The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law by President Obama on February 17, 2009, provides a nine month, 65% subsidy for COBRA premiums on behalf of employees and their families if the employee loses his or her job as a result of the economic downturn.
Who is Eligible for the Subsidy?
An “assistance eligible individual” or “AEI” is eligible for the subsidy. To be an AEI, a COBRA qualified beneficiary must satisfy two requirements:
- First, the qualified beneficiary must be someone (employee or dependent) who is entitled to COBRA as a result of an employee’s involuntary termination of employment (except where due to gross misconduct). So, if an employee loses health coverage due to a reduction in hours or a voluntary termination of employment, the subsidy isn’t available. Unfortunately, Congress did not provide a definition of “involuntary termination of employment” for this purpose. As a result, it’s unclear if a voluntary quit in anticipation of a layoff, a constructive discharge or a termination under a voluntary separation program or early retirement incentive program is considered “involuntary.”
If a qualified beneficiary claims he or she is an AEI and eligible for the subsidy and his or her request is denied, ARRA gives the individual a right to appeal the decision to the U.S. Department of Labor (DOL). The DOL must rule on the appeal within 15 business days.
- Second, the qualifying event (loss of health coverage due to involuntary termination of employment) must occur on or after September 1, 2008 and before January 1, 2010.
How Does the Subsidy Work?
While the federal government ultimately pays for the 65% subsidy, it is an initial cost to employers and insurers. First, the AEI (or a third party, such as a parent, health care provider or state agency, on the AEI’s behalf) must pay 35% of the normal 102% COBRA premium. Once submitted, it will be considered payment in full. Note, that the subsidy applies to the COBRA premiums for medical, dental and vision coverages but does not apply to COBRA premiums for medical FSA coverage. For most group health plans, the employer is responsible for the remaining 65% of the normal 102% COBRA premium. However, for certain fully-insured group health plans, the insurer is responsible for the remaining 65% of the premium. This special rule only comes into play for fully-insured plans not subject to COBRA (such as small employer plans or church plans) which are subject to a state COBRA law.
The employer or insurer is reimbursed by the federal government through a tax credit equal to the remaining 65% of the premium. Many employers pay all or a portion of the COBRA premium for employees who are terminated, for example, in a reduction in force. Any such employer contribution is disregarded for purposes of determining the amount of the tax credit the employer is entitled to receive.
The credit offsets the employer’s/insurer’s liability for income tax and FICA withholding purposes with respect to its payroll. Employers and insurers will be required to report certain information to the IRS as part of the process of receiving the credit, including attestation that each applicable employee’s termination was involuntary. The IRS will be providing more information on the mechanics of this reporting requirement.
When Does the Subsidy Begin?
The subsidy applies to “periods of coverage” beginning after February 17, 2009 (the date of the enactment of ARRA). A period of coverage means the monthly or shorter period of coverage with respect to which the COBRA premium is charged. For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009.
However, Congress recognized that it may be difficult for employers and insurers to implement the new law by March 1, 2009. For this reason, the full COBRA premium may be charged for one or two months (i.e., March and April 2009). If the plan takes advantage of this transition relief, the employer or insurer who received and accepted the full premium payment(s) must either credit the extra 65% it received against future COBRA premiums owing by the AEI or refund the overpayment to the AEI within 60 days.
When Does the Subsidy End?
As stated above, the maximum subsidy period is nine months. So for AEIs entitled to the subsidy beginning March 1, 2009, it will end after November 2009. An AEI can lose eligibility for the subsidy before the nine-month period ends if:
- The AEI’s maximum COBRA continuation coverage period ends.
- The AEI becomes eligible for (vs. entitled to or enrolled in) Medicare or other group health coverage. For this purpose, other group health coverage does not include a plan providing only dental, vision, counseling and/or referral services, nor does it apply to a medical FSA, or most onsite medical clinic coverage.
AEIs are required to provide notice of eligibility for Medicare or other group health coverage to the group health plan providing them COBRA coverage. If they fail to do so and receive the subsidy for any month after they lose eligibility for the subsidy, they are subject to a penalty equal to 110% of the subsidy provided to them after they were no longer eligible to receive it.
How Can Qualified Beneficiaries Who Became Entitled to COBRA Before the Enactment of ARRA Take Advantage of the Subsidy?
If an AEI’s qualifying event occurred on or after September 1, 2008 but before February 17, 2009 and the AEI did not elect COBRA or elected COBRA but that coverage was then terminated for failure to timely pay premiums, the AEI must be given a new special COBRA election opportunity. Under the special election opportunity, COBRA must be offered again.
The new election period begins on the date of the enactment of ARRA (February 17, 2009) and ends 60 days after notice of the special election is provided to the AEI. Coverage would then begin as of March 1, 2009. The AEI’s maximum COBRA continuation coverage period would continue to be measured from the date of the original qualifying event. Thus, the new special election opportunity does not extend the AEI’s maximum continuation coverage period.
Normally, if there is a more than 63-day break in coverage, a group health plan’s pre-existing condition exclusion may apply upon reenrollment. However, ARRA specifies that the period beginning on the date of the original qualifying event and ending with the day before the date of enactment of ARRA (February 16, 2009) is disregarded for purposes of determining whether a more than 63-day break in coverage has occurred. As a result, a plan’s pre-existing condition exclusion should not apply to AEIs taking advantage of this special election opportunity.
Can AEIs Change Coverage Options When They Elect COBRA?
