By James D. Harbert and Lisa M. Burman
The American Recovery and Reinvestment Act of 2009 (Stimulus Act), which was signed into law on February 17, 2009, includes significant changes to group health plan continuation rules. The Stimulus Act provides a temporary 65 percent premium subsidy to former employees whose employment was involuntarily terminated and who elect to continue group health plan coverage under either the federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) or a comparable state or governmental continuation coverage law. Employers and plan administrators are now subject to significant new responsibilities and have new rights to obtain reimbursement from the federal government for the temporary subsidy. What qualifying event entitles an individual to a COBRA premium subsidy?The qualifying event for a premium subsidy is the loss of health coverage due to involuntary employment termination between September 1, 2008 and December 31, 2009. “Involuntary” is not defined in the Stimulus Act. As a result, the term might be interpreted to cover former employees who can establish that they were constructively fired. Which group health plans are subject to the new COBRA premium subsidy rules?The new COBRA premium subsidy applies to plans that are subject to federal COBRA continuation laws, certain federal governmental plans, and plans that are exempt from COBRA but are subject to comparable requirements for health care continuation coverage under state law. Group health plan continuation coverage under all of these types of arrangements will be referred to in this Client Alert as “COBRA coverage.” Health flexible spending arrangements provided through a cafeteria plan are not eligible for the COBRA premium subsidy.Who is eligible for the COBRA premium subsidy?Individuals who lose group health plan coverage due to an “involuntary” termination of employment between September 1, 2008 and December 31, 2009, and who have or had the statutory right to elect COBRA coverage, are eligible for the COBRA premium subsidy. These individuals are referred to as “assistance eligible individuals.” Individuals who terminate their employment voluntarily or who become eligible for COBRA coverage as a result of reduced hours, divorce, loss of dependent status or some other qualifying event are not eligible for the COBRA premium subsidy. What is the amount of the COBRA premium subsidy?The COBRA premium subsidy is 65 percent of the amount that the individual would otherwise pay for COBRA coverage from March 1, 2009 forward. Accordingly, an assistance eligible individual need only pay 35 percent of the otherwise applicable monthly premium in order to continue COBRA coverage. Are there any income limitations for the COBRA premium subsidy?Yes. The COBRA premium subsidy phases out if federal modified adjusted gross income exceeds $125,000, or $250,000 for joint filers. The COBRA premium subsidy is completely eliminated if federal modified adjusted gross income exceeds $145,000, or $290,000 for joint filers. Those assistance eligible individuals in which the COBRA premium subsidy is phased out will be required to pay additional federal income tax equal to the amount of the phased-out COBRA premium subsidy. High income individuals may elect to waive the premium subsidy by notifying the COBRA administrator. Once a waiver is made, an assistance eligible individual cannot later elect the subsidy or claim the foregone premium subsidy as a credit or deduction on his or her individual federal income tax return.What if the employer already subsidizes the COBRA premium?The Stimulus Act provides that the subsidy amount is 65 percent of the COBRA premium that the assistance eligible individual would be obligated to pay “as determined without regard to” the subsidy. While this text is not entirely clear, it appears that, if the employer voluntarily subsidizes the premium, the 65 percent is on top of the employer’s existing subsidy. For example, if the full monthly cost of COBRA coverage is $1,000 and the employer already subsidizes 80 percent or $800, the assistance eligible individual is now required to pay only 35 percent of the remaining $200 he or she would normally be charged by the group health plan, or $70. The employer may then seek reimbursement from the federal government for 65 percent of $200, or $130. How does the employer obtain reimbursement for the COBRA premium subsidy?After receipt of the reduced payment from an assistance eligible employee, the employer may reduce its payroll tax deposits by an amount equal to the COBRA premium subsidy. Payroll tax deposits include federal income tax wage withholdings and the employer and employee shares of Federal Insurance Contributions Act (FICA) tax withholding. Special rules apply to an entity that offers COBRA coverage but does not collect payroll taxes. How long does the subsidized COBRA coverage last?The COBRA premium subsidy will generally be available to individuals for nine months, but not longer than the period of COBRA coverage, which is generally 18 months from the date of the involuntary termination of employment. The subsidy will be cut off sooner if the individual becomes eligible for coverage under Medicare or another major medical group health plan. An individual is subject to a penalty if he or she fails to notify the group health plan of the new health care coverage. What notices must be given? The Stimulus Act requires that existing COBRA notices be modified to contain additional information about the availability of the subsidy, the availability of any lower cost health plan options, the obligation of a qualified beneficiary to notify the plan of eligibility under another plan, and the penalty for failure to provide this notice. It is anticipated that the U.S. Department of Labor will publish a model notice by March 19, 2009. The notice may be incorporated into the existing COBRA notice or provided through a separate notice that is sent with the existing COBRA notice.When must notice of the COBRA premium subsidy be provided?In the case of individuals already eligible for the COBRA premium subsidy, the subsidy notice must be provided by April 18, 2009. Failure to distribute the notice will be treated as a failure to comply with the COBRA notification requirements. What happens if someone eligible for the subsidy mistakenly pays the unsubsidized COBRA premium for March 2009 and later months? An assistance eligible individual who has COBRA coverage and overpays his or her COBRA premium for March 2009 or a later month by paying the full premium must be provided either a credit against future premiums or a refund. May an individual who was involuntarily terminated on or after September 1, 2008, but who declined COBRA coverage, now elect coverage?Yes. Individuals who were involuntarily terminated on or after September 1, 2008, but who declined COBRA coverage, will have another opportunity to enroll for such coverage. The premium subsidy and COBRA coverage, however, will not be retroactive. There is no reach-back. When does the new enrollment period start if COBRA coverage was declined?The new COBRA enrollment period starts on February 17, 2009, and ends 60 days after the plan administrator provides the notice of the extended election period. If the assistance eligible individual elects COBRA coverage during this period, the coverage becomes effective as of March 1, 2009. The maximum COBRA coverage period, however, runs only from the date the assistance eligible individual first became eligible for COBRA coverage (i.e., generally the date of involuntary termination of employment).Are there IRS reporting requirements?Yes. Employers seeking COBRA premium subsidy reimbursements must submit to the IRS reports that include information about each assistance eligible individual and the current and anticipated effect on payroll taxes. The IRS will issue future guidance regarding the exact time and manner to satisfy the reporting requirements.For more information, please contact James D. Harbert, Lisa M. Burman, Anthony E. Antognoli, Marcia L. Mueller, Timothy M. Sullivan or your regular Hinshaw attorney.
This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.