Cobra changes under the American Recovery Reinvestment Act
Please see below for more information on the changes to Cobra
On February 17, 2009, President Obama
signed into law the American Recovery and Reinvestment Tax Act of 2009 (the “Act”). Although
a substantial portion of the Act is dedicated to stimulating the economy, there
are other provisions designed to assist individuals in making it through these
tough economic times. Of particular interest to the employee benefits
community is a 65% government-paid subsidy for COBRA premiums (up to 9 months)
for eligible individuals. The subsidy provision is temporary and, under
the Act, will end on December 31, 2009.
To comply with the COBRA subsidy provisions
of the Act, employers will need to make significant changes immediately. A
brief summary of some of the relevant provisions follows.
Amount of Subsidy: the amount of the subsidy is 65% of the COBRA
continuation coverage premiums for eligible individuals for a maximum of 9
months.
Who is Eligible for COBRA Subsidy: if an employee is involuntarily terminated during
the period of September 1, 2008 to December 31, 2009, that individual (and
dependents) may be eligible for the COBRA subsidy. However, the amount of
the subsidy is reduced if the individual’s modified
adjusted gross income exceeds $250,000 (for joint return filers) or $125,000
(for all other filers) and completely eliminated if the individual’s modified
gross income exceeds $290,000 (for joint filers) and $145,000 (for all other
filers).
Individuals who were
involuntarily terminated before the date the Act was signed and who declined
COBRA coverage will need to again be given the opportunity to elect COBRA
coverage. If that individual now decides to elect coverage, then the
maximum COBRA period would be measured from the original date he or she was eligible
for COBRA coverage.
Notices: employers must modify
their COBRA election notices or provide separate, supplemental notices to all
individuals who become entitled to elect COBRA through December 31,
2009. The new notices must describe the new premium subsidy. The
notices also must describe any right to change coverage options. Model
notices should be issued by the government within 30 days of February 17,
2009. For those individuals who became entitled to elect COBRA before the
Act’s enactment date, the employer must provide new notices within 60 days
after February 17, 2009. Failure to provide these notices could result in
monetary penalties under ERISA and the Internal Revenue Code.
How the Subsidy Works: in general, the Act requires the plan to
pay the full cost of the COBRA coverage and then seek reimbursement from the
federal government for the subsidy. Specifically, for:
- a self-insured, single employer plan, the
employer will be entitled to reimbursement of the 65% subsidy;
- an insured, single employer plan, the
insurance company providing the insurance will be entitled to reimbursement of
the 65% subsidy; and
- a multiemployer plan, the multiemployer
plan will be reimbursed for 65% subsidy.
The Act provides that the
reimbursement will be accomplished through reducing the amount of payroll taxes
that the entity receiving the reimbursement owes. If the reimbursement is
greater than the payroll tax due for that period, then the excess reimbursement
will be treated in the same manner as a refund or a credit due for overpayment
of payroll taxes. The IRS will have to provide additional guidance on how
exactly this reimbursement process is to work. Further, with respect to
reimbursement of multiemployer plans, the Act also provides that the IRS will
have to provide guidance on how the reimbursement process will
work.
Appeal Procedure: if an individual’s request for the
subsidy is denied, he or she may generally appeal the decision to the
DOL. The DOL must rule on the request within 15 business days.
The COBRA provisions in
the Act will require significant and immediate changes by sponsors of group
health plans. As mentioned above, additional guidance will need to be issued by
the various federal government agencies. However, sponsors do not have the
luxury of waiting until that guidance is issued before implementing the new
COBRA rules.