactment (March 19, 2009).
- Assistance eligible individuals must notify employers in writing if their eligibility for the subsidy lapses prior to the expiration of the nine month subsidy period.
- Employers must prepare and file reports with the IRS describing their activity with the special subsidy, including:
- the social security numbers of participants
- attestation of involuntary termination of all covered employees
- the amount of payroll taxes offset to recover the subsidy
- amount of subsidy reimbursed for each qualified beneficiary
- whether coverage for each qualified beneficiary was single coverage or for two or more individuals.
IV - COBRA Coverage Period Extension
- If a covered employee's pension becomes payable by the PBGC, the COBRA period extends to the date of death.
- If a covered employee is a Trade Adjustment Assistance-eligible individual, COBRA coverage may continue until the employee ceases to be TAA-eligible.
- The COBRA coverage period cannot be extended beyond December 31, 2010 under the above provisions.
- The TAA subsidy is increased from 65% to 80% through December 31, 2010
V - Employer Responses Required
- Identify individuals who terminated employment between September 1, 2008 and February 17, 2009.
- Identify whether the optional, multi-tiered plan election should be adopted (employer discretion).
- Prepare and send the special notice for those who terminated between September 1, 2008 and February 17, 2009.
- Establish rules for determining difference between voluntary and involuntary termination of employment.
- Modify COBRA election forms.
- Amend plans in a manner consistent with the new, temporary COBRA rules.
- Coordinate new offsetting payroll tax and withholding procedures with payroll department.