An unfortunate reality for most terminated employees is that they must assume the cost of health insurance at just the time when they can least afford it. Congress has acknowledged this problem, and has sought to remedy it by amendments to the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) which were enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”) recently signed into law by President Obama.
For employers who are less familiar with COBRA, the question and answer section that follows this overview starts with an explanation of how COBRA worked before the new law was passed. For those already familiar with the basic workings of COBRA, here is what you need to know right now.
What does the new COBRA law do?
The new law requires employers to subsidize the cost of continuing group health insurance coverage for most terminated employees.
What do employers need to do to comply with the new law?
First, employers must give terminated employees notice of their right to continue receiving group health insurance coverage after termination on a subsidized basis. The new law creates a potential trap for employers, because it makes this notice obligation retroactive, and as a general rule, all personnel that have been terminated since September 1, 2008 must be given the notice. The Department of Labor has recently posted COBRA model notice forms on its website.
Second, if an eligible former employee makes a timely election to continue group health coverage, the employer must subsidize the cost of this coverage. The employer must initially pay this cost out-of-pocket, and may recoup the expense through credits against subsequent payroll tax payments, or refunds from the federal government, if the credits exceed the amount of payroll taxes due. Employers will want to promptly file for credits or refunds. The Internal Revenue Service has recently updated its employment tax forms to provide for credits and refunds, and has added a new page to its website with extensive information about how to obtain credits and refunds.
How does COBRA work?
Under COBRA, employees who lose their jobs (for reasons other than gross misconduct) from a company that has more than 20 employees and provides health benefits are allowed to keep those benefits for up to 18 months. Until ARRA was passed, former employees who chose to extend their health benefits could have paid up to 102% of the premiums, often amounting to hundreds of dollars a month for individuals and perhaps a thousand dollars a month for families. As a result of ARRA, employees entitled to continued health coverage under COBRA are entitled to have their former employer subsidize the cost of premiums for specified period of time.
How does the premium subsidy work?
ARRA provides a 65% government subsidy of COBRA premiums for nine months to those who are involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009. The subsidy covers 65% of the full monthly COBRA premium, for a period of up to nine months. An eligible individual who pays 35% of the COBRA premium is treated as having paid the full amount. The base amount that is used to calculate the reduced COBRA premium is the premium that the eligible individual would have been required to pay for COBRA continuation coverage under COBRA (absent the subsidy), generally 102% of the employer’s premium.
Who is eligible to receive the premium subsidy?
An individual is eligible if that individual is an employee or dependent of an employee who:
What does it mean to be “involuntarily terminated?”
The IRS defines involuntary termination as severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request.
The determination of whether a termination is involuntary is based on all the facts and circumstances.
Involuntary termination may include:
An involuntary termination does not include:
Are there any other limits on who is eligilbe for the COBRA premium subsidy?
Those who are eligible for other group health coverage (such as a spouse’s plan) or Medicare are not eligible for the premium subsidy. There are also certain income limits above which eligibility for the premium subsidy is phased out.
Individuals with modified adjusted gross income of $125,000 or less ($250,000 or less if married filing jointly) for the tax year qualify for the full 65% subsidy. For taxpayers with incomes greater than those amounts, the subsidy is phased out through additional taxation until the subsidy is fully recaptured at modified AGI of $145,000 ($290,000 for joint returns). Taxpayers reaching these thresholds can permanently waive their right to a subsidy to avoid this issue and simply pay the full COBRA premium charged.
When does the premium subsidy start?
There is no premium reduction for premiums paid for period of coverage prior to February 17, 2009. Although the subsidy applies to employees who were terminated as long ago as Sept. 1, 2008, it is not retroactive. It applies only to periods of coverage (generally months) beginning on or after February 17, 2009. The premium reduction starts on March 1, 2009 for plans that charge for COBRA coverage on a calendar month basis.
When may an eligible person elect subsidized COBRA coverage under the new law?
A special election period exists for individuals involuntarily terminated on or after Sept. 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered OR who did elect COBRA, but are no longer enrolled (e.g., because they could not continue to pay the premium). This election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice. The special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee’s voluntary termination).
How long does the premium subsidy last?
