Volume 16

Partners' Perspective

American Recovery and Reinvestment Act - COBRA Implications

The Federal Government "Stimulus Bill" - formally known as the American Recovery and Reinvestment Act (ARRA) - was signed by President Obama on February 17, 2009. Provisions (relatively) quietly included in this legislation enact important changes in the administration of COBRA benefits, by making a Federal subsidy available to employees involuntarily terminated after September 1, 2008 should they choose to continue their employer sponsored medical benefits.

Significant COBRA subsidy-related features of the new regulations include:

Eligibility

  • In line with existing COBRA regulations, ARRA affects all employers with 20 or more employees. Plans in states with expanded COBRA coverage eligibility definitions will be required to comply as well. 
  • Subsidy-eligible individuals include employees involuntarily terminated from employment after September 1, 2008 and prior to December 31, 2009, along with their covered dependents. The subsidy may not available to individuals with a modified gross income of $125,000 or $250,000 if tax returns are filed jointly. It is the individual's, not the employer's, responsibility to account for the subsidy on their personal taxes. The subsidy is also not available to those that have other group health coverage available (through a spouse's plan) or Medicare.

Subsidy Guidelines

  • For current and future COBRA beneficiaries enrolled in employer sponsored healthcare plans, a 65% premium subsidy from the Federal Government becomes immediately available for up to 9 months, or through the date the individuals become eligible for other group healthcare coverage or Medicare if less. From a practical standpoint, this means the COBRA participant is responsible for 35% of the COBRA monthly premiums as of March 1, 2009. The Department of Labor is in the process of developing a revised COBRA Notice template to be sent to current COBRA beneficiaries, targeted for release by mid-March. We recommend having COBRA participants continue paying the full monthly premium amounts until eligibility for the subsidy can be confirmed. Retroactive credits should then be applied to future premium payments or a refund provided if future premium payments cease. 
  • For those former employees who initially declined COBRA coverage, a Special Enrollment period is to be provided allowing enrollment into the prior employer's plan. This Special Enrollment period ends 60 days after the Department of Labor releases a related Notification Letter, also expected in mid-March. 
  • Employers will take credit for COBRA premium subsidies by applying them against Federal Income and FICA payroll tax payments. The IRS has released an updated 941 Quarterly Federal Tax Form that incorporates the changes needed to take credit for the subsidy. Refer to the attached IRS website link, and see page 6 for specific subsidy instructions. www.irs.gov/pub/irs-pdf/f941.pdf
  • The premium subsidy is applicable to all COBRA eligible health benefits (Medical, Dental, Vision, etc.); however, Flexible Spending Accounts are not subsidy-eligible. 
  • Employers may, but are not required to allow COBRA beneficiaries to change their enrollment to a lower cost plan option (prior COBRA rules state that beneficiaries are eligible to elect only the coverage in place prior to their qualifying event, but are allowed to make changes during open enrollment for active plan participants).
  • It is the individual's responsibility to inform the former employer of eligibility into a new group health plan. Failure to notify the former employer can result in the COBRA beneficiary being subject to penalties of up to 110% of monthly COBRA premiums.

Subsidy Guidelines

  • While awaiting the Department of Labor release of the modified COBRA Notice and Special Enrollment Notice, anticipated by mid-March as noted previously, employers should review all terminations since September 1, 2008 to determine whether they were voluntary or involuntary.
  • Of those individuals determined to be involuntary terminated, the employer should delineate those currently covered under COBRA provisions of the healthcare plans from those who waived their continuation of coverage rights. 
  • COBRA beneficiaries currently covered under the plan(s) will need to be notified of their rights to the Federal subsidy.
  • Those who waived COBRA coverage must be notified of their rights to enroll in the healthcare plans.
  • Carefully consider the language in future severance agreement policies as the subsidy will not apply if the severance package includes employer paid COBRA premiums.

This information is intended to help our clients comply with these temporary changes to COBRA as contained in ARRA; we strongly recommend that all employers consult with their legal counsel to ensure that all procedures and documentation are in compliance. 

The benefits team at ERP will be keeping its clients apprised as additional guidance and materials surrounding these changes become available; please let us know if you would like to be included in future updates ERP issues on this front. Please also contact us if you we can provide other assistance relative to your Company's Employee Benefit programs.

Additionally, the Department of Labor has launched two new Web sites with additional COBRA information to assist employers:

http://www.irs.gov/newsroom/article/0,,id=204709,00.html
http://www.dol.gov/ebsa/COBRA.html

Note: The preceding summary is provided solely for informational/reference purposes. Equity Risk Partners cannot render legal advice. Before any actions are taken to alter your company's COBRA compliance procedure please consult with appropriate legal counsel.