COBRA Premium Subsidy Provisions of The American Recovery and Reinvestment Act of 2009

February 23rd, 2009

On February 13, 2009, Congress passed The American Recovery and Reinvestment Act of 2009 (the “Act”).  The Act was signed into law by President Obama on February 17, 2008.  Included in the Act are provisions that make significant changes to COBRA continuation premium payment requirements.  These provisions will be effective for most plans effective March 1, 2009.

Provisions of the Act

The Act provides a federal government subsidy of COBRA continuation premiums for a maximum of 9 months for certain individuals who are COBRA qualified beneficiaries because of a covered employee’s involuntary termination of employment.  The federal government will subsidize 65% of the COBRA premium actually charged to an “assistance eligible individual” (AEI) for up to 9 months.  The subsidy applies to coverage under both the federal COBRA law and any state “mini-COBRA” laws (i.e., state continuation laws applicable to employers with fewer than 20 employees).

Under the Act’s provisions, a group health plan may only require an AEI to pay 35% of the COBRA premium that the AEI would otherwise be required to pay.  The federal government will reimburse an employer for the remaining 65% of the COBRA premium by allowing the employer to take a credit against the employer’s liability to deposit payroll taxes and federal income taxes withheld from employees’ compensation.  The credit is applied as though the employer or insurer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary’s payment is received.

Assistance Eligible Individual

An “assistance eligible individual” is defined by the act as a COBRA qualified beneficiary who:

  • Is eligible for COBRA coverage at any time on or after September 1, 2008 and on or before December 31, 2009;
  • Elects COBRA coverage either during the original COBRA election period or during the special election period provided by the Act; and
  • Is a COBRA qualified beneficiary because of an involuntary termination of a covered employee’s employment (other than for gross misconduct) that occurs on or after September 1, 2008 and on or before December 31, 2009.

An AEI may be a covered employee or a covered employee’s covered spouse or dependent child who became a qualified beneficiary because of the involuntary termination of the covered employee’s employment.

Period of Coverage

The subsidy applies to periods of COBRA continuation coverage beginning after the enactment of the Act.  A “period of coverage” is the monthly (or shorter) period for which COBRA premiums are charged.  For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009.  The subsidy ceases to apply (and a plan administrator may again charge the full COBRA premium) as of the earliest of:

  • The date the AEI becomes eligible for coverage (not actually covered) under another group health care plan (other than plans providing only dental, vision, counseling, or referral services, a health care flexible spending plan, or a health reimbursement arrangement) or Medicare coverage; or
  • 9 months after the first day of the first month to which the subsidy applies; or
  • The end of the maximum COBRA coverage period required by law (including permissible early terminations); or
  • For an AEI who elects COBRA during the special enrollment period provided under the Act, the end of the maximum COBRA coverage period that would have applied if the AEI had elected COBRA coverage when first entitled to do so.

An AEI who becomes eligible for coverage under another group health plan is required to notify the plan providing COBRA coverage in writing.   An AEI who fails to provide the required written notice is subject to a penalty of 110% of the subsidy provided for the AEI after the date the AEI became eligible for the other coverage.

Subsidy Reimbursement

The subsidy does NOT apply to COBRA premiums for health care flexible spending accounts.  In situations where a group health plan charges less than the maximum permissible COBRA premium, 35% of the premium must be paid by the AEI or on the AEI’s behalf by someone other than the AEI’s employer or that employer cannot claim a subsidy credit until the group health plan has actually received the 35% of the COBRA premium as required by the Act.  An employer is only permitted to claim a subsidy credit of 65% of what the total COBRA premium would be if the amount actually paid by the AEI was 35% of the total COBRA premium.

High-Income Individuals

Although all AEIs are technically eligible for the subsidy, any AEI who is a “high-income individual” or the spouse or dependent of a high-income individual will be required to repay the subsidy as an additional tax (“recapture tax”) on the high-income individual’s individual tax return for the year in which the subsidy was provided.  A “high-income individual” is defined as a single taxpayer with modified adjusted gross income in excess of $145,000 or a married taxpayer filing jointly with federal modified adjusted gross income in excess of $290,000.  The modified adjusted gross income for this purpose is adjusted gross income determined without regard to Code §911 (relating to U.S. citizens or residents living abroad), Code §931 (income from sources in Guam, American Samoa, or the Northern Mariana Islands), or Code §933 (income from sources in Puerto Rico).

The subsidy recapture tax begins to phase in for a single taxpayer with federal 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.  However, qualified beneficiaries may make a one-time election to waive the COBRA subsidy.  Details regarding the form and manner of this election are to be provided by the Treasury Department following enactment of this new law.

Special Election Period for AEIs

The Act also provides for a special election period for AEIs.  An individual who would be an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the Act must be given a second chance to elect COBRA coverage.  This special election period begins on the date of enactment of the Act and ends 60 days after the plan administrator provides the required notice to the individual.

