The American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on February 17, 2009. The Act includes a temporary federal subsidy to cover 65% of the cost of COBRA coverage for eligible individuals. This subsidy also applies to health care continuation coverage required under state health continuation laws for small employers not subject to COBRA. The subsidy is scheduled to become effective for coverage beginning March 1, 2009.
Employers should take immediate steps to comply with these new requirements, including identifying whether they have former employees eligible for the subsidy and contacting their insurance carriers and/or third-party service providers.
The following is a brief summary of some of the highlights of the new COBRA subsidy.
Qualifying Event for COBRA Premium Subsidy
An eligible participant’s loss of health coverage must be due to involuntary loss of employment (other than by reason of gross misconduct) between September 1, 2008 and December 31, 2009. Eligible family members are also eligible for the subsidy if they lose health insurance coverage due to the employee’s involuntary termination.
Amount of Subsidy
The subsidy is 65% of the COBRA premium charged to the participant from and after March 1, 2009. Since it is unlikely that the Department of Labor or the IRS will issue guidance by this date, employers and health plans may charge eligible participants the full COBRA premium for March and April. If the employer chooses to do this, the employer must pay the amount of the subsidy to the eligible participant within 60 days or provide the participant with a credit against future premiums as long as it is reasonable to believe that the credit will be used within 180 days of the date of overpayment.
Generally, the subsidy is initially paid for by the employer who may then claim the subsidy amount as a credit against federal tax withholdings and payroll taxes. The reimbursement can be claimed only if the participant actually paid 35% of the COBRA premium. Therefore, if the employer already provides a full COBRA subsidy, the employer would not be entitled to claim any reimbursement. If the employer already provides a partial COBRA subsidy, it appears that the participant’s COBRA premium is reduced to 35% of the required participant payment, with the balance provided by the new federal subsidy.
For example, assume the normal COBRA premium is $1,000. The employer has agreed to pay $600 and the participant is required to pay $400. Under the Act, the participant’s COBRA premium is now reduced further to $140 (35% of $400). The employer is now required to pay $860 and is entitled to a payroll tax credit of $260 ($400-$140).
Duration of Subsidized COBRA Coverage
The maximum period of subsidized COBRA coverage is nine months, followed by unsubsidized coverage for up to nine more months, for a total of 18 months of COBRA coverage from the date of qualifying event as under current law. The subsidy ends when the eligible participant becomes eligible (as opposed to actually covered) for employer-sponsored health coverage or Medicare or when the normal 18-month COBRA period expires, whichever is earliest. Eligible participants must notify the health plan when they become eligible under another employer-sponsored health plan or Medicare. Failure to do so would result in a penalty tax equal to 110% of the premium subsidy.
Elimination of Premium Subsidy for High-Income Individuals
The premium subsidy will be fully phased out for those individuals with modified adjusted gross income of $290,000 for joint return filers and $145,000 for all other filers and is reduced proportionately for individuals with modified gross income of between $250,000 and $290,000 for joint filers and $125,000 and $145,000 for all other filers. If a subsidy is provided to a high-income individual, then the individual’s federal income tax for the relevant year is increased by all or a portion of the subsidy, depending on income level. To avoid this result, a high-income individual may waive the subsidy. Employers are not required to determine whether their terminated employees’ income makes them ineligible for the subsidy and can treat all involuntarily terminated employees as eligible for the subsidy.
Option to Change Coverage
An eligible participant may elect to change coverage under the health plan if such a change is permitted by the employer and the premium for the different coverage does not exceed the premium for coverage under the plan in which the participant was enrolled at the time the qualifying event occurred. The election has to be made within 90 days of the COBRA notice.
Employers should work with their third-party service providers and insurance carriers to modify their COBRA notices. The notices should inform eligible participants of the availability of the COBRA subsidy and the option to enroll in different coverage during the COBRA period if permitted by the employer. The notice must also describe the obligation of the eligible participant to notify the plan about subsequent eligibility for coverage under another employer-sponsored health plan or Medicare and the penalty for failure to do so. The Secretary of Labor is directed to issue model notices no later than March 19, 2009.
Special Election Period
Workers who were involuntarily terminated between September 1, 2008 and February 17, 2009, but failed to initially elect COBRA, have an additional 60 days from receipt of the COBRA subsidy notice to elect COBRA and receive the subsidy. Within 60 days of enactment of the Act, employers or health plan administrators must notify all qualified beneficiaries who incurred a qualifying event between September 1, 2008 and February 17, 2009 of the availability of the COBRA subsidy and the opportunity to enroll in COBRA. This means that individuals who are not even eligible to receive the subsidy will also receive this notice.
The new subsidy becomes effective for coverage beginning March 1, 2009. Eligible participants who have already elected COBRA are entitled to a reduction in premiums effective as of March 1, 2009.
Payroll Tax Credit
Generally, the employer is the entity that may claim the tax credit, with two exceptions. In the case of a multi-employer plan, the plan may claim the credit, and in the case of fully insured COBRA-like coverage provided under a state continuation health statute, the insurer is the party entitled to claim the credit. Employers may claim tax credit against periodic deposits for wage withholdings and FICA payroll taxes for the amount of COBRA subsidy payments. If the employer’s claims for COBRA subsidy payments exceed the amount of wage withholdings or FICA payroll taxes reported by the employer, IRS is required to reimburse the employer directly for the excess amount.