The new subsidy for Consolidated Omnibus Budget Reconciliation Act (COBRA) health care coverage provided under the American Recovery and Reinvestment Act (ARRA), which was signed into law on February 17, 2009, also creates new notice and election requirements for employers sponsoring health care plans. This memorandum provides an overview of the COBRA subsidy and highlights the key provisions affecting employers.
- Premium Subsidy Beginning March 1, 2009. ARRA subsidizes COBRA coverage for individuals who are involuntarily terminated (for reasons other than gross misconduct) from employment on or between September 1, 2008 and December 31, 2009. Individuals need pay only 35% of their COBRA premium to continue health care coverage. The remaining 65% of the premium is to be paid by employers, who can claim a credit for this amount against their quarterly payroll taxes. The subsidy amount is based on the premium the individual would have to pay for COBRA coverage absent the subsidy. Employers should consider the availability of the subsidy when considering their own COBRA policies.
- Duration of Subsidy: The subsidy can continue for up to 9 months or, if earlier, until the individual becomes eligible for coverage under Medicare or another group health plan or the COBRA eligibility period expires.
- Subsidy Phased Out Based on Income: The subsidy amount decreases for individuals with income above $125,000 and couples with incomes above $250,000. No subsidy is available when income reaches $150,000 (individuals) or $290,000 (couples).
- Retroactive Premium Subsidy: Individuals who were paying full COBRA premiums when the law was enacted will be entitled to the subsidy as of March 1, 2009. Employers must refund the excess or provide these individuals with a credit towards future premium payments (that must be made up within 6 months).
Payroll Tax Credit for Employers: Employers will receive a credit towards their payroll taxes equal to the amount of the premium subsidy that they pay. In order to claim this credit, employers must submit to the Internal Revenue Service (IRS) a report that may include an attestation of involuntary termination of employment for each employee for whom the employer paid the subsidy; the amount of payroll taxes that should be offset; and specified information regarding each employee for whom the subsidy is paid. Additional guidance regarding this submission is expected from the IRS.
Extended Election Period: Employers must notify former employees and beneficiaries who did not elect COBRA coverage during their regular COBRA election period but are otherwise eligible for the subsidy that the subsidy is available and that they have an additional 60-days (following the receipt of the notice) to elect COBRA coverage.
Alternate Coverage May Be Offered: Employers can allow subsidy eligible individuals to elect coverage different from the coverage received prior to the individual’s termination. The alternative coverage may not be more expensive than the original coverage and must be available to active employees. In addition, alternate coverage may not provide only dental, vision, counseling and referral services and cannot be a health flexible spending plan.
Employer Notice Requirements: Employers must provide new COBRA notices to all individuals who terminated employment between September 1, 2008 and December 31, 2009 within 60 days after the enactment of ARRA. These notices must: (a) include a description of the eligibility rules for the subsidy; (b) inform individuals of their ability to elect COBRA coverage even if it was initially declined; (c) inform individuals that they may elect same premium or lower-premium coverage, if it is available; (d) describe how the subsidy can be elected; and (e) inform individuals of their obligation to notify the plan if they become eligible for other health coverage. This information may be incorporated into existing COBRA materials or sent as a separate notice. The U.S. Department of Labor has been directed to issue a model notice for employers by March 19, 2009.
For additional information please contact Michael A. Curto at 202-457-5611.