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New COBRA Obligations: Subsidy, Second Chance, and MoreJanuary 1, 0001
The American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), signed by President Obama on February 17, 2009, imposes new health care continuation coverage requirements on employers. Federal law - widely known as COBRA - has long required that employers allow terminated employees to continue health care coverage at employees’ expense. Among other things, the Stimulus Act now requires employers to reduce by 65% the amount of COBRA premiums that certain COBRA participants must pay, provide notices of the new rules to anyone who became COBRA eligible since September 1, 2008, and modify future COBRA notices. Employers must act quickly to offer the subsidy, provide a second chance for certain former employees to elect coverage, and meet the new notice requirements. Set forth below is a brief summary of the Stimulus Act’s continuation coverage changes.
Some employers - generally those that are too small to be subject to COBRA - are subject to state laws that are similar to COBRA. The requirements of the Stimulus Act apply to these employers as well, but for simplicity, this Alert refers to all continued coverage as COBRA coverage.
Under the Stimulus Act, any qualified beneficiary who became or becomes eligible for COBRA continuation health coverage as a result of an involuntary termination that occurred or occurs between September 1, 2008 and December 31, 2009 (a “Stimulus Beneficiary”) is entitled to a subsidy of 65% of his or her COBRA premiums. Effective the first period of coverage following enactment (March 1, 2009 for most plans), a Stimulus Beneficiary who pays 35% of the applicable COBRA premium must be treated as paying the full amount of the COBRA premium. The subsidy must be in effect for 9 months or, if earlier, until the Stimulus Beneficiary becomes eligible for Medicare or another employer group health plan. The remaining 65% of the cost of coverage is paid to employers through a dollar-for-dollar credit against their Federal payroll taxes for the subsidized premiums.
In order to maximize use of the government-provided subsidy, employers should think carefully about any employer-provided COBRA coverage. The subsidy only applies to the COBRA premium charged by the employer, and the 35% payment must be made by the Stimulus Beneficiary or someone other than the employer. Thus, if an employer provides employer-paid COBRA coverage for any portion of the first nine months of coverage (e.g., as part of a reduction in force package), the employer will not receive any subsidy credit for that period and will only receive the credit for the remaining portion of the nine months allowed under the Stimulus Act. Further, if an employer allows a Stimulus Beneficiary to continue coverage at a reduced rate (e.g., the active employee rate) for some period, the Stimulus Beneficiary need only pay 35% of that reduced premium. The employer, however, can only receive the subsidy credit for 65% of the reduced premium rather than 65% of the full premium.
The subsidy is phased out for Stimulus Beneficiaries with an adjusted gross income of $125,000 ($250,000 joint) or more. Stimulus Beneficiaries who take the subsidy but have an adjusted gross income over the limit will be required to increase their tax liability for the year by the amount of impermissible subsidy. However, the phase-out will not affect the employer’s payroll tax credit.
Stimulus Beneficiaries who did not elect COBRA coverage when it was offered or whose COBRA coverage is not in effect as of February 17, 2009 must be given a second chance to enroll in COBRA. Plan administrators have until April 18, 2009 to notify such qualified beneficiaries of their ability to elect subsidized COBRA. The Stimulus Beneficiaries then have 60 days from notification to make a second chance COBRA election. If they do so, coverage becomes effective retroactive to March 1, 2009 but will not extend beyond the maximum COBRA coverage period that would have applied if the Stimulus Beneficiary had elected such coverage originally.
Normally, a qualified beneficiary under COBRA may only elect COBRA continuation coverage with respect to the health plan in which he or she was enrolled at the time of the qualifying event (the “Original Coverage”). Qualified beneficiaries may then change their benefit at the same time as active employees (e.g., during open enrollment). Under the Stimulus Act, employers may allow Stimulus Beneficiaries to elect COBRA coverage under a medical plan other than the Original Coverage. The different coverage must also be offered to active employees and the premium for such different coverage cannot be more than the premium for the Stimulus Beneficiary’s Original Coverage. Additionally, the different coverage cannot be health flexible spending account coverage or limited scope coverage (e.g., dental only). Employers will need to decide whether to make this additional right available to Stimulus Beneficiaries.
New Notification Requirements
The Stimulus Act requires employers to amend or supplement their existing COBRA notices to include additional information for Stimulus Beneficiaries. For example, notices must include:
- A description of the availability of the premium subsidy;
- The option to enroll in different coverage (if allowed by the employer);
- A description of the second chance election period; and
- A description of the Stimulus Beneficiary’s obligation to notify the plan if he or she becomes eligible for Medicare or an employer’s group health plan.
Employers should note that the notice requirement is not limited to Stimulus Beneficiaries. Rather, the new notice must be provided to any qualified beneficiary who became or becomes entitled to COBRA between September 1, 2008 and December 31, 2009.
Employers will need to act quickly to develop new COBRA notices, inventory and track employees who became eligible for COBRA coverage on or after September 1, 2008, and coordinate with their payroll department to obtain the applicable subsidy credits. Additionally, employers considering a reduction in force should think carefully before offering any employer-paid COBRA coverage.
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