Summary of Employer Obligations of Subsidized COBRA Coverage in the 2009 Stimulus Package

PUBLICATIONS

Christopher R. Woo

Labor & Employment

EMPLOYMENT NOTES

02.25.2009

On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act (H.R. 1), which is also commonly referred to as the “Stimulus Package.” This Act included extensive changes to COBRA, which will necessarily affect employers’ maintenance and reporting requirements for such coverage throughout the nation. Although the Act is effective immediately, provisions dealing with COBRA do not take effect until March 1, 2009.

In general, the Stimulus Package provides for a subsidy of up to 65% of the cost of COBRA coverage for eligible individuals who were involuntarily terminated between September 1, 2008, and January 1, 2010. The individual is responsible for paying 35% of the full COBRA premium, while the employer pays 65%. The employer receives a reimbursement of the paid subsidy through a payroll tax credit or a refund check from the Secretary of Treasury.

Below is a general summary of the provisions of the Stimulus Package as they relate to COBRA.

Affected Employees

– The COBRA expansion only applies to employees who were or are involuntarily terminated from September 1, 2008, through January 1, 2010. Accordingly, employees who voluntarily resign (or their qualified beneficiaries) or those who become eligible for COBRA as a result of other reasons, such as reduced hours, divorce, or loss of dependent status, do not qualify.

– Only individuals who have a modified adjusted gross income not greater than $125,000 ($250,000 for married taxpayers) are eligible for the full subsidy. If the individual has a modified adjusted gross income between $125,000 and $145,000 (or between $250,000 to $290,000), the subsidy amount is reduced by a sliding scale.

– Note: The new law does not change the “gross misconduct” exception to COBRA eligibility. Under that exception, an employee who is terminated for gross misconduct is not entitled to COBRA coverage because no “qualifying event” has occurred. The statute does not define what would be considered gross misconduct and caution should be exercised in applying this exception.

Duration

– The subsidy applies for up to nine months of coverage.

– Coverage ends when any of the following occur:

The expiration of nine months of subsidy payments;
The individual becomes eligible for coverage under any other group health plan (i.e. other employment or spouse’s coverage) or Medicare (Note: There are financial penalties for the individual’s failure to notify the COBRA administrator of the commencement of other coverage); or
The individual fails to pay the 35% portion.

– Further, individuals who were terminated on or after September 1, 2008, but prior to the passage of the Act, who may have declined or dropped out of COBRA coverage are given a second chance to opt in. The employee has 60 days from which the employer gives notice of the extended period for COBRA election to elect coverage.

Coverage is not retroactive, meaning that employers will not have to compensate for coverage between September 1, 2008, through February 28, 2009.
Coverage for these individuals begins on March 1, 2009, and will continue through November 30, 2009 (9 months) regardless of the actual enrollment date.

Optional Alternative Coverage

– As an alternative, employers may allow former employees to elect to opt other health care coverages available to current employees provided that the cost of the options does not exceed the cost of the COBRA coverage initially available to the individual.

Employer Notice Requirements

– Employers must notify all qualified individuals who lost COBRA coverage on and after September 1, 2008, whether or

not the loss of coverage was voluntary, regarding:

The availability of the 65% subsidy;
The second chance election;
The optional alternative coverage (if offered);
Information for eligibility for the 65% subsidy;
How to elect the subsidy; and
The obligations to notify the COBRA administrator for any subsequent health coverage and the penalties for the failure to notify.

– The Secretary of Labor will be issuing template notices by March 19, 2009.

– The notices must be distributed by employers by April 18, 2009.

– Similar notices must be given on an ongoing basis for all new COBRA-qualified beneficiaries through December 1, 2009.

Reporting Requirements

– In order to seek reimbursements for paid premiums, the employer must submit reports to the IRS containing thefollowing information:

An attestation that involuntary termination triggered the basis for the individual’s eligibility;
The amount of payroll taxes offset by subsidy payments for the current period;
The estimated offset for the following reporting period;
Tax payer identification numbers for all eligible individuals;
The subsidy amount reimbursed for each covered employee and qualified beneficiary; and
A designation as to whether the subsidy covered one or more qualified beneficiaries.

The breadth and scope of the COBRA extension in the Stimulus Package is extensive, and questions will certainly arise as the changes are implemented. Musick Peeler is available to address any of your questions or concerns regarding these changes.