The COBRA Subsidy in the Stimulus Package

Step 1: Provide the Subsidy to Assistance Eligible Individuals

Employers must advance the cost of the COBRA subsidy to “assistance eligible individuals” (“AEI”) and seek reimbursement from the federal government through a payroll tax credit. An AEI is a person who becomes eligible for COBRA between Sept. 1, 2008 and Dec. 31, 2009 due to a covered employee's involuntary termination of employment. Thus, a covered spouse or child (a “qualified beneficiary”) of an employee who is involuntarily terminated is eligible for the subsidy if they elect to continue COBRA coverage. The involuntary termination does not have to be related to a reduction in force ' any employee who incurs an involuntary termination within the applicable time frame is an AEI (except for employees who are not eligible for COBRA coverage at all because they are terminated for gross misconduct).

There may be situations in which it is unclear whether or not an employee's termination was involuntary, such as where termination occurs because the individual's employment contract is not renewed or where an employee claims a constructive discharge has occurred. There is currently no clear answer regarding whether such individuals are AEIs and each situation will have to be analyzed according to its own facts. Although it is possible that the IRS or Department of Labor may issue guidance on these types of issues, neither agency is required to do so. If an employer determines that an individual is not an AEI, and the individual disputes this finding, he or she can seek an expedited review from the Department of Labor of the determination.

An AEI is only responsible for paying 35% of his or her normal COBRA premium. The remaining 65%, which is initially paid by the employer, is reimbursed by the federal government through a payroll tax credit to the employer or, in the case of a multiemployer plan, the plan. In the case of a group insurance plan that is not subject to COBRA, the insurer receives the reimbursement. If the payroll tax is less than the credit received for the COBRA subsidy, the entity entitled to the reimbursement will receive a refund directly from the Internal Revenue Service (“IRS”). The IRS recently announced that this refund will be claimed on Form 941, the Employer's Quarterly Federal Tax Return. The employer will not be required to submit additional information with the Form 941 to claim the refund, but the supporting documentation must be kept by the employer.

The subsidy is only available for individuals with a modified adjusted gross income of less than $145,000 ($290,000 for joint filers) for the taxable year in which the subsidy is received. A reduced subsidy is available if the individual's modified adjusted gross income is between $125,000 and $145,000 ($250,000 and $290,000 for joint filers). Individuals with a modified adjusted gross income of more than $145,000 ($290,000 for joint filers) are technically still eligible for the subsidy. However, if a subsidy is provided to an individual at this income level, the subsidy is recaptured by the IRS through an increase in the individual's income tax liability on the individual's tax return. Thus, an individual at this income level may want to waive the subsidy. The subsidy will apply to premiums paid for periods of COBRA coverage beginning on or after Feb. 17, 2009. For plans providing coverage on a month-to-month basis, the first period is the one beginning March 1, 2009. However, the Act allows for a “grace period” of two months in order to implement the subsidy. Therefore, full COBRA premiums may be collected during the implementation period, and any premiums that were collected from AEIs in excess of the reduced premium can either be refunded or credited against future COBRA premiums.

The subsidy is available for up to nine months of coverage. The Act generally does not extend the maximum period of coverage required under COBRA, so the subsidy would end at the time the individual's COBRA coverage expires. Eligibility for the subsidy also ends upon the individual's becoming entitled to coverage under another group health plan or Medicare ' even if the individual decides not to take coverage under the other health plan and continues COBRA coverage under his or her former employer's plan. If the individual does not inform the plan of his or her eligibility for the other group health plan or Medicare, he or she may be liable for a penalty of up to 110% of the subsidy that he or she received after becoming eligible for the other coverage.

Step 2: Provide Second Chance COBRA Notices to Affected Individuals

AEIs who became eligible on or after Sept. 1, 2008, but did not elect COBRA as of Feb. 17, 2009 ' or who elected and let their COBRA coverage expire before the end of the maximum coverage period ' will have a special second chance to elect COBRA coverage. The second chance election period began on Feb. 17, 2009 and ends 60 days after the employer provides notices to the AEI of the subsidy. If the AEI elects COBRA during this special election period, COBRA coverage will begin with the first period of coverage beginning after Feb. 17, 2009 (for plans that provide coverage on a month-to-month basis, this means it will begin on March 1, 2009). COBRA coverage under the second chance election cannot extend beyond the maximum period of COBRA coverage that would have been allowed if COBRA had been initially elected under the normal time frames following the individual's termination of employment.

