On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”) into law.  One of the most significant provisions of the Act for employers is the changes it makes to insurance provided under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).  These changes affect both the federal COBRA provisions and the Public Health Service Act program that provides similar extension benefits for public programs. The subsidy provisions contained in the Act also apply to state continuation coverage that is comparable to federal COBRA.  This includes "mini-COBRA" state laws that cover groups below the 20 employee threshold for COBRA.  To be comparable, the state continuation law must allow the individual to continue substantially similar coverage as was provided under the group health plan at a monthly cost that is based on a specified percentage of the group health plan's cost of providing such coverage. 

          These changes went into effect on February 17, 2009 and require immediate action by employers.  This memorandum outlines the changes contained in the Act and provides guidance to employers on what actions need to be taken to ensure they comply with the Act. 

COBRA Subsidy for “Involuntarily”

Terminated Employees

          Employees who are terminated “involuntarily” between September 1, 2008 and December 31, 2009, and their covered dependents, are eligible to receive a subsidy of 65% of the premiums they are required to pay to maintain insurance under any group health plan in which they participated at the time of termination, excluding health flexible spending accounts.  Eligible individuals may receive the COBRA premium subsidy for up to nine (9) months.

          The Act itself does not provide a specific definition of who is an “involuntarily terminated employee,” but the Internal Revenue Service (the “IRS”) has defined involuntary termination, for purposes of the subsidy, as a “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, where the employee was willing and able to continue performing services.” 

          Generally, employees who qualify for COBRA benefits because of a reduction in hours are not entitled to the subsidy.  However, an employee’s voluntary termination in response to an employer-imposed reduction in hours may be considered an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.  An involuntary termination might also include retirement if the facts and circumstances indicate that, but for the retirement, the employee would have been terminated and the employee had knowledge that his or her employment would have been terminated.  Involuntary termination also includes a termination elected by the employee in return for a severance package, where the employer indicates that after the offer period for the severance package ends, a certain number of remaining employees will be terminated. 

          It is clear that the subsidy is not available for other COBRA qualifying events such as voluntary termination, divorce, or in the case of a dependent child reaching a limiting age under a health plan.  Employees who are terminated for “gross misconduct” are not eligible for COBRA benefits in the first place, so it follows that these employees are not entitled to the subsidy.  The subsidy is also not available to terminated employees who are eligible for other group health insurance, such as a spouse’s plan or Medicare. 

          The subsidy is not available to individuals (or their dependents) who have an adjusted gross income of more than $125,000 ($250,000 for joint filers) in the year in which they would receive a subsidy.  The subsidy is phased out completely for persons with modified adjusted gross incomes of $145,000 ($290,000 for joint filers).  If an individual with an income of more than $125,000 ($250,000 for joint filers) receives any premium subsidy, that subsidy will be added directly to the individual’s income tax liability in the relevant year.  These high-income terminated employees have the option to waive the right to receive the subsidy.

How It Works

            The involuntarily terminated employee is required to pay 35% of the health insurance premium.  The entity that is collecting the 35% premium pays the remaining 65% and then obtains reimbursement for this 65% from the federal government.  In cases where the employer collects the premium from the employee, the employer pays the remaining 65% and then recovers this 65% in the form of a credit against their income tax withholding and FICA taxes (employer and employee portion).  For plans where the insurer directly collects the premium from the terminated employee, the insurance company will be entitled to the reimbursement through a corresponding credit to its own payroll taxes.  If the premiums due an entity exceed its tax obligations in any given quarter, the U.S. Treasury will issue a check to make up the difference. 

          The Act provides employees who were terminated as far back as September 1, 2008 and who declined COBRA coverage with a new election period.  As discussed in greater detail below, employers must send notice of the subsidy to these former employees, and the employees have 60 days after receipt of the notice to elect to start coverage at the subsidized rate.  Employees who did elect COBRA coverage when initially eligible are eligible for the subsidy, but not retroactive to their termination dates.  Employees who initially elected COBRA coverage but then lost the coverage due to nonpayment of premiums are entitled to re-elect coverage at the subsidized rate.  The premium reduction applies as of the first period of coverage beginning on or after February 17, 2009. 

          An individual's eligibility for the subsidy terminates on the earlier of 1) the individual becoming eligible for coverage under another group health plan or Medicare; 2) the end of the nine-month period of subsidy; or (3) the end of the maximum required period of continuation under COBRA.  The Act does not extend COBRA coverage beyond the original maximum required period, which is generally 18 months after an employee's termination of employment.

          A beneficiary who becomes eligible for other group health plan coverage or otherwise ceases to qualify for the subsidy must notify the employer providing the subsidy.  If the beneficiary fails to do so, he or she will be required to pay a penalty equal to 110% of the premium subsidy received after the qualified beneficiary ceases to qualify for such assistance.

What This Means For Employers

Required Notices

          The Act requires employers to immediately add information about the subsidy and the option to enroll to current COBRA notices or provide the information in separate documents. 

The information that must be provided to former employees includes:

1.      A prominently displayed description of the qualified beneficiary’s right to a reduced premium;

2.      The conditions to receiving the reduced premium;

3.      The forms necessary for establishing eligibility for the subsidy;

4.      A description of the 60-day extended election period;

5.      The plan administrator’s contact information;

6.      A description of a qualified beneficiary’s obligation to notify the plan administrator of health coverage under another group plan or Medicare and the penalty for failure to do so.

          Notices containing information about the subsidy must also be sent to all individuals who experienced a COBRA-qualifying event at any time from September 1, 2008 through December 31, 2009, regardless of the type of qualifying event, and who are already receiving COBRA coverage, initially declined COBRA coverage, initially accepted coverage but lost the coverage due to non-payment of premiums, or are still in their initial election period.  These notices must be sent out within 60 days of the enactment date of the Act (by April 18, 2009).  The Act does not affect the timing of notices sent to individuals who become qualified beneficiaries on or after the date of enactment.

          The Department of Labor has prepared model notices that may be used as a reference by employers.  These model notices, as well as further information regarding the subsidy and sample posters and flyers can be found on the U.S. Department of Labor’s website at http://www.dol.gov/ebsa/cobra.html.

          An employer may allow a COBRA-subsidy eligible individual to change his or her health insurance coverage option when making a COBRA election.  The new plan option must be made within 90 days of receipt of the COBRA election notice, must have the same or lower premiums and must be available to non-COBRA active employees under the plan. 

          Failure to provide the required notices is a COBRA violation and is subject to the standard COBRA penalties of up to $110 a day under the Employee Retirement Income Security Act.  There could also be adverse tax consequences under the Internal Revenue Code, which can impose excise taxes of $100 per day per notice on the plan administrator.

Payroll Tax Credit

          To receive the payroll tax credit, the employer is required to submit reports to the Treasury attesting to the involuntary termination of the individual receiving the COBRA premium subsidy and the actual amount of payrolls taxes offset for the reporting period and the estimated payroll taxes to be offset during the next reporting period.  According to the Department of Labor Employee Benefits Division, employers can begin taking the tax credit by submitting IRS form number 941 with their payroll taxes.  Further information regarding calculation of the subsidy amount and the procedure for obtaining the payroll tax credit can be found on the IRS’s website at www.irs.gov.

Conclusion

          The Act requires immediate and careful attention on the part of employers.  Employers must immediately begin notifying involuntarily terminated employees of their eligibility to receive the COBRA subsidy and to update their existing COBRA notices.  Employers must be diligent to ensure they are in compliance with the requirements of the Act in order to avoid any penalties.  Employers must also carefully document this process in order to ensure they receive reimbursement for the subsidy from the federal government.