E-Alerts

Federal Guidance Concerning COBRA Continuation Coverage

Recently, the Internal Revenue Service and Department of Labor released guidance to both employers and employees concerning the American Recovery and Reinvestment Act’s (the “ARRA”) temporary amendments to the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”).  On February 26, 2009, the Internal Revenue Service (“IRS”) released “COBRA:  Answers for Employers,” offering guidance to employers on how to receive appropriate tax credit for COBRA premium payments paid by the employer on behalf of employees who are assistance eligible individuals (“AEIs”) pursuant to the recent COBRA amendments.  And on March 3, 2009, the Department of Labor (“DOL”) released “FAQs About COBRA” for employees and their families concerning an individual’s eligibility, rights and responsibilities under the COBRA amendments.

Most significantly for employers, the information provided by the IRS instructs employers on how to recover the subsidy provided to assistance eligible individuals.  These instructions, an overview of the ARRA’s COBRA amendments, and other clarifying information regarding an employer’s obligations under the amendments, are discussed below.

While additional guidance should be forthcoming, as well, this E-Alert is based on the most current guidance available.  Thus, this E-Alert supersedes the Firm’s prior publications on this topic.  As additional governmental guidance is issued in the coming weeks, we will continue to provide updates.

Continuation Of COBRA Coverage Under The ARRA

Overview

Effective February 17, 2009, AEIs are entitled to a federal subsidy equal to 65% of the applicable COBRA premium for continuation coverage for a period of up to nine months.  (Generally, COBRA gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for 18 months, under certain circumstances such as voluntary and involuntary job loss or a reduction in hours worked.)  As a result, AEIs need to pay only 35% of their COBRA premiums during the relevant nine month period.

AEIs of small employers (those with fewer than 20 employees) who provide COBRA continuation coverage under state laws are also eligible for the federal subsidy.  State “mini-COBRA laws” vary, so please contact us if you need state-specific information.

Employee Eligibility 

An employee who is involuntarily terminated from employment between September 1, 2008, and December 31, 2009, and who elects COBRA coverage, is eligible for the federal subsidy (i.e., he/she is an assistance eligible individual (“AEI”)).  However, employees whose employment is terminated for gross misconduct are not eligible for the federal subsidy.

If an employee disputes his/her eligibility for this federal subsidy, he/she can request an expedited review from the DOL.  The DOL must then make a decision within 15 business days.

Income Thresholds

While employers are required to offer the subsidy, regardless of the individual’s income level, the full subsidy does not apply unless the individual can certify that he/she has an annual adjusted gross income less than $125,000 (or $250,000 for joint filers).  (A partial subsidy is available for individuals with an annual adjusted gross income above these thresholds, but less than $145,000 (or $290,000 for joint filers).)

Special Election Period

The ARRA provides that AEIs who initially declined COBRA coverage prior to passage of the ARRA, will have 60 days from the date when notice of the federal subsidy is provided (“special election period”) to elect COBRA coverage.  If an AEI elects continuation coverage during the special election period, such coverage shall begin on the first period of coverage following the ARRA’s enactment (typically March 1, 2009, for group health plans using calendar months as periods of coverage), and shall not extend beyond the period of COBRA continuation coverage that would have been required if the AEI had initially elected coverage.

Modification Of HIPAA Regarding Pre-Existing Condition Exclusions

For AEIs electing coverage during the special election period, the Act provides that the period of time between the AEI’s qualifying event (i.e., the date of involuntary termination) and March 1, 2009, will be disregarded for purposes of determining whether the individual had a 63-day break in creditable coverage under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Premium Reimbursements

If employers are unable to revise COBRA invoices for the first two months of this new program, they can later reimburse AEIs who paid the full COBRA premium.  Alternatively, the employer can provide the AEI with a credit that reduces future payments due from the AEI.

Notification Requirements

The ARRA requires employers to notify AEIs, particularly former employees who previously declined COBRA coverage, about the availability of the federal COBRA subsidy.  These updated notifications should be provided to all AEIs.  Employers must distribute an updated notice to employees who are AEIs under the special election period by April 18, 2009.

Employers must therefore identify and locate all employees involuntarily separated from employment between September 1, 2008 and February 17, 2009, and determine if each employee is eligible for the subsidy as a result of the special election period.