Step 3: Determine Whether or Not a Lower Cost Coverage Option Will Be Offered

Generally under COBRA, qualified beneficiaries can only elect to continue the same coverage that they had immediately before the qualifying event. However, under ARRA, an employer may, but is not required to, permit AEIs to elect a lower-cost health plan option available under the employer's plan. If the employer wishes to offer a lower cost coverage option, the additional coverage option cannot be: 1) coverage that provides only dental, vision, counseling, or referral services; 2) a flexible spending arrangement, or 3) coverage for services or treatments furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care. The AEI has 90 days from the date he or she receives notice of the lower cost coverage option to elect it. When deciding whether or not to offer this lower cost coverage, an employer should consider whether or not the cost savings that could be realized if the AEI elects the lower cost option would outweigh any administrative cost of providing coverage under the lower cost option. Because information about any lower-cost options must be provided in the revised COBRA notice, employers will need to determine quickly whether or not they will give AEIs the option to elect a lower-cost COBRA option.

Step 4: Revise COBRA Notices and Plan Documents

Employers are required to provide all individuals who became eligible to elect COBRA coverage between Sept. 1, 2008 and Dec. 31, 2009 with a notice that contains information about the availability of the subsidy, the availability of any lower cost health plan options if the plan will offer them, the obligation of a qualified beneficiary to notify the plan of eligibility under another plan, and the penalty for failure to provide this notice. This notice is required to be provided within 60 days of the enactment of the Act, which is April 18, 2009. (The Second Chance notice described above must also be sent by this date. The Department of Labor is required to prescribe model notices within 30 days of enactment of the Act. Employers should also consider revising or supplementing other plan documentation, such as summary plan descriptions and severance plans, to reflect the COBRA requirements of ARRA.

Conclusion

The COBRA provisions of the Act represent some of the most significant changes to this area of the law since COBRA was first enacted. Employers will need to adapt to these changes quickly to ensure compliance with ARRA.

Karla Grossenbacher, a member of this newsletter's Board of Editors, is a partner in the Washington, DC, office of Seyfarth Shaw LLP, specializing in labor and employment law. She is chair of the Washington, DC, Labor and Employment Practice and serves on the firm's national Labor and Employment Steering Committee. John Burgess is an associate in the same department.

On Feb. 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA” or the “Act”). The Act creates new obligations for employers under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). Under COBRA, employers must provide covered individuals who participate in group health plans the opportunity to elect to continue group health plan coverage if such coverage is lost due to termination of employment or another qualifying event. Generally, such coverage must be offered to covered individuals for a period of up to 18 months at no more than 102% of the cost of health care coverage (the total cost of continued health care coverage) plus a 2% administrative fee.

Under ARRA, certain individuals will now be eligible for a subsidy from the federal government for up to 65% of the cost of their COBRA premiums. In light of the current economic downturn, the COBRA subsidy is an attempt by the Obama administration to provide more affordable health insurance to certain individuals who have involuntarily lost their jobs. The subsidy is a temporary measure, and it applies only to individuals who have been involuntarily terminated. The subsidy is not available to individuals who retire, otherwise voluntarily leave their employment, or become eligible for COBRA continuation coverage because of a reduction in hours that is not a termination of employment.

There are several steps employers need to take now to comply with the new COBRA obligations under ARRA.

Step 1: Provide the Subsidy to Assistance Eligible Individuals

Employers must advance the cost of the COBRA subsidy to “assistance eligible individuals” (“AEI”) and seek reimbursement from the federal government through a payroll tax credit. An AEI is a person who becomes eligible for COBRA between Sept. 1, 2008 and Dec. 31, 2009 due to a covered employee's involuntary termination of employment. Thus, a covered spouse or child (a “qualified beneficiary”) of an employee who is involuntarily terminated is eligible for the subsidy if they elect to continue COBRA coverage. The involuntary termination does not have to be related to a reduction in force ' any employee who incurs an involuntary termination within the applicable time frame is an AEI (except for employees who are not eligible for COBRA coverage at all because they are terminated for gross misconduct).

There may be situations in which it is unclear whether or not an employee's termination was involuntary, such as where termination occurs because the individual's employment contract is not renewed or where an employee claims a constructive discharge has occurred. There is currently no clear answer regarding whether such individuals are AEIs and each situation will have to be analyzed according to its own facts. Although it is possible that the IRS or Department of Labor may issue guidance on these types of issues, neither agency is required to do so. If an employer determines that an individual is not an AEI, and the individual disputes this finding, he or she can seek an expedited review from the Department of Labor of the determination.

An AEI is only responsible for paying 35% of his or her normal COBRA premium. The remaining 65%, which is initially paid by the employer, is reimbursed by the federal government through a payroll tax credit to the employer or, in the case of a multiemployer plan, the plan. In the case of a group insurance plan that is not subject to COBRA, the insurer receives the reimbursement. If the payroll tax is less than the credit received for the COBRA subsidy, the entity entitled to the reimbursement will receive a refund directly from the Internal Revenue Service (“IRS”). The IRS recently announced that this refund will be claimed on Form 941, the Employer's Quarterly Federal Tax Return. The employer will not be required to submit additional information with the Form 941 to claim the refund, but the supporting documentation must be kept by the employer.

