The New COBRA Subsidy in the Stimulus: How It Works by DLAPiper

VIEWS: 662 PAGES: 4

									DLA Piper | Publications | The New COBRA Subsidy in the Stimulus: How It Works

Page 1 of 4

Search

NEWS & INSIGHTS
Publications
26 FEB 2009

The New COBRA Subsidy in the Stimulus: How It Works
EMPLOYEE BENEFITS ALERT

The recently enacted American Recovery and Reinvestment Act of 2009 includes a subsidy for laid-off employees who elect to continue participating in their employer-sponsored group health plans under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). This COBRA subsidy covers 65 percent of the employee’s premiums for up to nine months and is paid by the employer. The employer is reimbursed through reduced federal payroll tax obligations. The details of the new COBRA subsidy are summarized here. How Does the COBRA Subsidy Work? COBRA requires most group health plans to offer employees (and their dependents) the opportunity to continue their health care coverage when certain qualifying events (e.g., termination of employment) result in the loss of coverage. Continuation coverage under COBRA generally lasts for 18 months, and the employee typically pays the entire cost of the coverage, up to 102 percent of the cost to the employer of covering a participant who is not on COBRA. The new law creates a federal COBRA premium subsidy for covered employees (and their dependents) who are involuntarily terminated from their jobs between September 1, 2008, and December 31, 2009, and who are otherwise eligible for COBRA during this period. These “assistance eligible individuals” are only required to pay 35 percent of their COBRA premiums for a maximum of nine months. The remaining 65 percent of the premium is paid by the employer, which is reimbursed through a reduction in federal payroll tax obligations. The COBRA subsidy is nontaxable to the assistance eligible individual. For plans with a monthly period of coverage, the first month that the COBRA subsidy will apply will be March 2009.

http://www.dlapiper.com/the-new-cobra-subsidy-in-the-stimulus:how-it-works/

2/26/2009

DLA Piper | Publications | The New COBRA Subsidy in the Stimulus: How It Works

Page 2 of 4

Example: Assume that Jamie is laid off on March 1, 2009, and is eligible to elect COBRA continuation coverage. The employer’s cost of covering Jamie as an employee was $1,000 a month. Jamie’s maximum monthly COBRA premium, before the new law, would have been $1,020. Under the new law, Jamie only has to pay, at most, $357 (35 percent of $1,020) a month for nine months. How Are Employers Reimbursed for the COBRA Subsidy? An employer who pays the COBRA subsidy is entitled to reimbursement through reduced federal payroll tax obligations in an amount equal to the subsidy. If the employer is entitled to an amount in excess of its payroll tax obligations, the excess amount is credited or refunded directly to the employer. To be entitled to reimbursement, the employer must file a claim, in form and manner to be announced by the IRS, and must collect the assistance eligible individual’s 35 percent COBRA premium payment. For purposes of the COBRA subsidy, “payroll taxes” means wage withholding taxes and both the employer and employee portions of FICA taxes (Social Security and Medicare)—i.e., it excludes state and local taxes (including Puerto Rico). For How Long is the COBRA Subsidy Available? Nine months is the maximum period for which the COBRA subsidy is available. Availability ends earlier when the assistance eligible individual becomes eligible for coverage under any of the following: any other group health plan; a health reimbursement arrangement or health flexible spending arrangement; an employer’s on-site medical facility; or Medicare or Medicaid. If a person who is benefiting from the subsidy is no longer eligible, then the person must notify the group health plan. If the person does not notify the plan, the person must pay a penalty of 110 percent of the subsidy. Who Is an “Assistance Eligible Individual”? An “assistance eligible individual” generally is any person who is eligible for—and elects—COBRA coverage following an involuntary termination of employment that occurs on or after September 1, 2008 through and including December 31, 2009. This general rule has the following exceptions: A person who otherwise would have qualified as an assistance eligible individual but did not elect COBRA coverage by February 17, 2009, must be allowed to elect COBRA during an extended election period. The extended election period began on February 17, 2009 and ends 60 days after the employer provides a notice explaining this new election opportunity. The COBRA subsidy will first apply in March 2009 (assuming monthly periods of coverage). Assistance eligible individuals who elected COBRA coverage before February 17, 2009, but who were no longer enrolled on February 17, 2009 (perhaps because they could no longer afford it), also must be allowed to make an election during the extended election period. The COBRA subsidy will first apply in March 2009 (assuming monthly periods of coverage). Note: The extended election period does not extend the expiration date for COBRA coverage. So if

