STIMULUS ACT IMPOSES NEW COBRA REQUIREMENTS
by
Cliff Bobholz, Andrew DeClercq, and Jeff Storch
The American Recovery and Reinvestment Act of 2009 (ARRA), signed February 17, 2009, makes
changes to COBRA that affect virtually all employers with group health plans, even those not currently
subject to COBRA. For most plans, the changes first apply March 1, 2009. Employers have until April
18, 2009, to send out new notices but should start preparing now.
Summary of the New COBRA Subsidy
"Assistance Eligible Individuals" may receive a 65% subsidy of the premiums they pay for continuation
coverage, whether under COBRA or state continuation coverage laws, for up to 9 months. The subsidy
is first paid by the employer, which may recover it from the government by an offset in the payroll taxes
it pays.
What Employers Should Do
- Identify "Assistance Eligible Individuals" (AEIs): Any qualified beneficiary who:
- has a COBRA qualifying event that is a covered employee's involuntary termination
between September 1, 2008, and December 31, 2009;
- is eligible for COBRA coverage at any time during that period; and
- elects COBRA coverage (whether when first offered or during the new ARRA second
chance election period, discussed below).
- Provide Notice: Employers must provide two notices.
- General ("Supplemental") Notice. Employers must provide notice to all individuals (not
just AEIs) entitled to elect COBRA between September 1, 2008, and December 31, 2009,
of the availability of the premium reduction and, if the employer elects, the availability
to enroll in different coverage (see 5 below). The Department of Labor is to develop a
model notice by March 19, 2009. Employers generally must provide the supplemental
notice by April 18, 2009.
- Second Chance Notice. AEIs not currently on COBRA (e.g., they never elected or
discontinued coverage) must be given a second chance to elect COBRA. The employer
must provide them notice of this election. They have 60 days to elect COBRA, from the
date notice is provided. To minimize adverse selection, employers should provide the
second chance notice as soon as possible.
- Determine Subsidy Amount: ARRA generally requires AEIs to pay 35% of the COBRA
premium they otherwise would pay. If the AEI normally would pay 100% of the premium, the
subsidy is simply 65% of the total premium. However, if the employer would pay any portion
of the COBRA premium (e.g., as part of a severance package), the employee only must pay 35%
of the balance the employee otherwise would pay.
- Plan for Reimbursements: The subsidy applies to the first "period of coverage" beginning after
ARRA's enactment. For most plans, this is March 1, 2009. Due to this short deadline and the fact
that employers are not required to provide notice until April, AEIs may continue to pay 100%
of the COBRA premium for March and April, even though eligible for the subsidy. Employers
must refund any excess payments or, if the overpayment will be used within 180 days, allow a
credit for future payments.
- Consider Offering Alternative Coverage: Generally qualified beneficiaries only may elect
COBRA coverage that is the same as they had as of the qualifying event. ARRA allows
employers to offer AEIs alternative coverage options, as long as they do not cost more and are
also offered to active employees. Restrictions apply, so employers should consult with their
benefit plans advisors before offering alternative coverage.
- Prepare to Recapture Subsidies: The 65% subsidy is first paid by the employer, who in turn
can deduct the subsidy paid from the employer's payroll tax payments. No deduction may be
taken until the employer receives the 35% premium payment from the AEI. Taking the deduction
before it is due is considered an underpayment of payroll tax. The IRS has updated the Form 941
for reporting payroll tax and provided additional information at
http://www.irs.gov/newsroom/article/0,,id=204505,00.html
- Coordinate with Service Providers: This is only a brief summary of the ARRA changes to
COBRA. Employers should contact their insurers, third party administrators, and benefits plan
advisors to coordinate how they will comply with the new COBRA subsidy rules.
If you have questions or would like assistance in complying with the new COBRA rules, please
contact:
Treasury Circular 230 Notice: Any advice in this document relating to any federal tax issue is not intended or written
to be used, and cannot be used, to avoid federal tax penalties.
February 27, 2009