The subsidy is only available for individuals with a modified adjusted gross income of less than $145,000 ($290,000 for joint filers) for the taxable year in which the subsidy is received. A reduced subsidy is available if the individual's modified adjusted gross income is between $125,000 and $145,000 ($250,000 and $290,000 for joint filers). Individuals with a modified adjusted gross income of more than $145,000 ($290,000 for joint filers) are technically still eligible for the subsidy. However, if a subsidy is provided to an individual at this income level, the subsidy is recaptured by the IRS through an increase in the individual's income tax liability on the individual's tax return. Thus, an individual at this income level may want to waive the subsidy. The subsidy will apply to premiums paid for periods of COBRA coverage beginning on or after Feb. 17, 2009. For plans providing coverage on a month-to-month basis, the first period is the one beginning March 1, 2009. However, the Act allows for a “grace period” of two months in order to implement the subsidy. Therefore, full COBRA premiums may be collected during the implementation period, and any premiums that were collected from AEIs in excess of the reduced premium can either be refunded or credited against future COBRA premiums.

The subsidy is available for up to nine months of coverage. The Act generally does not extend the maximum period of coverage required under COBRA, so the subsidy would end at the time the individual's COBRA coverage expires. Eligibility for the subsidy also ends upon the individual's becoming entitled to coverage under another group health plan or Medicare ' even if the individual decides not to take coverage under the other health plan and continues COBRA coverage under his or her former employer's plan. If the individual does not inform the plan of his or her eligibility for the other group health plan or Medicare, he or she may be liable for a penalty of up to 110% of the subsidy that he or she received after becoming eligible for the other coverage.

Step 2: Provide Second Chance COBRA Notices to Affected Individuals

AEIs who became eligible on or after Sept. 1, 2008, but did not elect COBRA as of Feb. 17, 2009 ' or who elected and let their COBRA coverage expire before the end of the maximum coverage period ' will have a special second chance to elect COBRA coverage. The second chance election period began on Feb. 17, 2009 and ends 60 days after the employer provides notices to the AEI of the subsidy. If the AEI elects COBRA during this special election period, COBRA coverage will begin with the first period of coverage beginning after Feb. 17, 2009 (for plans that provide coverage on a month-to-month basis, this means it will begin on March 1, 2009). COBRA coverage under the second chance election cannot extend beyond the maximum period of COBRA coverage that would have been allowed if COBRA had been initially elected under the normal time frames following the individual's termination of employment.

Step 3: Determine Whether or Not a Lower Cost Coverage Option Will Be Offered

Generally under COBRA, qualified beneficiaries can only elect to continue the same coverage that they had immediately before the qualifying event. However, under ARRA, an employer may, but is not required to, permit AEIs to elect a lower-cost health plan option available under the employer's plan. If the employer wishes to offer a lower cost coverage option, the additional coverage option cannot be: 1) coverage that provides only dental, vision, counseling, or referral services; 2) a flexible spending arrangement, or 3) coverage for services or treatments furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care. The AEI has 90 days from the date he or she receives notice of the lower cost coverage option to elect it. When deciding whether or not to offer this lower cost coverage, an employer should consider whether or not the cost savings that could be realized if the AEI elects the lower cost option would outweigh any administrative cost of providing coverage under the lower cost option. Because information about any lower-cost options must be provided in the revised COBRA notice, employers will need to determine quickly whether or not they will give AEIs the option to elect a lower-cost COBRA option.

Step 4: Revise COBRA Notices and Plan Documents

Employers are required to provide all individuals who became eligible to elect COBRA coverage between Sept. 1, 2008 and Dec. 31, 2009 with a notice that contains information about the availability of the subsidy, the availability of any lower cost health plan options if the plan will offer them, the obligation of a qualified beneficiary to notify the plan of eligibility under another plan, and the penalty for failure to provide this notice. This notice is required to be provided within 60 days of the enactment of the Act, which is April 18, 2009. (The Second Chance notice described above must also be sent by this date. The Department of Labor is required to prescribe model notices within 30 days of enactment of the Act. Employers should also consider revising or supplementing other plan documentation, such as summary plan descriptions and severance plans, to reflect the COBRA requirements of ARRA.

Conclusion

The COBRA provisions of the Act represent some of the most significant changes to this area of the law since COBRA was first enacted. Employers will need to adapt to these changes quickly to ensure compliance with ARRA.

Karla Grossenbacher, a member of this newsletter's Board of Editors, is a partner in the Washington, DC, office of Seyfarth Shaw LLP, specializing in labor and employment law. She is chair of the Washington, DC, Labor and Employment Practice and serves on the firm's national Labor and Employment Steering Committee. John Burgess is an associate in the same department.