Obligations Imposed on Employers by the COBRA Provisions of the Stimulus Bill
Background
Under federal law, employers with 20 or more employees must offer continuation of health coverage (Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”)) to former employees, their spouses and dependents (“qualified beneficiaries”) if they lose coverage due to certain qualifying events. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“the Act”) was enacted, which, in part, 
amended COBRA rules to create additional notice requirements and alter payroll tax administration in order to administer a temporary, yet significant, federal subsidy of COBRA premiums. These changes will affect every employer that sponsors a group health plan for employees and has terminated or laid off an employee on or after September 1, 2008.
The Changes
-
The Subsidy
Under the Act, for COBRA coverage periods beginning on or after February 17, 2009, “assistance eligible individuals” will be required to pay only 35% of his or her applicable COBRA premium. Employers that provide coverage through insurance or self-insurance will be able to obtain reimbursement of a 65% premium subsidy they are required to provide as a credit against their quarterly federal employment tax filings. -
Eligible Individuals
“Assistance eligible individuals” under the Act are those who: (1) are or were otherwise eligible for COBRA continuation coverage; (2) lost coverage under their employer-sponsored group health plan due to an involuntary termination of employment between September 1, 2008 and December 31, 2009; AND (3) elect COBRA continuation coverage. The Act’s language does not expand on what constitutes an involuntary termination, but does suggest that anything short of a discharge for a cause tantamount to COBRA gross misconduct qualifies for the subsidy. The Act requires the Department of Labor (DOL) to provide for expedited review of any situation where an individual requests consideration as an assistance eligible individual and the group health plan denies that status. -
Duration of the Subsidy
Generally, the subsidy is available for up to 9 months but can end sooner, such as when the maximum continuation coverage period under COBRA expires (the statute does not extend the maximum COBRA continuation coverage periods). Additionally, the subsidy will cease to be available for COBRA coverage after an assistance eligible individual becomes eligible for: (1) coverage under any other group health plan (other than one consisting only of dental, vision, counseling, or referral services); (2) coverage under a health flexible spending account plan; (3) coverage of treatment at certain employer on-site facilities; or (4) Medicare or Medicaid. Kevin Nelson,Partner (304) 720-7545 knelson@huddlestonbolen.com Obligations Imposed on Employers by the COBRA Provisions of the Stimulus Bill Background Employees receiving the subsidy are required to notify employers of events that would cause the subsidy to cease. The Department of Labor is expected to specify the time and manner of such notice. Under the Act, absent reasonable cause and willful neglect, the failure to provide this notice would subject the individual to a penalty equal to 110% of the premium reduction provided after termination of eligibility.If a qualifying individual has already paid the full COBRA premium the Act entitles such assistance eligible individuals to reimbursement from the employer for the excess over which the individual is required to pay under the Act, or a credit of that amount against future COBRA premium payments. The credit is permissible depending on whether it is reasonable to expect the individual to use it within 180 days of the full premium payment.
-
Notice Requirements
Employers must temporarily amend their current COBRA election notices to include general information about the availability of the premium subsidy and, if applicable, the option to enroll in different coverage. Specifically, the notices must include or provide:- The forms necessary for establishing eligibility for the premium subsidy;
- Contact information of the plan administrator and any other person with information regarding the premium subsidy;
- A description of the extended election opportunity for those who previously declined COBRA continuation coverage;
- A description of an assistance eligible individual’s obligation to notify the plan when he or she becomes eligible for cover age that would cause eligibility for the subsidy to cease and the penalty for the failure to do so;
- A prominent description of the qualified beneficiary’s right to the COBRA subsidy and any conditions on such right; and
- A description of the option to enroll in different coverage under the health plan, if applicable.
This information must be included in the COBRA election notices provided to persons who become eligible for COBRA continuation coverage after enactment of the Act. For assistance eligible individuals who became eligible for COBRA continuation coverage prior to enactment, a similar notice must be provided within 60 days of enactment. The Act directs the Department of Labor to issue model notices within 30 days after enactment of the Act.
Congress recognized that many individuals who were recently terminated may have declined to elect COBRA continuation coverage because of its cost. Accordingly, the Act includes a special election opportunity for assistance eligible individuals who were eligible to elect COBRA coverage when they were terminated from employment but choose to not participate. These individuals are entitled to an extended election period that began on February 17 and ends no sooner than 60 days after an extended election notice is provided.
The Act requires employers to locate former employees who previously declined COBRA and provide notice of the right to COBRA coverage with the government subsidy. If an eligible individual elects COBRA continuation coverage during the special extended election period, COBRA coverage will commence with the first period of coverage beginning on or after the enactment of the Act. However, for purposes of determining the maximum COBRA coverage period, the date of the individual’s involuntary termination of employment (or the date of the loss of coverage resulting from such termination) will continue to be treated as the “qualifying event.” For example, an assistance eligible individual terminated on September 30, 2008, who makes a timely election during the extended election period, generally will be entitled to COBRA continuation coverage prospectively beginning March 1, 2009, though the 18-month maximum coverage period is measured from October 1, 2008.
-
Payment for the Subsidy
Because the federal COBRA premium subsidy is reimbursed to employers through the federal quarterly payroll tax reporting system, the Act requires employers to advance the premium subsidies until the employer’s payments can be recouped through reduced federal payroll tax payments. Employers will have to determine the total amount of the subsidy with respect to premiums received during the federal payroll tax reporting period from assistance eligible individuals that have elected COBRA continuation coverage. The employer may use this amount as an offset to its federal payroll tax liability. For purposes of the Act, “payroll taxes” include amounts to be withheld for federal income taxed and the employer and employee portions of FICA, Social Security, and Medicare taxes.To the extent that the amount exceeds the employer’s liability for federal payroll taxes, the Internal Revenue Service will reimburse the employer for the excess directly. If an employer claims too much in reimbursement, it will be treated as an underpayment of federal payroll taxes to be assessed accordingly.
In addition to expected modifications to current payroll tax reporting forms, the Act requires additional information be provided by employers seeking reimbursement of subsidy payments, such as attestations that terminations of employment were involuntary and the levels of coverage individuals are receiving.