http://www.dlapiper.com/the-new-cobra-subsidy-in-the-stimulus:how-it-works/

2/26/2009

DLA Piper | Publications | The New COBRA Subsidy in the Stimulus: How It Works

Page 3 of 4

Jamie was laid off and loses coverage on September 1, 2008, and elects COBRA coverage after February 17, 2009, Jamie’s maximum COBRA coverage period (typically 18 months) is measured from September 1, 2008. The COBRA subsidy will first apply in March 2009 (assuming monthly periods of coverage). In addition, the extended election period does not count in determining whether a 63-day gap in coverage permits the application of preexisting condition limits. An assistance eligible individual who has already paid the full COBRA premium for a period of coverage that begins on or after February 17, 2009 is entitled to either (1) reimbursement of the amount equal to the COBRA subsidy or (2) a credit of that amount against future payments. Crediting against future payments is allowed only if an employer reasonably believes that the credit will be used within 180 days after receipt of the full COBRA premium. Otherwise, reimbursement must be made within 60 days after the date the employer determines that it is unreasonable to believe that the credit will be used. Is There an Income Limit for Receiving the COBRA Subsidy? There is no income limit for receiving the COBRA subsidy, but high-income individuals who take advantage of the subsidy face an increase in their income tax liability equal to the amount of the subsidy (subject to a phase-in formula). A “high-income individual” is a person whose modified adjusted gross income exceeds $125,000 ($250,000 for married individuals filing jointly). “Modified adjusted gross income” means adjusted gross income plus amounts excluded for US citizens and residents living abroad or in certain US territories. High-income individuals may elect to waive the subsidy. What if There’s a Dispute Regarding Eligibility as an “Assistance Eligible Individual”? The United States Department of Labor will develop an expedited review process that determines within 15 business days whether a person was improperly denied eligibility. May an Assistance Eligible Individual Enroll in Different Coverage? Usually, COBRA-eligible individuals may only elect to continue the type of coverage in which they were enrolled before becoming eligible for COBRA. The new law gives employers the option—it is not mandatory—to allow a one-time change in enrollment, subject to the following conditions: the change must be made within 90 days after receiving notice of the opportunity to make the change; the premium for the new coverage cannot be more than the premium for the old coverage; the new coverage is offered to active employees of the employer at the time of the change; and the new coverage is not (1) coverage that provides only dental, vision, counseling or referral services (or a combination of these); (2) a health flexible spending account; or (3) coverage that provides benefits or services through the employer’s on-site medical facility. Note: Although unclear, it appears that the 90-day limit for enrollment changes does not extend the 60-day extended election period. Employers considering the option of allowing enrollment changes should consider the administrative consequences (e.g., plan amendments, participant communication), and should ask their insurance

http://www.dlapiper.com/the-new-cobra-subsidy-in-the-stimulus:how-it-works/

2/26/2009

DLA Piper | Publications | The New COBRA Subsidy in the Stimulus: How It Works

Page 4 of 4

providers whether offering this option would increase premiums. What Are the New Notice Requirements? COBRA requires an employer to provide notices to any person who becomes eligible for COBRA coverage. Employers must provide updated COBRA notices describing the subsidy (or a separate notice) to all individuals who became eligible for COBRA between September 1, 2008 through February 17, 2009, by no later than April 17, 2009. The new information will become a part of the standard COBRA notice during the subsidy period. This COBRA notice must now include the following information: the availability of the COBRA subsidy; a description of the option to enroll in different coverage, if the employer permits; the forms necessary for establishing eligibility for a COBRA subsidy; the name, address and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the COBRA subsidy; a description of the extended election period; a description of the obligation of assistance eligible individuals to notify the plan when they cease to be eligible for the COBRA subsidy and the penalty for failing to do so; and a prominent description of the assistance eligible individual’s right to the COBRA subsidy and any conditions on that right. The new law requires the Department of Labor to publish a model COBRA notice by no later than March 19, 2009. Employers should consult their benefits counsel about the pros and cons of preparing a COBRA notice before the issuance of the model notice. A failure to provide the notices will be treated as a failure to meet the COBRA notice requirements, which could subject the employer or plan to penalties and excise taxes. The COBRA rules under the new law are complex, and this Alert is intended only as a brief overview. More information may be found at the US Department of Labor webpage dedicated to the COBRA subsidy. If you have any additional questions, please contact any member of the Employee Benefits and Executive Compensation Group.

http://www.dlapiper.com/the-new-cobra-subsidy-in-the-stimulus:how-it-works/

2/26/2009


								
To top