Eligible individuals may receive a premium subsidy for a period of up to nine months beginning on the later of February 17, 2009, or the date the individual loses regular coverage under the plan. For example, an individual whose COBRA coverage began on Jan. 1, 2009 would be eligible for a subsidy for the nine-month period beginning on March 1, 2009. However, the subsidy terminates before the end of the nine-month period if (a) the employee becomes eligible for other employer health coverage, (b) the employee becomes eligible for Medicare, (c) the maximum COBRA coverage period required by law expires, or (d) for those electing COBRA during the special election period, the COBRA period starting from the initial time period when the employee could have elected COBRA expires. An individual who ceases to become eligible for the subsidy under (a) or (b) above must notify the group health plan providing the subsidized COBRA coverage; failure to provide notification can result in a penalty equal to 110% of the premium reduction.
Are there any limits on the type of group health coverage to which the premium subsidy applies?
The subsidy applies to whatever level of COBRA coverage the terminated employee elects. If the employer allows, employees may elect coverage different than that in effect at the time of termination, so long as the premium for that option is no higher than the premium for the pre-termination option.
How is the subsidized premium paid, an how does the employer obtain reimbursement for the portion it pays?
The employer must collect 35% of the COBRA premium from the eligible individual. The employer sponsoring the plan must pay the remaining 65% of the premium (i.e., the “subsidy”). The employer or plan then obtains reimbursement by taking a payroll tax credit (toward the entity’s wage withholding or FICA taxes – IRS Form 941). If this credit against employment taxes is insufficient to recover the full premium subsidy, the employer will qualify for direct payment from the federal government, which is handled in the same way as an overpayment of employment taxes.
Since employers may not be able to implement this premium subsidy in time to meet the effective date, the Act provides that assistance eligible individuals who pay the full COBRA premium for either March or April coverage must either have the 65% subsidy amount refunded to them by the plan’s sponsoring employer or have the subsidy credited against their future COBRA premiums.
What do employers need to do to make sure they are reimbursed?
Employers applying to collect the subsidy should maintain the following supporting documents:
1. Reports attesting to the involuntary termination of each covered employee for whom they are claiming a subsidy;
2. Proof of eligibility for covered employee;
3. A report of the amount of payroll taxes offset for the reporting period and the estimated offsets for such taxes for the subsequent reporting period in connection with subsidy reimbursements;
4. Receipts showing the date and amount of the covered employees 35% share;and
5. A report containing the tax identification numbers or social security numbers of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and qualified beneficiaries, and a designation with respect to each covered employee as to whether the subsidy reimbursement is for coverage of one individual, or two or more individuals.
What obligation do I have to notify individuals that they are eligible for COBRA premium subsidies?
By April 18, 2009, new notices must be provided to alert covered employees and their qualified beneficiaries of the changes. The additional notification requirement may be met either by amending existing notice forms, or by including a separate document with the notice otherwise required. New forms will also need to be created for establishing eligibility for the subsidy. The Department of Labor has posted model notices on its website that employers can use to comply with the notice obligation.
All individuals and their beneficiaries who have incurred a COBRA-qualifying event since September 1, 2008, must be provided with new notices containing the following information:
Who must receive notice of eligibility for COBRA premium assistance?
There are three separate classes of individuals that need to be notified of the changes:
1. Covered employees and qualified beneficiaries with a qualifying event that occurred between September 1, 2008 and February 17, 2009 who currently have COBRA coverage;
2. Covered employees and qualified beneficiaries with a qualifying event that occurred between September 1, 2008 and February 17, 2009 who do not currently have COBRA coverage; and
3. Covered employees and qualified beneficiaries with a COBRA qualifying event that occurred on or after February 17, 2009.
If my business is too small to be covered by COBRA, do I have any new obligations as a result of the adoption of this new law?
Yes, because the provisions of ARRA described above apply serve to modify New Hampshire law, as well as the federal COBRA law discussed above. ARRA, by its terms, provides the subsidy for “state programs that provide comparable continuation coverage.”
New Hampshire has a “mini-COBRA” statute which requires COBRA-like continuation when employers are too small to be under federal COBRA. The law states that in non-federal COBRA situations, reimbursement goes through the carrier; not through payroll credits. At this time, it is unclear how employers recapture the amounts they advance on the 65% share.
* Dodd Griffith is admitted in New Hampshire.