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Stimulus Package Contains Complicated COBRA Subsidy Provisions

On February 17, 2009, the President signed The American Recovery and Reinvestment Act (the “Act”), which, among other employee benefit changes, contains provisions temporarily modifying the group health continuation coverage provisions under COBRA and expanding special enrollment rights. (The privacy and security provisions of HIPAA have also changed, but the effective dates of those changes are further off and will be addressed at a later date.) These wide-ranging changes will require immediate action by employers and COBRA administrators.

Generally, the new law provides a federal subsidy (which can be as much as 65% of the cost of coverage under COBRA) to certain involuntarily terminated employees and covered family members. The subsidy is provided through a payroll tax credit (to employers in the case of self-insured arrangements and to insurers in the case of fully insured arrangements). The Act also includes special enrollment election rights for previously terminated employees. Although we expect detailed guidance and model notices to be coming from the government shortly, the following provides an overview of the new requirements.

COBRA Changes

Which employers are affected by the COBRA change? Employers sponsoring group health arrangements, which appear to include medical, dental and vision coverage but explicitly exclude health flexible spending accounts, who are otherwise subject to COBRA or state-equivalent continuation coverage, such as Massachusetts “mini-COBRA,” and who have involuntarily terminated (or will involuntary terminate) employees between September 1, 2008 and December 31, 2009, may be affected.

What subsidy does the legislation provide? The Act provides a federal subsidy of up to 65% of the cost of COBRA (or state-equivalent) continuation coverage for Eligible Individuals (as defined below) for up to nine months. In addition, the Act provides a new special COBRA (or state-equivalent) continuation coverage election period for Eligible Individuals who were previously involuntarily terminated and did not elect COBRA. To implement these requirements, the Act imposes a notice obligation, as described below.

Who are Eligible Individuals? Qualified beneficiaries who had or have a COBRA (or state-equivalent continuation coverage) qualifying event due to involuntarily termination between September 1, 2008 and December 31, 2009 and who either previously elected continuation coverage, or elect such coverage during the special election period described below may be eligible for the subsidy (“Eligible Individuals”). For these purposes, a qualified beneficiary includes a service provider (an employee or partner, for example) and his or her spouse or dependents that were covered under a group health plan at the time of the COBRA (or state‑equivalent) qualifying event. Therefore, the subsidy may continue even after the death of the terminated employee. The term “involuntary termination” is not defined in the Act, and may be a source of controversy with former employees who believe they should be eligible for the subsidy. (The Act does provide an expedited appeal procedure by the Departments of Labor or Health and Human Services for an individual who believes he or she was improperly denied the subsidy.)

The subsidy begins to phase out for Eligible Individuals with modified adjusted gross income that exceeds certain limits ($125,000, or $250,000 for a married taxpayer filing jointly). If a taxpayer, his or her spouse or certain dependents receive the subsidy and has modified adjusted gross income that exceeds these limits, the taxpayer will be required to repay the subsidy (or a portion of it) as an additional tax on his or her individual income tax return for the year in which the subsidy was provided. Thus, employers and COBRA administrators are not required to verify an Eligible Individual’s income. Eligible Individuals, however, must be provided the opportunity to permanently waive the subsidy in a manner to be prescribed by the Secretary of Treasury. (Note that the income limits apply on an annual basis so that an Eligible Individual may exceed the income limits for 2009, but not 2010. A waiver, however, would be irrevocable and would apply to both years.)

How does the subsidy work? The subsidy is provided through a credit to payroll taxes and is only available after the Eligible Individual pays 35% of the cost of coverage. In other words, if a former employer is paying for 100% of the cost of coverage, there appears to be no federal subsidy available. (Whether the Eligible Individual makes the payment, or someone else does on his or her behalf is not relevant, although the Act provides that the Eligible Individual’s “employer” cannot make the payment. Whether the reference is to a current employer or the former employer is unclear and will hopefully be one of the many issues addressed when guidance is published.)

