Charming the Stimulus Act COBRA:New COBRA Rights and Employer Obligations
A federal subsidy of continued health coverage under COBRA is one of the main “ease-the-pain” provisions of the Stimulus Act enacted February 17, 2009 (the American Recovery and Reinvestment Tax Act of 2009).
This provision is intended to keep the recession from swelling the ranks of the uninsured, by making COBRA coverage more affordable for involuntarily terminated employees and their dependents.
The new COBRA provision is effective immediately, and it retroactively benefits employees terminated involuntarily since September 1, 2008. The new employee COBRA rights are accompanied by new employer notice obligations.
The following is a summary of these new rights and obligations.
Stimulus Act COBRA Subsidy
Currently, COBRA allows continuation of health care coverage that would otherwise terminate due to specified “qualifying events,” but payment is the covered individuals’ responsibility.
In contrast, the Stimulus Act provides “assistance-eligible individuals” a federal subsidy of 65% of their normal COBRA premiums for up to 9 months.
- They can continue coverage under COBRA for 35% of the normal premium.
- The government pays the remaining 65% through payroll tax credits.
- This subsidy is not taxable income to “assistance eligible individuals.”
Who Qualifies as an “Assistance-Eligible Individual”?
The COBRA subsidy is available to employees and covered family members eligible for COBRA coverage between September 1, 2008, and December 31, 2009, if:
- The reason for loss of health coverage is involuntary termination.
- Involuntary termination is not defined in the Act. Employees permanently laid off for economic reasons obviously qualify.
- The Conference Committee report explains that Congress intended to cover all involuntary terminations — even for cause — except those involving “gross misconduct” (COBRA is inapplicable to these anyway).
- The subsidy is not available for other COBRA qualifying events (such as divorce, resignation, reduction in hours, or covered child attaining the age limit).
- The individual properly elects COBRA coverage pursuant to new election rules allowing retroactive election in some situations in which COBRA would otherwise be unavailable (see below).
The COBRA subsidy is unavailable to taxpayers with modified adjusted gross incomes of over $145,000 ($290,000 for joint filers) or their dependents.
- Any subsidy payments improper under this rule will be recaptured through additions to income tax for the year in which received.
- This recapture phases in pro rata for taxpayers with modified adjusted gross income over $125,000 ($250,000 joint).
- Because taxable income is not determined until the tax year is over, relatively highly-paid individuals may be able to benefit from the subsidy, subject to recapture. They also have the express right to waive the opportunity to this benefit, avoiding any possible tax issues.
“Different Coverage” COBRA Option Under Stimulus Act
Assistance-eligible individulas may receive the subsidy for coverage different than they had while employed, but only if:
- The employer chooses to offer this different coverage.
- The unsubsidized premium for such coverage is no higher than the premium for their coverage during employment.
- Such coverage is also offered to active employees at the time.
- It is unclear whether this means active employees must be able to change to the different coverage immediately — rather than only at normal open enrollment times — or only that it must be an option available to active employees under normal election procedures.
- The different coverage is not one of the following:
- Coverage providing only dental, vision, counseling, and/or referral services
- A flexible spending arrangement.
- Coverage consisting primarily of first-aid services, prevention and wellness care, and/or similar care in an employer-maintained on-site medical facility.
- The individual elects the different coverage within 90 days after notice of this option.
Extended Election Period Under Stimulus Act
The Act provides an extended election period to assistance-eligible individuals who did not initially make a timely COBRA election or who did so but lost COBRA coverage due to premium nonpayment:
- They may elect subsidized COBRA between the Act’s enactment date (February 17) and 60 days after receiving notification of the Act’s subsidy provisions.
- If they do, subsidized COBRA is not retroactive to the termination date as if a timely election had been made initially. Rather, it starts with the first coverage period after the enactment date. (For a typical plan whose coverage periods are calendar months, such coverage will begin March 1, 2009.)
- Coverage elected under the extended election period terminates when it would have if elected during the original election period.
New Employer COBRA Notice Obligations Under Stimulus Act
Who Is Entitled to Notice?
The new notice obligations apply to three groups of assistance-eligible individuals:
- Those who lost coverage on or after September 1, 2008, but before the Act’s enactment, who are already receiving COBRA coverage or are still in their initial COBRA election period.
- Those who lost coverage on or after September 1, 2008, but before the Act’s enactment, who are not receiving COBRA because their initial election period expired and they did not elect COBRA or they elected it but their coverage was cancelled for premium nonpayment.
- Those losing coverage due to involuntary termination after the Act’s enactment.
Notice to the first two groups of individuals requires a special effort to identify them all and retroactively provide them with the additional information required (seel below).
