On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (the "Stimulus Plan") into law. Among its many measures, the Stimulus Plan adds provisions that temporarily modify the continuation coverage rules applicable under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") and state laws for certain group health plans. These provisions will require immediate action by employers, insurers and COBRA administrators, including notices to eligible individuals by April 18, 2009. While many unanswered questions remain, this Client Advisory will explain the Stimulus Plan's COBRA provisions and what employers can do now to prepare for its requirements.
What are the main COBRA requirements of the Stimulus Plan?
The Stimulus Plan makes two major changes to COBRA's continuation coverage requirements. First, it creates a federal COBRA premium subsidy for covered employees who are involuntarily terminated from their jobs between September 1, 2008 and December 31, 2009, and those employees' qualifying dependents, provided those individuals otherwise are eligible for continuation coverage during that period. The subsidy will cover 65% of the premium for coverage for up to nine months with respect to premiums paid for periods of coverage on or after March 1, 2009.
Second, the Stimulus Plan creates new notice requirements and special election rights for certain individuals. The Stimulus Plan also permits employers, at their election, to permit individuals eligible for the special subsidy to elect a different health coverage option from the one in which the individual was enrolled at the time of termination of employment.
The Stimulus Plan also extends COBRA benefits for certain covered employees who have the right to receive pension benefits directly from the Pension Benefit Guaranty Corporation and their spouses and dependents, and certain covered employees who are eligible for Trade Adjustment Assistance. Sweeping changes also were made to privacy and security requirements under the Health Insurance Portability & Accountability Act ("HIPAA"). These new rules are outside of the scope of this Client Advisory.
Which employers and group health plans are subject to these requirements?
Although the Stimulus Plan refers to "COBRA continuation coverage," this term is defined to include employers that provide group health plan coverage that is subject to state continuation coverage requirements that are "comparable" to federal COBRA requirements. Because Colorado requires continuation coverage for up to 18 months in the case of termination of employment, Colorado employers that are subject to state continuation coverage requirements also should be prepared to meet the new requirements of the Stimulus Plan. Government employers also are subject to these requirements.
Group health plans subject to these requirements include medical and health coverage (including both insured and self-funded plans), but do not include coverage under a medical flexible spending account.
Which individuals are eligible for the subsidy?
The subsidy is available for employees who suffer an involuntary termination of employment from September 1, 2008, until December 31, 2009, who become eligible for continuation coverage, as well as any family members who lose coverage as a result of that termination. Employees who were laid off before September 1, 2008, are not eligible for the subsidy. In addition, individuals who lose coverage for any other reason (such as a reduction in hours, voluntary termination of coverage, death, divorce, or loss of dependent status) are not eligible for the subsidy.
In order to be eligible for the subsidy, the individual must elect continuation coverage. The individual (or a person other than the individual's employer) must pay the 35% of the employee's required premium. This means that if the employer already is subsidizing the employee's entire premium, the individual is not eligible for the subsidy. In addition, if the employer is subsidizing a portion of the premium already, the subsidy is determined based upon the amount of the premium the individual is responsible for paying (not the amount of the entire premium). For example, if the employer already put in place a lay off, where the employer agreed to pay 50% of the laid-off employees' COBRA premiums, the 65% subsidy would apply only to the 50% of the premium for which the laid-off employee was responsible.
Additionally, while all individuals meeting the rules discussed above are eligible for the subsidy, "high-income individuals" will be required to repay all or some of the subsidy paid on behalf of the individual, the individual's spouse or dependent as an additional tax for the year in which the subsidy was provided. A "high-income individual" is a single taxpayer with modified adjusted gross income in excess of $125,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $250,000. Such an individual will need to repay a portion of the subsidy. Single taxpayers with modified adjusted gross income in excess of $145,000 or married taxpayers filing jointly with modified adjusted gross income in excess of $290,000 will need to repay the entire subsidy received. These individuals can permanently waive the subsidy in order to avoid the additional tax.
How long will the subsidy last?
Eligible individuals may receive the subsidy for a maximum period of nine months, effective as of the first period of coverage beginning on or after February 17, 2009 (in most cases, this would be continuation coverage beginning on and after March 1, 2009). Eligibility for the subsidy will end on the earliest of: (1) the end of the nine month period; (2) the expiration of the individual's maximum continuation coverage period; (3) expiration of the individual's maximum coverage period under the special election period (discussed below); or (4) the date on which the individual becomes eligible for coverage under another group health plan or Medicare. Please note that this last rule is different than the rule allowing termination of federal COBRA continuation coverage upon enrollment in another group health plan. Therefore, an individual who becomes eligible for other employer coverage, but declines that coverage, will have the right to continue coverage, but will lose the COBRA premium subsidy. If an individual becomes eligible under another group health plan or Medicare, he or she must notify the former employer that he or she no longer is eligible for the subsidy.
Who is initially responsible for the subsidy and seeking reimbursement from the federal government?
The answer to this question depends upon what type of group health plan the employer maintains.
If a multiemployer plan is involved (generally, plans sponsored by a union), the plan itself is initially responsible for the subsidy and for seeking reimbursement from the federal government. Because a multiemployer plan probably does not collect or pay payroll taxes, it will need to receive a credit or a refund check directly from the federal government as reimbursement after the plan receives the subsidized payment (the 35% portion of the premium paid by the covered individual).
If a group health plan is not fully insured or if the plan is subject to federal COBRA continuation coverage requirements (regardless of whether the plan is fully insured or self-funded), the employer is initially responsible for the subsidy and for seeking reimbursement from the federal government. After the employer receives the subsidized payment (the 35% portion of the premium paid by the covered individual), the employer can reduce its payroll tax deposits by an amount equal to the remaining 65% of the COBRA premium. The Stimulus Plan allows for offsets from federal income tax wage withholdings and the employer and employee share of FICA tax withholding. For fully insured plans, this will require coordination between the insurer (which likely is collecting the COBRA premiums) and the employer (which is eligible for the COBRA premium subsidy).
