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The American Recovery and Reinvestment Act of 2009 (ARRA), the financial stimulus law signed by President Barack Obama on Feb. 17, 2009, includes significant changes to the COBRA continuation coverage rules. In general, the ARRA:
Plan administrators of group health care plans subject to COBRA need to act quickly to:
In addition, group health plan documents will need to be amended to incorporate these changes.
COBRA Premium Subsidy
What COBRA premium subsidy does the ARRA provide?
Under the ARRA, the federal government will subsidize 65 percent of the COBRA premium actually charged to an “assistance eligible individual” (AEI) for up to nine months.
How is the subsidy provided?
Under the subsidy program, a group health plan can require an AEI to pay only 35 percent of the COBRA premium that the AEI would otherwise be required to pay. The federal government will reimburse an employer for the remaining 65 percent of the COBRA premium by allowing the employer to take a credit against the employer’s liability to deposit payroll taxes and federal income taxes withheld from employees’ compensation.
Who are “assistance eligible individuals”?
An AEI is a COBRA qualified beneficiary who meets all three of these criteria:
An AEI may be a covered employee ora covered employee’s covered spouse or dependent child who became a qualified beneficiary because of the involuntary termination of the covered employee’s employment.
When does the subsidy begin?
The subsidy applies to periods of COBRA continuation coverage beginning after the enactment of the ARRA. A “period of coverage” is the monthly (or shorter) period for which COBRA premiums are charged. For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009.
When does the subsidy end?
The subsidy ceases to apply (and a plan administrator may again charge the full COBRA premium) as of the earliestof:
The act requires an AEI who becomes eligible for coverage under another group health plan to notify the plan providing COBRA coverage in writing. An AEI who fails to provide the required written notice is subject to a penalty 110 percent of the subsidy provided for the AEI after the date the AEI became eligible for the other coverage.
Does the subsidy apply to COBRA premiums for all types of group health plans?
No. The subsidy does not apply to COBRA premiums for health care flexible spending accounts.
How does the subsidy apply in situations where the group health plan charges the AEI less than the maximum permissible COBRA premium?
The ARRA specifically states that 35 percent of the premium must be paid by the AEI or on the AEI's behalf by someone other than the AEI's employer and that an employer cannot claim a subsidy credit until the group health plan has actually received the 35 percent of the COBRA premium as required by the ARRA.
This means that an employer is permitted to claim only a subsidy credit of 65 percent based on the total COBRA premium actually charged to the AEI. Employers that do not charge the full COBRA premium (e.g., when an AEI is charged a reduced COBRA premium under a separation agreement) will have to calculate the correct subsidy based on the COBRA premium actually charged to the AEI, not what the full COBRA premium could have been. If the employer pays 100 percent of the AEI's COBRA premium, the employer cannot claim any subsidy credit for that AEI. For example:
If the maximum permissible COBRA premium is $1,000 per month, but the employer only requires the AEI to pay $200 per month, the employer can only claim a subsidy credit of $70 ($200 X 35 percent = $200). If the employer wanted an AEI to pay a net $200 for COBRA coverage, the employer would have to set the COBRA premium for the AEI at $571 ($571 X 35 percent = $200).
(For additional examples regarding this formula, please seeIRSNotice 2009-27: Premium Assistance for COBRA Benefits, issued on March 21, 2009).
Are all AEIs eligible for the subsidy?
Although all AEIs are technically eligible for the subsidy, any AEI who is a “high-income individual” or the spouse or dependent of a high-income individual will be required to repay the subsidy as an additional tax on the high-income individual’s individual tax return for the year in which the subsidy was provided.
A “high-income individual” is a single taxpayer with modified adjusted gross income in excess of $145,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $290,000. The subsidy “recapture tax” begins to phase in for a single taxpayer with modified adjusted gross income in excess of $125,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $250,000.
A plan administrator must allow an AEI who is a “high-income individual” to waive the subsidy permanently in the manner to be prescribed by the Secretary of the Treasury. If it is waived, the “high-income individual” would pay the full COBRA premium charged by the group health care plan.
Actions Required to Implement the Subsidy
What does a group health plan administrator have to do now?
A group health plan administrator must take all necessary actions to provide the 65 percent subsidy to AEIs beginning March 1, 2009. This generally means ensuring that an AEI is required only to pay the reduced COBRA premiums for periods of coverage beginning on or after March 1, 2009.
However, because it is likely that a plan administrator will not be able to make timely notification to all AEIs about the reduced amounts effective for March premium payments, AEIs may pay the full COBRA premiums for one or two months. If an AEI pays the full COBRA premium for the first or second period of coverage beginning after the date of enactment of the ARRA (i.e., periods of coverage for March and April 2009), the plan administrator must credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days) or refund the subsidized portion within 60 days.
