The American Recovery and Reinvestment Act-COBRA

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act in an effort to stimulate the Nation’s struggling economy. This unprecedented legislation makes major changes to the health care benefits available to terminated employees under COBRA and radically changes the administration of continuation of group health coverage. This article provides a quick summary of the major changes.

Employer Subsidy of Continuation Premiums

The major provision of the Act is a subsidy for continuation of group health coverage for any employee or dependent who loses coverage from September 1, 2008 to December 31, 2009. Any employee or dependent who is a "qualified beneficiary" under COBRA person is eligible for a subsidy if he or she is entitled to receive COBRA benefits following an involuntary termination of employment or reduction of hours. Although the Act does not define "involuntary termination", it is suggested that common sense will apply and it will not be hard to determine if a termination was voluntary or not.

Qualified beneficiaries will be required to pay only 35% of the required continuation health care premium for a period of not to exceed nine months. The remaining portion will be paid by the employer. These percentages are based on the continuation premium an employee or dependent, would have otherwise been required to pay. This means that if the employer had already committed to pay a portion of the continuation premium as part of severance agreement or general lay off policy, the employee or defendant would only 35% of the portion of the premium not covered by the employer.

The way the Act stimulates the economy is by granting employers refundable credits for federal payroll taxes paid by the employer. The credit is applied as if the employer had submitted an equivalent amount of payroll tax on the day the employee or dependent’s payment is received. The tax credit only applies to COBRA premiums paid by the employer by reason of the Act, so employers who have agreed to pay portions of COBRA premiums as a result of any other arrangement are not entitled to the payroll tax credit. The subsidy begins with the employee or dependent’s premium payment after March 1, 2009 (in most cases) and will continue for up to nine months of coverage.

Employee Liability For Failure to Report New Coverage

Of course, once an employee or dependent becomes eligible for other health care coverage or Medicare the subsidy ends. The employee or dependent is required to notify the former-subsidizing employer of the eligibility for a new plan and failure to provide such notice makes the employee or beneficiary liable for 110 percent of the improperly paid subsidy amount. Still, it is easy to see how employees and new employers may wish to delay enrollment in group health care plans to “milk” the subsidy.

Income Eligibility For Subsidy

Not all otherwise qualified beneficiaries are eligible for the subsidy. The subsidy is not available to employees during a year in which he or she is a taxpayer, or spouse or dependent of a taxpayer, whose federal modified adjusted gross income exceeds $145,000 (or $290,000 in the case of a taxpayer filing a joint return). There is a reduced COBRA subsidy if the federal modified adjusted gross income exceeds $125,000 (or $250,000 for joint returns). The employee or dependent are required to report the subsidy on their returns, so employers will not be required to make tax adjustment for payment of the subsidy.

Because of these income limitations, a one-time election to waive the COBRA subsidy is permitted.

Retroactive Coverage and Notification

The Act is retroactively applied to employees or dependents who suffered from involuntary terminations after September 1, 2008. Group health plans must identify and inform these persons of an additional COBRA election period and their eligibility for a COBRA subsidy, even if the eligible initially rejected COBRA coverage. This retroactive eligibility period will end 60 days after notice is given to the eligible beneficiaries.

The election period will begin on the date of enactment and ends 60 days after the date the plan administrator provides the required notice. Coverage elected during this new election period will begin with the first coverage period after enactment. Coverage will end on the date coverage would otherwise have ended if the qualified beneficiary had timely elected COBRA coverage following the employee's termination or reduction of hours.

Flexibility in Coverage Level Choices

The Act provides some cost flexibility by allowing employers to permit the former employees or dependents to choose any lower-cost benefit option offered to active employees. This, of course, will reduce the amount of the subsidy but may make coverage more affordable, for some qualified beneficiaries.

Retroactive Notification Requirements

Of course, the Act requires plan administrators to inform qualified beneficiaries of these new provisions. This can be done in two ways. Employers can revise their current notices or include the new information as a separate document. A model notice should be published within 30 days, but plan administrators still have an obligation to send our appropriate notices in a timely manner.

The Act does not make any changes in the 44 day notice period for persons who become eligible for COBRA after the enactment of the legislation. Persons who were involuntarily terminated before the enactment date still should receive the an original COBRA notice but will later receive a supplemental notice advising them about the subsidy provisions within 60 days after the effective date of the Act.

Reporting Requirements for Employers

It is certain that employers will have to file new reports to the federal government concerning subsidies. The exact nature of those reports is unclear but three types of report are foreseeable:

(1) A report establishing that each person receiving the subsidy was affected by an involuntary termination.

(2) A report accounting for the payroll tax credit taken for a reporting period and the estimated credits to be taken during the following reporting period.

(3) A report for all covered individuals stating the amount of subsidy treated as a payroll tax credit for each employee.

Conclusion

The Obama stimulus plan includes a significant impact on how businesses administer COBRA benefits for employees and dependents affected by involuntary terminations. It is important the small business owners and employees understand how the COBRA subsidy plan will work and their respective obligations under the Act.

If you have any questions, please feel free to contact Tom Barron at (856) 642 6445 or at tbarron@barpostlaw.com .