If the group health plan is fully insured and is not subject to federal COBRA continuation coverage requirement, the insurer providing coverage is initially responsible for the subsidy and for seeking reimbursement from the federal government through a refund or by an offset of payroll taxes, as discussed above.
All entities claiming the 65% subsidy will be required to meet reporting requirements to substantiate the amount of the credit, refund or offset. The IRS is expected to provide more information regarding the reporting requirements soon.
What special election rights are provided?
Individuals involuntarily terminated from September 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, must be given another chance to elect continuation coverage. This special election period begins on February 17, 2009, and ends 60 days after the plan administrator provides the required notice to the individual. If the individual uses this special election period to elect continuation coverage, this coverage begins on the first day of the coverage period beginning after February 17, 2009 (usually March 1, 2009). Under this special election right, individuals do not have the right to retroactive coverage back to the date of the original loss of coverage; however any gap in coverage caused by this special election right cannot be counted when determining whether a significant break in coverage occurred for purposes of applying any pre-existing condition exclusions imposed by the plan. The maximum length of continuation coverage will be measured as if the individual had elected continuation coverage timely after the involuntary termination of employment and without regard to the actual enrollment date provided under the special election right.
Does the Stimulus Plan allow individuals to elect different coverage than required under COBRA? What additional notification requirements are imposed by the Stimulus Plan?
Normally, a COBRA qualified beneficiary initially is only allowed to elect COBRA continuation coverage that is the same as the coverage the individual had as of the date of the qualifying event. The Stimulus Plan allows (but does not require) an employer to permit an individual eligible for the subsidy to elect a health care coverage option that is different from the coverage usually required under COBRA, with certain limitations.
Plan administrators need to be prepared for two new notice requirements. First, a notice must go out to all individuals who became entitled to elect continuation coverage from September 1, 2008 through February 16, 2009. This notice must explain the availability of the new premium subsidy and, if applicable, the right to change coverage, along with additional information.
Second, in the case of an individual eligible for the special election period discussed above, the plan administrator must provide a notice of the special election right by April 18, 2009. The DOL, Treasury and Health and Human Services are supposed to issue model notices no later than March 19, 2009, that can be used for both purposes. While employers should look to their COBRA administrators to meet these notice obligations, more than likely the employers will be held ultimately responsible for satisfying these requirements (so employers should confirm that the notices and election forms used will meet the requirements of the Stimulus Plan).
What do plan administrators need to do now?
Under the Stimulus Plan, a plan administrator must take all necessary actions to provide the 65% subsidy to eligible individuals beginning March 1, 2009. However, because it is unlikely that the plan administrator will be able to notify all eligible individuals of the subsidy before March 1, if eligible individuals do pay the full COBRA premium for March and April of 2009, the plan administrator must either credit the subsidized portion of the premium against future premiums (if the administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days) or refund the subsidized portion within 60 days.
The following additional steps should be taken as soon as possible:
- Contact COBRA administrators to determine and allocate responsibility for compliance with the new rules.
Identify all potential individuals eligible for the subsidy (employees who were covered by the plan and whose employment was involuntarily terminated beginning September 1, 2008 and their covered spouses and dependents), and determine the amount of the required premium payments.
Identify which of these individuals are currently receiving continuation coverage and which will need to be offered the special enrollment period.
Determine how the employer wants to proceed with respect to the following options:
-- whether the employer wants to allow employees to switch to alternative
health coverage as permitted under the Stimulus Plan;
-- whether to apply the excess of any COBRA premium payments made by
individuals during March and April to future premiums or to refund the
If the employer already subsidizes all or a part of the COBRA premium for an otherwise eligible individual, determine whether the agreements under which those subsidies are provided should be modified to take advantage of the federal subsidy.
Develop a method to allow "high-income individuals" to permanently waive the premiums subsidy (subject to modification when the IRS issues additional guidance).
Prepare and revise COBRA communication materials, including:
-- the new notice regarding the availability of the premium subsidy (model
notices should be issued by March 19, 2009);
-- the new notice regarding the special election rights
(due by April 18, 2009)(model notices should be issued by
March 19, 2009);
-- modifications to the election forms, general and initial COBRA election
notices, and summary plan descriptions.
Coordinate with payroll to revise systems and other procedures for paying the 65% share of the premium and for reflecting the revised charges on premium statements sent to participants.
Coordinate with payroll to revise systems and other procedures for obtaining reimbursement of the amounts from the federal government.
What penalties can be imposed under the Stimulus Plan?
If an individual who loses eligibility for the subsidy because of eligibility for coverage under another group health plan or Medicare fails to notify their former employer of this fact, the individual will be penalized up to 110% of the amount of the subsidy they receive after their eligibility terminated (unless the failure to notify was due to reasonable cause and not due to willful neglect). The Department of Labor is directed to provide guidance on the deadlines and manner in which this notification must be provided.
Any overstatements of reimbursements to which an entity is entitled will be treated as an underpayment of payroll taxes by that entity and such underpayment may be assessed and collected by the Secretary of the Treasury in the same manner as payroll taxes.
Failure to provide the required notification will be subject to the same penalties applicable to failing to provide other notification required under federal COBRA laws.
We anticipate additional guidance to be issued on a number of matters related to the premium subsidy requirements. In the meantime, if you have any questions regarding the new requirements, please contact a member of our Employee Benefits team for additional information.
Sherman & Howard has prepared this advisory to provide general information on recent legal development that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.
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© 2009 Sherman & Howard L.L.C. February 24, 2009
[clarified March 4, 2009]