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The American Recovery and Reinvestment Act of 2009 imposes new requirements on employers providing COBRA continuation coverage. Employers must act quickly to comply with the new requirements, which became effective February 17, 2009. Most notably, employers will be required to provide a 65 percent subsidy on premiums for COBRA continuation coverage to eligible COBRA continuation coverage recipients for up to nine months. In connection with the subsidy, new rules regarding notice to eligible individuals and COBRA coverage elections apply for COBRA continuation coverage, effective February 17, 2009.
The Subsidy
What is the subsidy?
The subsidy is a 65 percent price reduction for the COBRA
continuation coverage premium for up to nine months. It is
initially paid for by the employer, who may then claim the subsidy
amount as a credit against federal tax withholding and payroll
taxes.
Who is eligible?
Employees and their eligible spouses and dependents who became (or
become) eligible for COBRA continuation coverage between September
1, 2008 and December 31, 2009, due to an employee's involuntary
termination of employment, are eligible for the subsidy.
The subsidy is phased out for individuals with a modified adjusted
gross income over $125,000 ($250,000 for joint filers) for the
taxable year in which the subsidy is received. Individuals who
exceed these limits will incur tax on a portion of the amount of
the subsidy received, based on their modified adjusted gross
income.
How long is the subsidy available?
Generally, an eligible individual may take advantage of the subsidy
for up to nine months. However, the nine-month period may be cut
short upon the expiration of the maximum COBRA continuation
coverage period (from the initial qualifying event) or upon the
individual becoming entitled to coverage under another group health
plan or Medicare.
A Special Election Period
Who is eligible?
Individuals who would have been eligible for the subsidy
– those employees whose employment has been involuntarily
terminated since September 1, 2008, but had not elected COBRA
continuation coverage as of February 17, 2009 – have a
special election period for COBRA continuation coverage. The
election period begins on February 17, 2009, and ends 60 days after
the notice of the Special Election Period is provided to the
individual.
What does the Special Election
provide?
If an employee elects COBRA continuation coverage during this
Special Election Period, the employee will commence COBRA
continuation coverage with the first period of coverage beginning
after February 17, 2009 (March 1 for employers with monthly
coverage periods). The COBRA continuation coverage will end no
later than the day the COBRA continuation coverage would have ended
if the employee had originally elected COBRA continuation coverage
based on the date of the original qualifying event, absent the
Special Election Period.
Low-Cost Health Plan Options
One of the only optional COBRA-related provisions of the Act allows an employer to permit qualified beneficiaries who are eligible for the subsidy to elect a lower-cost health plan option, if any, available under the employer's group health plan. However, this will not be an option for (a) coverage that provides only dental, vision, counseling or referral services, (b) a flexible spending arrangement, or (c) coverage for services or treatments furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care.
New Notice Requirements
In connection with providing the subsidy and offering the Special Election Period, employers are required to notify individuals terminated between September 1, 2008 and December 31, 2009 about the availability of the subsidy, the availability of any lower-cost health plan options and the availability of the Special Election Period. Additionally, the employer is required to inform such individuals of their responsibility to notify the group health plan administrator of eligibility under another group health plan or Medicare, and the penalty for failure to provide such notice.
Next Steps
The Department of Labor has been instructed to provide form
documents to assist employers with compliance with the new notice
requirements. Those form documents are expected in the next few
weeks. In the meantime, employers need to implement the new COBRA
continuation coverage rules and work with their internal HR
managers, as well as their external COBRA administrators, to ensure
compliance with the new requirements.
If you have any questions about the new COBRA continuation coverage
rules, your employee benefits advisors at Holland & Knight are
ready to assist.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.