Model Notice

The Department of Labor released model notices in March, 2009.  Alternatively, employers may amend their existing COBRA election-rights notices to include the following:

• Information regarding availability of the subsidy;
• Information necessary to establish eligibility for the subsidy;
• The name, address and telephone number of the plan administrator and any other person maintaining relevant information in connection with the subsidy;
• Information regarding the special election period;
• Information regarding the availability of alternative coverage under the employer’s health plan, if applicable; and
• A description of an eligible employee’s obligation to inform the employer of a qualifying event that would terminate the employee’s eligibility for coverage under the subsidy.

The requirement for these additional notifications may be met by amendment of existing notice forms or by inclusion of a separate document with the COBRA notice forms otherwise required.

Source Of The Federal Subsidy And Method Of Employer Reimbursement

To fund the federal subsidy, the ARRA requires employers to pay 65% of an AEI’s COBRA premium, which will then be reimbursed to the employer by the federal government via a credit against payroll taxes equal to the cost of the COBRA premium subsidy provided by the employer.  The IRS revised Form 941 to allow employers to claim the tax credit for all COBRA premium assistance payments made to AEIs.

In order to be eligible for the federal tax credit reimbursement, the ARRA requires employers to submit a quarterly Form 941 to the IRS containing the total amount of COBRA premium assistance payments and the number of individuals for whom the employer provided COBRA premium assistance.  (See lines 12a and 12b of Form 941.)  In the event the tax credit amount is greater than the taxes due, the Secretary of the Treasury will directly reimburse the employer, insurer or plan for the excess.

In addition to completing Form 941, employers are required to maintain, but not submit, the following information:

• Information on the receipt, including dates and amounts, of the AEI’s 35% share of the premium;
• In the case of an insured plan, a copy of the invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA;
• In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the AEIs;
• Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy;
• Proof of each AEI’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage;
• A record of the social security numbers of all covered AEIs, the amount of the subsidy reimbursed with respect to each covered AEI, and whether the subsidy was for 1 individual or 2 or more individuals; and
• Other documents necessary to verify the correct amount of reimbursement.

Because of the complexity and uniqueness of the reimbursement process, employers are encouraged to become familiar with the ARRA’s COBRA-related provisions and to inform relevant departments (e.g. Payroll, Human Resources) of these new obligations and responsibilities. 

Calculating The AEI’s 35% Contribution

If the employer does not make any contribution toward the AEI’s COBRA premium, then the AEI (or someone on the AEI’s behalf) must pay 35% of that premium.

Until recently, however, the question remained of how to handle a situation where an employer voluntarily paid a portion of an AEI’s COBRA continuation premium.

IRS guidance instructs that the premium used to determine the 35 percent share that must be paid by (or on behalf of) an AEI is the cost that would be charged to the AEI for COBRA continuation coverage if the individual were not an AEI.

Termination Of Eligibility

An AEI’s eligibility for federal subsidy assistance ends upon the earliest date on which any of the following occurs:

1. the date nine months after the first day the AEI becomes eligible for the federal subsidy;

2. the AEI’s maximum period of COBRA continuation coverage expires;

3. the AEI fails to pay the required 35% contribution of the COBRA premium; or

4. the AEI becomes eligible for coverage under Medicare or another group health care plan (excluding (a) limited coverage consisting of only dental, vision, counseling, or referral services, or any combination thereof; (b) coverage under a flexible spending arrangement; or (c) coverage of treatment that is 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).

Under the ARRA, it is the AEI’s obligation to inform the former employer or group health plan of any such event affecting the individual’s eligibility for the subsidy.  Failure of an AEI to provide such notification will result in a tax penalty equal to 110% of the premium reduction provided after termination of the AEI’s eligibility for the subsidy.

Recommendations For Employers 

Although regulations, model notices and additional revised tax forms are still forthcoming, employers should take proactive steps to ensure compliance with the ARRA.  The Firm recommends that employers take the following steps:

Review employment records to determine those individuals eligible for the subsidy as a result of the special election period.

• Update COBRA notice and eligibility forms to comply with the ARRA’s new requirements and distribute these notices and forms appropriately.
• Contact payroll personnel and establish procedures that allow the employer to maintain accurate records of all COBRA premium assistance payments made to assistance eligible individuals.
• Obtain updated relevant tax forms to ensure compliance with the law and to recover the maximum tax credit available for COBRA premium assistance payments made to assistance eligible individuals.

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Please contact us if you would like assistance with these new compliance obligations.