What does a group health plan administrator have to do in the near future?
For any individual who becomes a COBRA qualified beneficiary after the enactment of the ARRA:
The first notice must go to all AEIs who currentlyhave COBRA continuation coverage to advise them of the availability of the subsidy and the requirements to qualify for the subsidy.
The second notice must go to any individual who is entitled to the special enrollment period (discussed below). An individual is eligible for this special enrollment period if the individual qualifies as an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the ARRA. (This includes an individual who previously made a COBRA coverage election but whose COBRA coverage ended before the enactment date because of non-payment of premiums.) The notice to these individuals must advise them of the availability of the subsidy, the requirements to qualify for the subsidy and additional information required by the ARRA, as well as provide them forms necessary for electing COBRA during the special election period.
The act requires the U.S. Department of Labor to provide model notices for plan administrators to use within 30 days after the enactment of the ARRA.
Special COBRA Election Period
What is the special election period for AEIs?
An individual who would be an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the ARRA must be given a second chance to elect COBRA coverage. This special election period begins on the date of enactment of the ARRA and ends 60 days after the plan administrator provides the required notice described above to the individual.
If an AEI elects COBRA during the special election period, when does COBRA coverage begin?
COBRA coverage for an AEI who elects COBRA during the special election period begins on the first day of the first COBRA coverage period beginning after the date of enactment of the ARRA (March 1, 2009, for group health plans using calendar months as COBRA coverage periods).
COBRA coverage is notretroactive to the date the AEI originally lost coverage.
If an AEI elects COBRA during the special election period, when does the COBRA coverage period end?
The COBRA coverage period for an AEI who elects COBRA during the special election period ends when COBRA coverage would otherwise have ended if the AEI had elected COBRA when initially eligible to do so after qualifying event. For example:
An AEI who lost coverage and became entitled to elect COBRA continuation coverage that would have begun on Oct. 1, 2008 elects COBRA under the special election. This AEI’s COBRA coverage period begins on March 1, 2009 and ends on March 31, 2010 (18 months after the date the AEI’s COBRA coverage would have begun because of the original qualifying event). The AEI’s 18 month maximum COBRA coverage period is not measured from the date of enactment of the ARRA.
Can pre-existing condition exclusions be applied to an AEI electing during the special enrollment period?
The act provides that the period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period beginning after the date of enactment of the ARRA is disregarded when determining if the AEI had a 63-day significant break in coverage for purposes of applying pre-existing condition exclusions.
Employer’s Option to Offer Additional COBRA Coverage Options
What is the ARRA’s “Plan Enrollment Option”?
Generally, a COBRA qualified beneficiary is permitted only to elect COBRA continuation coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event. The act permits (but does not require) an employer to allow AEIs (including AEIs that have COBRA coverage without the special election) to elect a health care coverage option different from the health care coverage originally offered to the AEI under COBRA.
What requirements apply to the different coverage option?
When is an AEI permitted to elect different coverage?
If an employer decides to offer the different coverage option to an AEI, the employer must provide the AEI an election notice and allow an election period of not less than 90 days.
What questions or issues regarding the subsidy are not addressed by the ARRA?
COBRA Coverage Period Extension
How does the ARRA extend the COBRA coverage period?
The act extends the initial COBRA coverage period for two distinct groups of COBRA qualified beneficiaries following a termination of employment or reduction in hours of a covered employee COBRA qualifying event:
Is there a limit on these extended COBRA coverage periods?
Under the ARRA, a COBRA coverage period cannot be extended beyond Dec. 31, 2010 under either of the provisions above.
When do the extended COBRA coverage periods become effective?
These extensions to the maximum COBRA coverage periods for these groups of qualified beneficiaries apply to any COBRA coverage periods that would otherwise end on or after the date of enactment of the ARRA.
The new COBRA provisions established by the ARRA require employers and plan administrators to take prompt action and make quick decisions to implement new COBRA procedures. Some of these decisions and procedures include:
We encourage all employers and plan administrators to begin responding to these new rules immediately. Employers using a third party COBRA administrator should contact their COBRA administrator to coordinate a response.
Originally published by Butzel Long. Reposted with permission
Antoinette M. ("Toni") Pilzner is an attorney based in the Ann Arbor office of national law firm Butzel Long. Ms. Pilzner practices primarily in the area of ERISA and employee benefits, including qualified retirement plans, executive compensation arrangements, and welfare benefit plans. She is currently a member of the Employee Benefits Committee of the U.S. Chamber of Commerce. She was appointed by former U.S. Secretary of Labor Elaine Chao to the Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans and finished her three-year term in November 2005 after chairing the Council's Working Group on Communications to Retirement Plan Participants. She is also a member of the Society for Human Resource Management and served on its Total Rewards/Compensation and Benefits Special Expertise Panel.
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