Employers Must Respond Immediately to New Premium Subsidies and Other COBRA Requirements Included as Part of Economic Stimulus Bill

The highly publicized economic stimulus bill, known as the American Recovery and Reinvestment Act of 2009 ("ARRA") includes provisions that substantially impact COBRA continuation coverage by creating a subsidy of 65% of the COBRA premium for up to nine months.  With the subsidies being available generally as of March 1, 2009, employers and plan administrators must understand and comply with the new premium subsidies and other COBRA requirements in a very short period of time.  The following is a summary of the changes to COBRA and recommended actions that can be taken right away.

Scope of ARRA

ARRA is applicable to most group health plans.  This includes private sector plans, state and local government plans, federal government plans, and plans subject to state continuation coverage programs.  All group health plans are covered except for health flexible spending arrangements and certain church plans.  Noncompliance with the COBRA provisions of ARRA will result in the same consequences as violations of the underlying COBRA provisions, which could include ERISA penalties of $110/day and excise taxes of $100/day in addition to other relief for COBRA notice failures.

Assistance Eligible Individuals

ARRA's requirements extend to a new subset of eligible COBRA-qualified beneficiaries, referred to as Assistance Eligible Individuals ("AEI").

            Initial Eligibility

ARRA defines an AEI to include any qualified beneficiary who becomes eligible for, and elects, COBRA continuation coverage as a result of an involuntary termination of a covered employee's employment between September 1, 2008 and December 31, 2009.  The subsidy will begin to be phased out for AEIs who are high-income taxpayers (those with a modified adjusted gross income above $125,000 or $250,000 for joint returns) and is completely unavailable for AEIs with modified adjusted gross income over $145,000 ($290,000 for joint returns).  Any subsidy received in these high-income taxpayer cases will be recaptured through an increase in a taxpayer's income taxes.  To avoid the recapture, a high-income taxpayer may make a one-time, permanent election not to receive the subsidy.

Covered employees who were terminated on or after September 1, 2008, but who did not elect, or elected and subsequently lost, COBRA coverage, must receive an extended election period to receive subsidized COBRA continuation coverage.  If elected through this method, COBRA continuation coverage begins as of the first period of coverage beginning on or after the day of enactment (generally March 1, 2009), but the 18-month maximum coverage period is determined from the date the qualified beneficiary first became COBRA-eligible. 

            Expiration or Loss of Eligibility

An AEI is eligible for the COBRA premium subsidy for a maximum of nine months, beginning on the later of the first period of coverage on or after enactment and the date the AEI loses regular coverage under the plan.  Eligibility will end earlier if (i) the AEI becomes eligible for another group health plan or for Medicare, (ii) the maximum COBRA continuation coverage period of 18 months expires, or (iii) the maximum coverage period for the AEI under the extended election period expires.

New Election of Different Coverage Option

An employer or plan administrator may, but is not required to, offer qualified beneficiaries the opportunity to elect a different coverage option, provided that the premium for the newly elected option is not higher than the premium for the current coverage option.  If this new election is offered, the employer or plan administrator must include notice of this opportunity with the required notice and the qualified beneficiary has 90 days to elect a different coverage option.

Premium Subsidy Amount

An AEI is responsible for paying 35% of the applicable COBRA premium.  The employer is initially responsible for the other 65%.  This amount will be recovered by the employer through a credit against the employer's employment tax liability (appearing on IRS Form 941).  If the credit against employment taxes is not sufficient to recover the full 65% of the premium payment, the employer will receive the remainder of the subsidy through a direct payment from the federal government.

The employer must receive the 35% payment before the 65% subsidy may be requested.  If an AEI pays the full premium during the first two periods of coverage after the date of enactment (generally March and April 2009), the employer must reimburse the 65% subsidy or credit that amount toward future COBRA premium payments.  For an employer to request reimbursement, it must submit a report to the IRS containing an attestation that the employee was involuntarily terminated, the amount of payroll taxes offset by the subsidy for the current and next payroll period, the TIN for each covered employee, the amount of subsidy reimbursed to each covered employee and whether the subsidy is for coverage of one or multiple persons.

New ARRA Notices

In addition to the existing COBRA notices, an employer or plan administrator must provide notice of the availability of the COBRA premium subsidy to all individuals who become entitled to elect COBRA between September 1, 2008 and December 31, 2009.  Failure to give timely and sufficient notice is treated as a violation of the notice requirements of the underlying COBRA provisions and can result in severe penalties, as outlined above.

            Notice to Future Qualified Beneficiaries

Going forward, additional notice of the availability of COBRA premium reductions can be made by amending existing COBRA notices or by including a separate document with such notice.  The additional notice must contain a description of the qualified beneficiary's right to the subsidy, the forms necessary for establishing eligibility for the subsidy, the contact information of the plan administrator, a description of the extended election period and a description of the obligation of the qualified beneficiary to notify the plan of eligibility for coverage from another employer.

            Notice to Qualified Beneficiaries

For all qualified beneficiaries who became entitled to elect COBRA continuation coverage on or after September 1, 2008 but before the enactment of ARRA, the employer or plan administrator must provide notice of the availability of COBRA premium reductions and the extended election period within 60 days from enactment (April 17, 2009).  The qualified beneficiary then has 60 days from the date of the notice to respond.  If the qualified beneficiary elects coverage through this method, the coverage will not be retroactive prior to the first period of coverage after February 17, 2009 (generally March 1, 2009), although any resulting gap in coverage will not count toward the 63-day break in coverage that would otherwise cause credited coverage to be lost pursuant to HIPAA.

            Other Notices

Notice should be given to qualified beneficiaries of the ability to waive the COBRA premium subsidy so that high-income taxpayers may avoid recapture of the subsidy.

Qualified beneficiaries should be notified to alert the plan when they are no longer eligible for the COBRA premium subsidy.  Penalties amounting to 110% of the premium reduction will result if a qualified beneficiary continues to receive subsidized coverage after losing eligibility.

If enrollment in different coverage is permitted, notice must be given to all individuals who become entitled to elect COBRA between September 1, 2008 and December 31, 2009.