The entity eligible for the refundable payroll tax credit will depend on who collects the premiums. For a self-insured arrangement, the employer will be entitled to the credit. For a fully insured arrangement, the insurance company collecting the premium will be entitled to the credit.

When does the subsidy begin? The subsidy applies to periods of continuation coverage beginning after the enactment of the Act. For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009. The special reenrollment election period begins on the date of enactment and runs for sixty days after the date the notice required under the Act is provided to the Eligible Individual.

Does the Act provide any transition relief? Because it is unlikely that an employer or COBRA administrator will be able to timely notify all Eligible Individuals of the reduced cost of coverage by March 1st, the Act provides that the full cost may continue to be collected for one or two months. Afterwards, the plan administrator must either refund the subsidized portion within sixty days or in some cases may credit the subsidized portion of the cost against future premiums.

When does the subsidy end? The subsidy ends on the earliest of (1) the date the Eligible Individual becomes eligible for coverage under certain other group health care plans, (2) the date the coverage period would otherwise end (for example, because the individual fails to pay his or her share of the cost of coverage or the continuation coverage period ends, generally eighteen months after the COBRA qualifying event) or (3) nine months after the first day of the first month to which the subsidy applies.

An employee who becomes eligible for coverage under another group health plan must notify the plan providing the continuation coverage in writing, or face a penalty of 110% of the subsidy provided after the date the employee became eligible under the new plan. Note, however, that the subsidy is only available after the Eligible Individual has paid his or her 35% share. Therefore, if an Eligible Individual simply stops paying the cost of coverage, the penalty would not apply.

Special Enrollment Rights

Who is eligible for the special election period? Any Eligible Individual who does not have a continuation coverage election in effect as of February 17, 2009 is eligible to make a new election during a special election period.  Thus, if an Eligible Individual had not elected COBRA at the time of an involuntary termination, he or she would now be allowed to elect coverage. Also, if a dependent of an involuntarily terminated employee had elected COBRA continuation coverage but was no longer enrolled because the cost ceased to be paid, the dependent is eligible to reenroll during this special election period.

When does the special election period run? The new election period begins on February 17, 2009 and ends sixty days after the plan administrator provides a required notice to the Eligible Individual. Coverage as a result of the special election will not extend past the date the coverage otherwise would have terminated if the Eligible Individual had commenced coverage after the qualifying event. In other words, the special election period does not extend the original coverage period (typically eighteen months from the involuntary termination).

Must Eligible Individuals enroll in the same coverage in which they were previously enrolled? Ordinarily, an individual eligible for COBRA (or state-equivalent) continuation coverage is permitted to enroll only in the coverage he or she had at the time of the qualifying event. The Act permits, but does not require, employers to allow Eligible Individuals (including those who are already enrolled in COBRA or state-equivalent continuation coverage) to enroll in coverage that differs from the coverage they previously maintained. The new coverage must be an option that the employer is offering to active employees, and the cost for the new coverage cannot exceed the cost for the old coverage. (In addition, the new coverage cannot provide only dental, vision, counseling or referral services, and cannot be a health flexible spending account or an on-site facility providing primarily first aid prevention or wellness care.) This special enrollment option begins on the date the notice described below is provided and ends ninety days later.

Notice Requirements

What are the notice requirements of the Act? The Act requires employers or COBRA administrators to modify COBRA election notices and/or provide supplemental notices to all Eligible Individuals. The notice must describe the new subsidy, the special election period and, if applicable, the right to change coverage options, as well as certain other information. With respect to individuals who became entitled to elect COBRA (or state equivalent) continuation coverage prior to February 17, 2009, a supplemental notice must be sent by April 18, 2009. The Department of Labor will develop a model notice by March 19, 2009 for employers and COBRA administrators to use. Failure to provide the notice could subject the employer or plan to a penalty of up to $110 per day under ERISA and an excise tax of $100 per day per notice (up to certain limits) under the Internal Revenue Code.