Employment: The Stimulus Act - A Significant Change To COBRA
On February 17, President Obama signed into law the American Recovery and Reinvestment Tax Act of 2009 (“Act”). One of the many provisions in the Act is made to COBRA. COBRA allows employees who leave employment to continue to be covered by their ex-employer’s health insurance plan, though the employees pay the full monthly premium. However, as outlined below, the Federal government will pay 65% of the COBRA monthly premium under specific circumstances. This subsidy is available for a period of 9 months to employees who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009.
Involuntary termination is as the name suggests – the termination of an employee who is willing to remain employed but is still terminated (an “eligible employee”). Examples include employees terminated in a reduction in force, layoff or termination for cause (except for gross negligence). Neither employees who voluntarily leave employment nor those who lose health coverage because of a reduction in hours are eligible for the subsidy (though both groups are still entitled to regular COBRA coverage). An employee who is involuntarily terminated will not be eligible for the subsidy if the employee has an adjusted gross income of $125,000 (or $250,000, if married).
This COBRA provision covers all employers who are required to offer COBRA continuation health coverage, as well as any employer covered by a state-mandated continuation coverage law. Any eligible employee may make any election he or she could make when electing COBRA coverage regardless of the subsidy, such as choosing single or family coverage. The subsidy will terminate early only if the employee becomes eligible for Medicare or for coverage under another group health plan, whether or not the eligible employee elects the coverage.
On its face, this governmental subsidy appears straightforward. In reality, employers are highly involved in the provision of this subsidy. If an eligible employee elects COBRA coverage, the employer collects 35% of the premium from the employee and the employer pays the other 65%. The employer then will recoup the amount it paid as a credit against its employment taxes. If for some reason the employer does not recover the full amount owed by the government through the credit, the employer will receive a direct payment from the government.
The Act recognizes that putting the mechanics into place for the collection of the premium and acquiring the tax credit may take a few weeks. If any eligible individual pays the full COBRA premium during this period, the employer must either refund the overpayment or use it to offset future premiums. The employer has until April 30 to have its systems modified to accommodate the new COBRA subsidy.
Maybe the most difficult part of this Act is the retroactive impact. Any eligible employee who was terminated from employment since September 1, 2008 is eligible for the subsidy. For eligible employees that elected COBRA, the subsidy would begin March 1, 2009. However, for eligible employees who did not elect continuation coverage, the employer must locate these individuals and provide them a second opportunity to enroll in COBRA. This notice of election must be provided by April 18, 2009, and individuals have 60 days after the notice is provided to elect COBRA. However, this special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (which is generally 18 months from the employee’s involuntary termination).
The Act requires the Department of Labor (along with other agencies) to issue draft model notices by March 17. While that date is soon, employers must provide to any eligible employee revised COBRA notices of the subsidy’s availability until the draft notices are actually issued.
Because of the complexities of the COBRA provision in the Act, further guidance will likely be issued from the agencies overseeing these provisions, especially the Department of Labor and the Internal Revenue Service.
By Anita K. Chancey, firstname.lastname@example.org