New COBRA Rules Require Prompt Action
The Health Insurance Assistance for the Unemployed Act of 2009 (the “Act”) imposes significant new COBRA premium and notice requirements on employers, insurance companies and plan sponsors. The Act enables certain terminated employees to obtain COBRA coverage (for themselves and their beneficiaries) by paying only 35 percent of the otherwise applicable COBRA premium. The federal government subsidizes the other 65 percent, but employers, insurers and multiemployer plan sponsors must facilitate the subsidy. The premium reduction is effective on March 1, 2009, and employers must act quickly to implement the required changes.
In addition, employers must send revised COBRA election notices to all employees (and qualified beneficiaries) who have been terminated since Sept. 1, 2008, even if they are not eligible for premium assistance. Amended notices must be sent by April 17, 2009, except under certain conditions described in this advisory.
Most Employers and Plans Covered
Generally, all group health plans subject to federal COBRA are subject to the Act's new rules. This includes medical, dental, vision and health reimbursement arrangements. The new rules do not apply to coverage through a flexible spending account under a Tax Code Section 125 Cafeteria Plan. Group health plans of smaller employers, which are normally exempt from federal COBRA, must nevertheless comply with the new rules if they are subject to any state law that requires continuation coverage comparable to federal COBRA. This means that employers with less than 20 employees in Washington, D.C., and states such as New York, California and Oregon must also facilitate premium assistance and send revised notices to their terminated employees (and qualified beneficiaries). In addition, the new rules apply to governmental employers.
Premium assistance to eligible individuals. Effective March 1, 2009, eligible individuals need to pay only 35 percent of the COBRA premium amount. To be eligible for the premium reduction, an individual must be eligible for COBRA continuation coverage by virtue of an involuntary termination of employment for any reason (except gross misconduct), between Sept. 1, 2008, and Dec. 31, 2009. The remaining 65 percent of the premium is covered by the entity to which COBRA participants pay their premiums—either (1) the plan, in the case of health care coverage provided by multiemployer plans (i.e., union-based plans); (2) the employer, in the case of an insured or self-insured plan subject to COBRA (or its equivalent for governmental employers); (3) the insurer, in the case of all other group health plans. The federal government will reimburse the entity who subsidizes the 65 percent premium reduction through either a credit against its payroll taxes or, if necessary, a direct payment. The premium assistance is tax-free to the COBRA participants.
Employees who were involuntarily terminated between Sept. 1, 2008, and March 1, 2009, and who elected COBRA and previously paid the premiums, are not eligible for reimbursement for the previously paid COBRA premiums.
If an employer is already paying part of a COBRA premium on behalf of an eligible employee, perhaps as part of a severance or termination program, the 65 percent reduction is calculated based on the reduced amount paid by the employee, not the full cost of covering the individual. For example, if an employer has agreed to pay the full COBRA premium on behalf of an eligible employee, then there is no reduction in the applicable COBRA premium and no reimbursement available from the federal government.
Notice Requirements
Employers must notify employees of the premium assistance program. This can be done by amending existing COBRA election notices or preparing a supplemental notice to accompany existing forms. Amended or supplemental notices must be given to all employees who experience a COBRA-qualifying event between Sept. 1, 2008, and Dec. 31, 2009, even if they are not eligible for premium assistance.
There is no required time frame for providing an amended notice to individuals who are not eligible for the reduced premium. In contrast, by April 17, 2009, employers must send amended election notices to all former employees (and their qualified beneficiaries) who have been involuntarily terminated since Sept. 1, 2008. This applies to individuals who previously elected COBRA and currently have COBRA coverage, those who elected and then discontinued coverage, and those who did not elect COBRA.
The Act directs the Department of Labor to publish model notices within 30 days, but the model notices are not yet available. The Act also provides that failure to furnish the required new notice will be treated as a failure to meet notice requirements under COBRA. This includes a civil penalty of up to $100 a day, and possible excise taxes.
Special Election Period
Former employees (and their qualified beneficiaries) who have been involuntarily terminated since Sept. 1, 2008, have 60 days form the date of the amended notice to elect continuation coverage and receive premium assistance. This includes individuals who previously refused COBRA coverage, as well as those who elected and then discontinued coverage. If the individual elects continuation coverage, the coverage becomes effective as of March 1, 2009, and continues for the remainder of the period that would have otherwise applied if the individual had elected COBRA when first eligible.
Premium Assistance Coverage Period
If an eligible individual elects COBRA coverage, then the 65 percent premium reduction will apply until the earlier of: (1) Nine months after the date premium assistance began; (2) the date the individual is eligible for other health care coverage; (3) the date on which the continuation coverage period expires; or (4) the date on which the individual stops paying his or her portion of the COBRA premium. Individuals are required to notify their group health plan if they are no longer eligible for premium assistance, including if they become eligible for coverage under another group health plan or Medicare, or are otherwise no longer eligible for COBRA.