The employer may, but is not required to, offer AEIs a coverage change option. Upon a qualifying event, the qualified beneficiary may normally only elect to continue the health benefits he or she was enrolled in at the time of the qualifying event. Under this new rule an employer may allow an AEI to change to a health benefit option which has the same or a lower premium cost. For this purpose, health benefits do not include a plan providing only dental, vision, counseling and/or referral services, a medical FSA, or most onsite medical clinic coverage. The AEI must make the election within 90 days of receiving a notice of this opportunity.
Are There Income Limits that Apply to Receipt of the Subsidy?
A qualified beneficiary who is a “high income individual” and the spouse or dependent child of a “high income individual” who receives the subsidy will have to repay all or a portion of the subsidy to the federal government. A “high income individual” is a person with modified adjusted gross income (AGI) of more than $125,000 ($250,000 for joint filers).
Employers and insurers do not need to determine whether an AEI is a high income individual or the spouse or dependent child of a high income individual. An AEI who suspects he or she may subject to this rule can avoid repayment of the subsidy by making an irrevocable election to waive the subsidy. If an otherwise eligible AEI does not make such an election, the employer or insurer can assume he or she is otherwise eligible for the subsidy.
If a high income individual or his or her spouse or dependent child receives the subsidy, the high income individual’s federal income tax liability will be increased by the amount of the premium subsidy received. However, for individuals whose modified AGI does not exceed $145,000 ($290,000 for joint filers), the increased tax liability will not exceed the “phase-in percentage” of the subsidy received. The “phase-in percentage” is the amount by which the individual’s modified AGI exceeds $125,000, divided by $20,000 ($250,000 and $40,000 for joint filers). For example, if an individual’s modified AGI is $135,000, the phase-in percentage is $10,000/$20,000 or 50%, and the increased tax liability would be 50% of the subsidy received.
The income limits apply on an annual basis. Thus, if an AEI had modified AGI above the limits for 2009 but his or her income fell in 2010 and the individual was still entitled to COBRA in 2010, he or she would not have to repay any subsidy received in 2010.
What Notice Obligations Do Employers Have as a Result of This New Law?
First, for any individuals who become qualified beneficiaries after ARRA is enacted (not just those whose qualifying event is due to involuntary termination of employment), the plan administrator must include, as part of the COBRA notice and election materials, the additional specific information about the availability of the subsidy and the requirements to qualify for it. This obligation ends for qualifying events occurring after December 31, 2009.
In addition, the plan administrator must provide notices to two groups of existing qualified beneficiaries within 60 days after the enactment of ARRA.
- The first group consists of qualified beneficiaries whose qualifying event occurred on or after September 1, 2008 and who currently have COBRA continuation coverage. This group includes qualified beneficiaries whose qualifying event was based on any triggering circumstance, not just an involuntary termination of employment. The plan administrator must provide these qualified beneficiaries with the same notice as described above regarding of the availability of the subsidy and the requirements to qualify for it.
- The second group consists of any AEIs whose qualifying event occurred on or after September 1, 2008 and before February 17, 2009 and who are not currently enrolled in COBRA (either because they never elected it or discontinued coverage by not timely paying the premiums). In addition to receiving the notice described above regarding the availability of the premium subsidy and the requirements to qualify for it, this group must also receive notification of their second special election opportunity to enroll in COBRA continuation coverage.
ARRA requires the DOL to provide model notices for plan administrators to use within 30 days after the enactment of the new law (i.e., by March 19, 2009).
Are There any Other COBRA Provisions in ARRA?
The House version of ARRA proposed extending COBRA for certain older and long-service employees. Specifically, the House would have allowed a qualified beneficiary to stay on COBRA until becoming entitled to Medicare if employer group health coverage was lost due to a termination of employment or reduction in hours after attaining age 55 or completing at least ten years of service with the employer. That proposal in the House Bill was not included in the final version of the Act.
However, there is another provision elsewhere in ARRA which extends the maximum COBRA continuation coverage period for two confined groups of qualified beneficiaries.
- The first group consists of qualified beneficiaries associated with a former employee who is receiving pension benefits directly from the Pension Benefit Guaranty Corporation (PBGC). In other words, the PBGC has taken over the employer’s pension plan. The former employee is entitled to continue COBRA continuation coverage under any continuing employer group health plan until his or her death and any dependents are allowed to continue COBRA for 24 additional months following the former employee’s death. However, in no event is COBRA required to continue in these circumstances beyond December 31, 2010.
- The second group consists of qualified beneficiaries associated with an employee or former employee who is eligible for trade adjustment assistance (TAA) or alternative trade adjustment assistance (ATAA) benefits. The purpose of the TAA and ATAA laws is to provide benefits to employees who lose their jobs or experience a reduction in hours due to foreign competition. In order for an employee to qualify for TAA or ATAA benefits, a petition must be filed with and approval must be obtained from the DOL. The petition would either be filed by the employer, a group of workers or their union. If the DOL approval is granted, affected COBRA qualified beneficiaries are entitled to a refundable tax credit with respect to their premiums and have certain additional COBRA election opportunities. In addition, under ARRA, the maximum COBRA period may continue beyond the normal 18 or 36-month period until the date the TAA or ATAA benefits are exhausted or, if earlier, December 31, 2010.
We are ready to assist you in preparing the additional notices required as a result of the new Act and in preparing amendments to your plan documents and SPDs. If you would like our assistance or if you have any other questions regarding these changes, please contact any attorney in the Miller Johnson Employee Benefits Practice Group.