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Recent Changes to COBRA Require Immediate Attention

The American Recovery and Reinvestment Act of 2009 (the “Act”), commonly known as “the stimulus bill,” was signed into law by President Obama on February 17, 2009. The Act includes a provision that enables unemployed workers to continue their health insurance coverage under the COBRA* continuation coverage rules with additional assistance from the federal government. Effective immediately, the new provision expands election and enrollment rights and subsidizes the amount an eligible individual pays for up to nine (9) months of COBRA continuation coverage for the individual and his or her eligible dependants.

If you are an employer who sponsors a group health plan, it is important that you understand the new rules, how they apply, and what actions need to be taken. Some actions may need to be taken immediately. The remainder of this article presents the most basic commonly-asked questions regarding the Act and summarizes the answers to these questions. For more guidance or additional information, please contact a member of Bingham McHale’s Labor and Employment Department.

Commonly-Asked Questions and Answers Regarding New COBRA Provisions

Q: Who qualifies for the subsidy?
A: In short, assistance eligible individuals qualify for the subsidy. An assistance eligible individual is an employee whose employment is involuntarily terminated (for reasons other than gross misconduct under COBRA) on or after September 1, 2008, and before December 31, 2009, who is eligible for COBRA continuation, and who elects COBRA coverage.

Family members of assistance eligible individuals are also eligible for the subsidy, unless the family member becomes eligible for COBRA continuation coverage for any reason other than involuntary termination of employment, like divorce or loss of dependant status. Individuals who are eligible for other group health coverage or Medicare are not eligible for the subsidy. Also, there is no premium reduction for periods of coverage that began prior to February 17, 2009 and certain high income individuals are ineligible.

Q: How does the subsidy work?
A: When an individual makes a payment of 35% of the premium for COBRA coverage, the employer is required to treat the individual as though his or her premium is paid in full. The employer or entity responsible for payments can obtain reimbursement from the federal government via payroll tax credits or reductions.

The subsidy period lasts for up to nine (9) months. The nine month subsidy period may end sooner if the individual becomes eligible for coverage under another group health plan or Medicare or the maximum period for COBRA continuation expires.

This obligation of the employer to treat 35% payment as full payment of the premium takes effect as of the first coverage period beginning on or after February 17, 2009.

Q: How will employers recover the cost of the subsidy?
A: The 65% subsidy, or the 65% of the premium which the assistance eligible individual no longer must pay, can be recovered by the employer or other entity as a dollar-for-dollar reduction or credit to the employer’s quarterly federal payroll tax obligation. IRS Form 941 has been updated to reflect the COBRA premium subsidy and should be used by employers to recover the subsidy. Before recovering the cost of the subsidy, an employer will need to comply with certain record-keeping and reporting requirements and may need to provide records supporting its ability to take the credit against the payroll tax obligation.

The IRS has published some additional guidance to assist employers in qualifying to recoup the premium subsidy through the payroll tax system. More information will be provided by the IRS and Federal Treasury as it becomes available.

Q: What are the new notice requirements?
A: Employers must provide all individuals who become entitled to elect COBRA continuation coverage between September 1, 2008 and December 31, 2009 with the forms necessary for establishing eligibility for the subsidy and a notice that contains the following information:

  • A description of the COBRA premium subsidy and who is eligible;
  • The ability to elect a different coverage option if offered by the employer;
  • The name, address, and telephone number necessary to contact the plan administrator and anyone else with relevant information regarding the subsidy;
  • A description of the second election period for assistance eligible individuals who are eligible for such; and
  • The requirement to notify the group health plan if he or she becomes eligible for any other group health coverage and the penalty associated with the failure to provide such notice

An employer can modify its regular COBRA continuation coverage election notice to include the information required by the Act or provide the information in a separate, supplemental notice along with the regular COBRA election notice. The notice must be distributed by April 18, 2009. A model notice is expected to be issued by March 19, 2009. The Act directs the Department of Labor to issue model notices within 30 days of enactment, or before March 19, 2009.

Q: What about individuals who were terminated after September 1, 2008 but who did not initially elect COBRA coverage or who stopped paying premiums?
A: Individuals who became eligible for COBRA continuation due to an employee’s involuntary termination on or after September 1, 2008, but who did not elect COBRA continuation coverage or who are no longer enrolled in COBRA for other reasons, must be offered a second chance to elect COBRA continuation coverage and receive the COBRA premium subsidy. Employers must provide this second chance notice by April 18, 2009 and the individual has 60 days after they are provided notice and applicable forms to decide whether to elect COBRA coverage. If such an individual elects coverage, the coverage would begin effective March 1, 2009. However, the Act does not extend the maximum COBRA continuation coverage period otherwise available to an individual.

Q: When do these changes become effective?
A: The Act is effective February 17, 2009 and the COBRA premium subsidy is effective for an eligible individual’s first period of coverage beginning on or after that date. Thus, an employer who bills COBRA coverage premiums on a monthly basis must begin applying the subsidy on or after March 1, 2009. However, the Act does provide a grace period for employers who need additional time to modify their billing systems in March or April. As such, the Act permits an employer to continue to accept the full COBRA premium for two billing periods and then credit the subsequent billing period in an amount equal to the missed subsidy or reimburse the individual for the missed subsidy.

Q: Are there other issues of which I need to be aware?
A: Yes. The new COBRA rules contain a number of other provisions such as treatment of pre-existing conditions, fines and penalties for failure to provide notice, and ability of assistance eligible individuals to change their coverage selection. If you have questions or would like more information on any of these areas, please contact the labor and employment attorneys at Bingham McHale.

Q: So, now that I understand that I have a new set of obligations under COBRA, what should I do?
A: Please see our “Compliance Tips” article, also featured in this newsletter. There you will find a list of some of the actions that employers should undertake. