The New COBRA Challenge:
Subsidies, Notices, and a Second Bite at the COBRA Apple

 

Background.  The American Recovery and Reinvestment Act of 2009 (Act), signed by President Obama on February 17, 2009, contains important changes to group health plan continuation coverage requirements that take effect immediately.  Under the existing COBRA continuation rules, employees and their qualified beneficiaries who are covered under group health plans maintained by employers that have at least 20 employees and experience a qualifying event must be allowed to elect to continue their coverage at their own expense, plus an additional two percent administrative charge.  This coverage must continue for at least 18 months after the date that health coverage is lost due to an employee's termination of employment (and certain other qualifying events).  The Act provides new rights and obligations to assistance eligible individuals (AEIs), which are described below.

 

Premium Subsidies.  For periods of COBRA coverage beginning after February 17, the Act grants AEIs a 65 percent reduction in the premium the AEI would otherwise be required to pay for up to nine months.

 

So Who Is An AEI?  An AEI is any individual or qualified beneficiary (e.g., a dependent of an employee who is covered immediately before a qualifying event) if:

·        at any time from September 1, 2008 through December 31, 2009, the employee or  qualified beneficiary is eligible for COBRA continuation coverage arising out of the covered employee's "involuntary" termination of employment; and

·        COBRA continuation coverage is elected.

 

The Act does not define "involuntary" termination of employment.  Thus, it is not clear if an employee who terminates for "good reason," or voluntarily terminates in response to an early retirement incentive program or other voluntary incentive program, is treated as an involuntary termination.  The Act requires the Department of Labor (or Health and Human Services for governmental and small employers) to provide an expedited review process for claims of entitlement and directs courts to grant deference to its decisions.

 

High-income individuals (over $125,000 for single filers, $250,000 for joint filers) will receive the subsidy but the government will recoup all or part of it on the individuals' tax returns by increasing their tax by the amount of the disallowed subsidy.  These individuals may waive the subsidy and avoid having to pay the increased tax. We expect guidance on a procedure for allowing such individuals to waive the subsidy and avoid recoupment.

 

Recoupment of the Subsidy.  When the employer receives the AEI's reduced premium payment, the employer recoups the 65 percent subsidy by reducing its next Federal payroll tax deposit.  The amount of the subsidy claimed will be substantiated on the employer's next quarterly Form 941.

 

Transition Period, or What to Do When You Can't Implement Overnight.  Because of the short time period for implementation, the Act allows employers to continue to charge the normal full COBRA premium for the first two COBRA periods beginning after the date of enactment.  The employer must then either reimburse the AEI for the excess payment or apply it toward future COBRA premiums.  Refunds must be made within 60 days after the employer knows or reasonably believes it will not be applied to future premiums.

 

There are practical issues with applying the overpayment to future premiums.  The excess will not pay for whole months' coverage, which may cause confusion in the month when the last of the excess is exhausted.  For example, if the COBRA premium is $1,000 per month, and the AEI pays $2,000 for the first two months' coverage when only $700 was payable, there is a $1,300 excess.  If credited toward future premiums due, this excess will pay for three months' coverage at $350 per month, with $250 left.  Employers who choose to apply the overpayment may wish to apply the excess only to the extent it covers whole months' premiums and refund the difference.  However, it may be administratively difficult to coordinate the timing of the employer's payroll tax offset for the subsidy with hybrid credit/refund policies.

 

Length of Subsidy Period and COBRA Eligibility.  As noted above, the subsidy applies to the AEI's first premium payment for the first period of COBRA coverage beginning after February 17, 2009 (normally this will be March 1, 2009 for AEIs currently receiving COBRA coverage). The subsidy continues for up to nine months, but ends earlier if the AEI's entitlement to COBRA coverage otherwise ends or the AEI becomes eligible for (not covered by) other comprehensive group health plan coverage or Medicare.  This does not include coverage under stand-alone dental, vision, counseling, referral services, flexible spending arrangements, health reimbursement accounts, first aid, prevention or wellness care provided at an employer's on-site medical clinic (Limited Coverage).

 

While nothing in the Act grants an extension of the maximum COBRA periods to AEIs, the Act does extend the maximum COBRA entitlement period for two specific groups:

·        Individuals receiving COBRA who are entitled to receive pension payments from the Pension Benefit Guarantee Corporation (PBGC) can continue to receive COBRA until their date of death; their spouses can continue for an additional 24 months thereafter.

·        Individuals eligible for Trade Adjustment Assistance can continue to receive COBRA until their TAA eligibility ends.

 

Second Bite At the Apple.  If an individual would be an AEI except that no COBRA continuation coverage election was in effect on February 17, 2009, the Act gives the individual and his or her qualified beneficiaries a second chance to elect COBRA and receive the subsidy.  This special election period:

·        begins on February 17, 2009; and

·        ends 60 days after the date on which the notice regarding the extended election period is provided to the AEI by the plan administrator.

 

The COBRA continuation coverage provided to the AEI who elects coverage during this extended election period must:

·        begin with the first period of COBRA coverage beginning on or after February 17, 2009 (coverage is not retroactive to the original qualifying event); and

·        not extend beyond the period of COBRA continuation coverage that would otherwise have been required if the coverage had been elected during the normal election period.

 

The Act does not specify when the first premium payment is due for coverage elected during the special election period.

 

To Choose or Not to Choose (New Health Coverage Options).  Although COBRA ordinarily requires only the coverage the qualifying individual was receiving just prior to the qualifying event, if an employer offers more than one health care coverage option to its active employees, it may allow AEIs to elect another coverage option.  If the election is permitted, the option must be for comprehensive health care coverage (not just Limited Coverage), the premium for the optional coverage can't exceed the premium for the COBRA-qualifying coverage, and the AEI must have 90 days after receiving notice of the option to enroll in different coverage.

 

Notice Requirements and Timing. Both AEIs and plan administrators have notice obligations under the Act. AEIs must notify the plan providing COBRA coverage in writing when they become eligible for other group health plan coverage or Medicare and are no longer eligible for the subsidy.  AEIs who fail to provide this notice must repay 110 percent of the ineligible subsidy received.  Since employers will already have been made whole for the subsidy by claiming payroll tax credits, this penalty will be paid to the government, which will enforce this requirement.

 

The plan administrator has notice obligations regarding the availability of the subsidy and the second election period.  There is some ambiguity in the Act as to whom these notices must be provided.  It is clear under the Act that the plan administrator must provide these additional notices to all AEIs, but it appears that the notices must also be provided to any other individual who has a qualifying event after September 1, 2008.  IRS representatives have supported this more expansive reading in informal comments.  If these additional notices are not provided by April 18, 2009, and for future terminations through December 31, 2009 within the usual COBRA notice periods, the plan administrator will not have satisfied the COBRA notice obligations and will be subject to the standard penalties for this failure.  The additional notification requirement may be met either by amending existing notice forms or by providing a separate notice.  The required additional notice must include:

·        the forms necessary for establishing eligibility for the subsidized premium and, if applicable, electing COBRA during the special election period;

·        the name, address, and telephone number needed to contact the plan administrator and any other person maintaining relevant information in connection with the premium reduction;

·        a description of the special election period;

·        a description of the AEI's obligation to notify the plan providing COBRA in writing of the AEI's eligibility for subsequent coverage under another group health plan or Medicare, and the penalty for failure to do so;

·        a description, displayed in a prominent manner, of the qualified beneficiary's right to a reduced premium and any conditions on entitlement to the reduced premium; and

·        a description of the qualified beneficiary's option to enroll in a different coverage option, if permitted by the employer.

 

The Act requires the Department of Labor, in consultation with the IRS and the Department of Health, to provide model notices no later than March 19.

 

Key Implications:

·        Employers must carefully consider the structure of any COBRA subsidies provided as part of a reduction in force or separation/severance agreement to maximize the amount of subsidy recoverable under the Act, and must take care when describing COBRA premiums in this context.

·        The extremely short implementation period requires immediate consideration of the policies and procedures that will be required to identify AEIs, calculate and notify AEIs of the reduced premiums, increase the premiums again when the subsidy period ends, track and report eligibility and substantiate subsidy claims, credit or refund excess AEI payments resulting from the transition period, revise or prepare notices and new forms and provide them timely, and retain the full premium payment provisions for high-income employees who elect to waive the reduced payment and avoid the tax assessment. 

·        Since the notice must be sent to all COBRA-eligible individuals who terminated for any reason on or after September 1, 2008, employers should be prepared to field inquiries from individuals who are not eligible for the subsidy or the special election period. 

·        Employers should prepare for disputes regarding entitlement to coverage and the "involuntary" nature of terminations.  Employers initially resolving these disputes in favor of eligibility may be subject to underpayment penalties for offset of ineligible subsidies against their payroll tax deposits.

·        There will be substantiation and reporting obligations.  The extent and procedures are not yet known.

·        Employers must decide whether to permit AEIs to change their health coverage options. 

·        Finally, as with all COBRA obligations, the employer is ultimately responsible for compliance.  Because the provisions of the Act will require close coordination between the payroll and human resources departments and (if applicable) the COBRA administrator, employers will likely not be able to outsource all of the Act's compliance obligations to the COBRA administrator.

 

Ice Miller will continue to monitor developments and will send future e-updates as guidance is issued.  Meanwhile, for more information please contact Chris Sears, Tara Shulstad Sciscoe, Mary Beth Braitman, Terry Mumford, Rebecca Sczepanski or your Ice Miller LLP employee benefits attorney.

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.