Temporary COBRA Premium Assistance Included in Economic Stimulus Bill
The American Recovery and Reinvestment Act signed into law on February 17, 2009 includes a temporary subsidy for the cost of so-called COBRA continued health care coverage. Currently, many individuals whose employers are subject to COBRA and who lose their jobs can continue employer-sponsored health care coverage under COBRA by paying 100% of the cost of the coverage, plus a 2% administrative fee. In an effort to make this coverage more affordable and increase the likelihood that employees losing their jobs during the economic downturn will be able to retain health insurance, the Act provides a subsidy of 65% of the cost of COBRA coverage for nine months to certain individuals, described below, whose employers are subject to COBRA.
Key Features of the COBRA Subsidy Program
- Eligibility—The new COBRA subsidy is available to individuals who elect COBRA coverage and whose employment is involuntarily terminated during the 16-month period beginning September 1, 2008; however, any subsidy paid to eligible individuals with modified adjusted gross income of $125,000 or more ($250,000 or more in the case of a joint return) will be subject to recapture by the IRS when the individual pays tax for the year. While these high-income individuals can waive the subsidy, cash flow and other considerations could lead them to accept the subsidy and repay it in the form of an increased tax for the year.
- Subsidy Payment—Employers receive a credit against their payroll taxes (FICA and withholding taxes) to the extent of COBRA subsidy payments made. If the subsidy amount paid exceeds the payroll taxes owed, Treasury will reimburse the employer for the excess; however, no subsidy reimbursement will be made with respect to a qualified beneficiary until the individual pays his or her share of the COBRA premium. The credit and reimbursement mechanics are not spelled out in the legislation.
- Termination of Subsidy—The subsidy terminates at the end of the nine-month period, or sooner, if the covered individual becomes eligible for other group health insurance, or for Medicare, or if the individual’s COBRA eligibility ends. In most cases, the termination of the subsidy will not coincide with the termination of a qualified beneficiary's COBRA coverage. In order to maintain coverage once the subsidy terminates, a qualified beneficiary must pay the full cost of that coverage for the balance of the COBRA period.
- Extended Election Period—Any qualified beneficiary who was involuntarily terminated between September 1, 2008 and the effective date of the Act and whose COBRA election period has expired, will be eligible to make an election during the 60-day period following the date of enactment. However, coverage elected during this period will be retroactive only to the date of enactment, not to the qualifying termination date. In addition, the extended election period does not serve to extend the COBRA coverage period, which begins on the date the qualified beneficiary lost coverage.
- Additional COBRA Notice—Employers must provide notice regarding the availability of the subsidy both to individuals who newly qualify and to those who were involuntarily terminated on or after September 1, 2008, but before the date of enactment. The employer can amend its existing COBRA notice or provide a supplement. The Department of Labor is expected to provide model subsidy notices within 30 days.
- Amending Coverage Under COBRA—If permitted by an employer, individuals eligible for the COBRA subsidy will have 90 days after they receive notice of the option of an election change to choose coverage that differs from the coverage they had at the time of the involuntary termination of their employment. This option to change coverage will only be available to beneficiaries if employers choose to provide the option, and only to the extent that the other coverage is available to active employees, is not solely dental, vision, counseling, referral services or flexible spending account coverage, and if the premium for the new coverage does not exceed the premium for the previously held coverage.
Because the new provisions are effective immediately, plan sponsors must comply with them now. Additional guidance is expected on certain aspects of the COBRA subsidy program. Steps to consider include:
- Identifying individuals who are eligible for the COBRA subsidy. This includes only individuals who lost coverage owing to an involuntary termination of employment on or after September 1, 2008 but who are otherwise eligible for COBRA, including individuals whose COBRA election period has already expired. Note that while an individual may be a COBRA qualified beneficiary when coverage is lost owing to a reduction in hours, retirement, voluntary termination of employment, or a legal separation or divorce, these events, and any involuntary terminations for gross misconduct, are not qualifying events for purposes of the subsidy.
- Contact the Plan's COBRA administrator, if applicable, about its process for notifying eligible qualified beneficiaries about their COBRA rights and collecting subsidized premiums.
- Notify, or work with the Plan’s COBRA administrator to notify, all eligible beneficiaries, including eligible individuals who have not yet elected COBRA coverage, of their right to a 65% subsidy of their COBRA premiums for up to 9 months and the process for submitting timely payments of their share of the premiums.
- Work with payroll staff or vendor to determine how to pay the required payroll taxes and report to the Treasury the subsidy amounts requested. Further information about the reporting requirements and reimbursement is expected shortly.
This alert provides a general summary of the COBRA subsidy provisions of the Act. If you have further questions or would like assistance in implementing any aspect of the subsidy program, please contact your Ropes & Gray attorney.