Under no circumstances will the premium assistance program extend the period of health care continuation coverage that would otherwise be available to an eligible individual under federal COBRA or state law.
Employer Tax Credit and Reimbursement
Employers should implement payroll and administrative procedures to keep track of the new premium structure and the COBRA premium amount paid by each eligible individual.
The entity to which eligible individuals pay reduced COBRA premiums will receive a credit against its quarterly payroll taxes in an amount equal to 65 percent of the premium that would have been otherwise payable by the eligible individual. If this amount exceeds the amount of its payroll taxes, the Secretary of the Treasury will provide direct reimbursements to the entity in the amount of the excess.
If the employer's plan is self-insured, whether in whole or in part, or subject to COBRA continuation coverage under ERISA, the Tax Code, the Public Health Service Act or Title 5 of the U.S. Code, then the employer is treated as the party to whom premiums are paid and the employer will be eligible for reimbursement. If the employer's plan is fully insured and not subject to COBRA continuation coverage under federal law, then the insurer is treated as the party to whom premiums are paid, and the insurer is eligible for reimbursement. This is true even if technically the eligible individual pays the COBRA premium to the employer and the employer passes it along to the insurance company. In the case of a multiemployer plan, the plan is eligible for reimbursement.
Reporting Requirements
In order to obtain a tax credit or reimbursement, the applicable entity must file a claim with the Department of Treasury along with its Form 941. Although the exact method and form of claim have not yet been announced, the claim must include (1) an attestation by the entity of the involuntary termination of employment of each covered employee; (2) the amount of payroll taxes offset for the reporting period and the estimated offsets of such taxes for subsequent reporting periods; (3) the taxpayer identification numbers for all covered employees; (4) the amount of COBRA premium assistance provided to each covered employee and qualified beneficiary; and (5) a designation with respect to each covered employee as to whether the COBRA premium assistance provided is for individual or family coverage. Entities that fail to properly identify individuals eligible for premium assistance may not be eligible for the full credit amount, and thus potentially subject to underpayment penalties for payroll taxes.
This report raises problems for plans and insurance companies that may be providing premium assistance but may not have access to all the required information, including circumstances surrounding an employee's termination and taxpayer identification numbers. These entities will have to rely on employers to provide this information.
Employee Reimbursement Requirements
It is important to implement payroll and administrative procedures to determine whether any eligible individuals have overpaid COBRA premiums. If an individual who is eligible for premium assistance pays the full COBRA premium amount in either the first or second coverage periods beginning on or after March 1, 2009, then the individual is eligible for a credit to reduce any future premium payments scheduled to be paid within 180 days, or a direct reimbursement within 60 days.
High-Income Individuals
Individuals whose adjusted gross income exceeds $145,000 (or $290,000 for joint filers) during the year for which they seek premium assistance are not eligible. Premium assistance for individuals who earn between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers) is reduced proportionately. Individuals who fall within this high-income category may make a permanent election to waive the right to premium assistance by notifying the entity to which premiums are paid. Individuals who fail to make this election and receive premium assistance during a year in which they exceed the income limits must repay the amount of premium assistance with their taxes.
As many employers, insurers and plans will not know whether an individuals falls within the high-income exclusion, it is important that the revised COBRA election notice describe the income restrictions on COBRA premium assistance and the ability of individuals to permanently waive premium assistance with notice to the entity to which premiums are paid.
Alternative Health Coverage
At the option of the employer, employees may elect to enroll in coverage offered by the employer that is different than the coverage such individual was enrolled in at the time the COBRA-qualifying event occurred; provided that, the different coverage meets certain requirements, including that it is offered to active employees and doesn't have a higher premium. If the employer chooses to provide alternative coverage, the employer must give eligible individuals 90 days to elect alternative coverage.
Action Items for Employers
Employers should act quickly to implement the premium assistance program. In general, employers need to do the following:
1) Amend notices: Amend COBRA notices to describe premium assistance.
2) Identify those eligible: Identify former employees and qualified beneficiaries who are eligible.
3) Distribute notices: Distribute amended COBRA election notices describing the premium assistance by April 17, 2009.
4) Facilitate the special enrollment period: Allow eligible individuals to enroll in COBRA for 60 days after the date of the amended COBRA election notice.
5) Adopt payroll procedures: Effective March 1, 2009, implement payroll and administrative procedures to track the new premium structure. The new procedures should track the amount of premium assistance provided by the employer for each COBRA beneficiary.
6) Implement transition procedures: Implement procedures to identify premium overpayments by COBRA beneficiaries in the first and second coverage periods beginning after March 1, 2009.
7) Identify high-income COBRA recipients: Adopt procedures and notices to identify high-income individuals and facilitate their ability to opt out of premium assistance.
8) Address potential alternative coverage: Decide if alternative health care coverage will be provided.
We will provide updates on further developments, including the Department of Labor's publication of a model notice. In the meantime, if you have questions, please contact a member of our Employee Benefits practice group.