COBRA coverage for an AEI who elects COBRA during the special election period begins on the first day of the first COBRA coverage period beginning after the date of enactment of the Act (March 1, 2009 for group health plans using calendar months as COBRA coverage periods).  COBRA coverage is NOT retroactive to the date the AEI originally lost coverage.  The COBRA coverage period for an AEI who elects COBRA during the special election period ends when COBRA coverage would otherwise have ended if the AEI had elected COBRA when initially eligible to do so after the qualifying event.  The period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period beginning after the date of enactment of the Act is disregarded when determining if the AEI had a 63-day significant break in coverage for purposes of applying pre-existing condition exclusions.

Generally, a COBRA qualified beneficiary is only permitted to elect COBRA continuation coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event.  The Act permits (but does not require) an employer to allow AEIs (including AEIs that have COBRA coverage without the special election) to elect a health care coverage option different from the health care coverage originally offered to the AEI under COBRA.  The COBRA premium for the different coverage cannot exceed the COBRA premium for the coverage in which the AEI was enrolled when the COBRA qualifying event occurred.  The different coverage must be coverage the employer is offering to its active employees at the time the AEI elects the different coverage.  Additionally, the different coverage cannot provide only dental, vision, counseling or referral services (singly or in any combination) and cannot be a health care flexible spending account or an on-site facility primarily providing first aid, prevention, or wellness care.  If an employer decides to offer the different coverage option to an AEI, the employer must provide the AEI an election notice and allow an election period of not less than 90 days.

Extension of Coverage for Certain Individuals

The Act also extends COBRA continuation coverage periods for certain individuals receiving Trade Adjustment Assistance benefits or pension benefits from the Pension Benefit Guaranty Corporation (PBGC).  The initial COBRA coverage period is extended for these two groups of COBRA qualified beneficiaries following a termination of employment or reduction in hours of a covered employee COBRA qualifying event:

  • If the covered employee has (as of the qualifying event date) a nonforfeitable right to receive any pension benefits directly from the Pension Benefit Guaranty Corporation, the maximum COBRA coverage period for the covered employee ends on the covered employee’s date of death;
  • If the maximum COBRA coverage period for the covered employee’s surviving spouse or dependent children ends 24 months after the covered employee’s date of death; or
  • If the covered employee is a Trade Adjustment Assistance-eligible individual (as of the date COBRA coverage would otherwise end because of the regular 18-month or 36-month COBRA coverage periods), the maximum COBRA coverage period ends on the date the covered employee ceases to be a Trade Adjustment Assistance-eligible individual.

Actions Required of Plan Sponsors

For most plan sponsors, beginning March 1, 2009, group health plan administrators must take all necessary actions to provide the 65% subsidy to AEIs.  Generally, this means ensuring that an AEI is only required to pay the reduced COBRA premiums for periods of coverage beginning on or after March 1, 2009.

If an AEI pays the full COBRA premium for the first or second period of coverage beginning after the date of enactment of the Act (i.e., periods of coverage for March and April 2009), the plan administrator must either:

  • Credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days); or
  • Refund the subsidized portion within 60 days.

For any individual who becomes a COBRA qualified beneficiary after the enactment of the Act, the group health plan administrator must include with all other required COBRA election notices and forms specific information about the availability of the subsidy.  A group health plan administrator must also provide notices to two groups of AEIs within 60 days after the enactment of the Act:

  • The first notice must go to all AEIs who currently have COBRA continuation coverage to advise them of the availability of the subsidy and the requirements to qualify for the subsidy; and
  • The second notice must go to any individual who is entitled to the special enrollment period (this includes an individual who previously made a COBRA coverage election but whose COBRA coverage ended before the enactment date because of non-payment of premiums).

The notice to these individuals must advise them of:

  • The availability of the subsidy;
  • The requirements to qualify for the subsidy; and
  • Additional information required by the Act, as well as providing the forms necessary for electing COBRA during the special election period.

Employers (or insurers, if applicable) will be required to file reports relating to the subsidy.  The specific types of reports and applicable deadlines will be determined in the future by the Treasury Department.  However, three types of reports are currently specified.  The employer (or insurer) must:

  • Attest that each employee receiving the subsidy was involuntarily terminated;
  • File an accounting to report the payroll tax credit taken for the reporting period and the estimated credits to be taken during the following reporting period; and
  • File a report of all covered employees, the amount of subsidy treated as a payroll tax credit for each employee and a designation as to whether the subsidy is for coverage of one individual or two or more individuals.

Conclusion

The Act, while very beneficial for COBRA eligible individuals, creates an additional administrative burden for plan sponsors when complying with COBRA requirements.  Additionally, the time period between the Act’s enactment and the date most employers are required to comply with the Act is very short.  Plan sponsors are encouraged to contact their benefits counsel immediately to ensure compliance prior to the Act’s effective date.  Please contact our office for more information.

3 Responses to “COBRA Premium Subsidy Provisions of The American Recovery and Reinvestment Act of 2009”

  1. Melodyon 06 May 2009 at 4:44 pm

    Is there a penalty to employers who fail to follow through on this law or who drag their feet?

  2. Michele Aikenon 06 May 2009 at 10:19 pm

    Melody:

    Administrators who fail to comply with the subsidy notice requirements are subject to COBRA’s usual penalties, which include a penalty of up to $110 per day of non-compliance.

  3. Hanh Cowieon 25 May 2011 at 10:49 am

    Son of a gun! Everybody understands that these are the hot recommendations in the matter of.

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