The American Recovery & Reinvestment Act - COBRA Revisions
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (AARA), which, among other things, will impact significantly how individuals who are terminated "involuntarily" between September 1, 2008, and December 31 2009, will be offered COBRA continuation coverage.
The Act is effective for monthly periods of COBRA coverage beginning March 1, 2009. While there are still a number of details to work through and the Secretary of Labor has 30 days to provide Model Notices, what follows are some key highlights of the new law:
The new law provides for a COBRA premium subsidy. What is this?
The COBRA premium subsidy means eligible COBRA participants will only be required to pay 35% of their COBRA continuation premium for a period of up to 9 months, or until they become covered under another Group Health Plan or Medicare. Employers will not receive any subsidy payments up front for the remaining 65% percent of premium, but would be able to recover this amount in the form of a credit against their income tax withholding and FICA taxes (employer and employee portion).
Who is eligible for this subsidy?
This temporary federal COBRA subsidy is available to employees who are involuntarily terminated between September 1, 2008 and December 31, 2009, and have incomes of less than $125,000 (single) or $250,000 (joint filers) for the taxable year in which the subsidy is received. This includes individuals to whom COBRA coverage has previously been offered and subsequently declined. In essence they would have a new 60-day election period upon notification to participate in the premium subsidy program.
These individuals must be allowed to elect the same coverage as they would have had available at the time of their termination, or if the Employer agrees, they may be allowed to select from the same coverage currently available to active employees. However the full COBRA premium cannot exceed the premium which would have been in place upon their termination.
Additionally, current COBRA participants who lost their coverage due to involuntary termination are eligible for this premium subsidy beginning March 1, 2009, if their termination occurred on September 1, 2008 or later.
If someone had declined COBRA previously and elects to take advantage of the premium subsidy program, would the coverage be retroactive as far back as September 1, 2008?
No. If an individual elects to participate in this program the coverage will become effective no earlier than March 1, 2009, there is no retroactive provision.
What about pre-existing conditions?
Individuals who elect COBRA coverage under the premium subsidy program shall not be subject to the 63-day break in coverage rule for purposes of determining pre-existing.
Does this extend COBRA coverage for those eligible for the premium subsidy?
No, it does not. The original COBRA coverage dates, and continuation requirements such as timely premium payment still apply.
What do employers need to do now?
- Identify those individuals who have been terminated involuntarily since September 1, 2008.
- Notify them of their eligibility to enroll in COBRA continuation coverage which includes a premium subsidy, regardless of whether or not they previously declined COBRA continuation coverage.
- Current COBRA notices should either be amended, or a separate notification provided which should include:
1. Forms necessary for establishing eligibility for premium reduction;
2. Plan Administrator's contact information;
3. A description of the 60-day election period;
4. Explanation of the COBRA participant's responsibility for notification to the Plan if they become covered under another group health plan or Medicare, and the penalty for failure to do so (110% of premium); and,
5. A prominently displayed description of COBRA participant's right to a reduced premium and the applicable conditions for receiving the reduced premium.
- Determine which plan(s) to offer to COBRA premium subsidy participants.
How does the Payroll tax credit work?
Each employer will be required to submit reports to the Treasury identifying those former employees who were terminated involuntarily in order to receive a payroll tax credit. This report will include the premium subsidy amount and the actual amount of payroll taxes offset for the reporting period. Additional information will be forthcoming as to how this is to be accomplished.