Notice to the third group can be accomplished going forward by promptly changing existing COBRA notice procedures.
Notice may be accomplished by amending existing notice forms or using a separate document.
What Must Notices Say?
Notices must include these facts:
- That premium subsidy is available, and under what conditions (displayed prominently).
- That the option to enroll in different coverage is available — if the employer permits this.
- Description of extended election period and duration of coverage if elected during this period.
- Name, address, and phone number of plan administrator and anyone else maintaining relevant information in connection with premium subsidy.
- Description of obligation to notify plan if a covered individual becomes eligible for coverage under another group health plan or for benefits under Title XVIII of the Social Security Act (events terminating COBRA) and the penalty for failure to do so.
When Must Notices Be Sent?
Notices must be sent within 60 days of the February 17, 2009, enactment.
The Department of Labor is to prepare model notices within 30 days of enactment.
Therefore, employers will have to be ready to implement the new model notices on very short notice (30 days following DOL preparation of the model notices, if DOL is on time). Employers can prepare their own notices and forms, but it is probably preferable to use government-specified ones.
In the meantime, employers should prepare a list of all assistance-eligible individuals entitled to notice based on terminations before enactment (not just employees, but all covered family members).
For assistance-eligible individuals involuntarily terminated after enactment but before the DOL notices are available, employers’ options include:
- Sending the current COBRA notice, following up with a second notice on the subsidy when the DOL provides its notices.
- Sending the current COBRA notice, with an accompanying insert briefly mentioning the new subsidy and stating they will soon receive more detailed information and forms.
- Preparing a complete, tailor-made notice and form and beginning full compliance immediately.
Mechanics of Implementing COBRA Subsidy Under Stimulus Act
Assistance-eligible individuals pay only the 35% portion of COBRA premium. Then “the person to whom premiums are payable” will be reimbursed the remaining 65% by having it treated as as payroll taxes paid. Specifically:
- The remaining 65% will be a credit offsetting payroll tax liability.
- If it exceeds payroll tax liability, it will be credited or refunded as if it were an overpayment of payroll taxes.
- The credit is claimed on Line 12a of the January 2009 revision of Form 941, with the number of individuals provided COBRA premium assistance disclosed on Line 12b.
The following supporting documentation for the credit must be maintained, according to the IRS:
- Information on receipt of assistance-eligible individuals’ 35% premium shares, including dates and amounts,
- For insured plan, copy of invoice or other supporting statement from insurance carrier and proof of timely payment of full premium to insurance carrier
- For self-insured plan, proof of premium amount and coverage provided to assistance-eligible individuals
- Attestation of involuntary termination, including date, for each covered employee whose involuntary termination is the basis for subsidy eligibility
- Proof of each assistance-eligible individual’s eligibility for COBRA coverage between September 1, 2008, and December 31, 2009, and of their election of COBRA coverage
- SSN’s of all covered employees, amount of subsidy reimbursed for each, and whether subsidy was for 1 person or 2 or more
In most instances, the employer is “the person to whom premiums are payable,” who may claim the reimbursement, except where coverage is through a multiemployer plan, in which case the plan itself can claim the reimbursement.
The IRS and Treasury will be providing further details regarding this credit process through regulations.
Employers’ Action Checklist
- Calendar the notice deadline — 60 days after February 17, 2009 (February 18, 2009).
- Decide whether to offer a different coverage option to assistance-eligible individuals.
- Coordinate efforts with insurer, multiemployer plan, or third-party administrator, as appropriate, including determining who will issue notices, collect COBRA premiums from assistance eligible individuals, and recover.
- Identify all assistance-eligible individuals based on involuntarily terminations since September 1, 2008.
- Decide whether to create your own notices and forms or await those from the DOL.
- Begin coordinating with payroll department or payroll service as needed to recover the COBRA subsidy through payroll tax credit using revised IRS Form 941.
- Establish procedures for handling elections of subsidized COBRA by individuals who already paid in full, through rebates or credits against future payments.
We will continue to analyze this new legislation and will provide further updates to you as we become aware of them. In the meantime, we would be happy to discuss your compliance strategy, and help you begin complying with the new requirements.
- IRS Press Release February 26, 2009: IRS Releases Information to Help Employers Claim COBRA Medical Coverage Credit on Payroll Tax Form
- IRS FAQs: COBRA — Answers for Employers
- Department of Labor Stimulus Act COBRA Table of Contents
- Department of Labor COBRA FAQs (general FAQs on COBRA, updated with Stimulus Act information)
- Department of Labor FAQs About COBRA Premium Reduction For Workers And Their Families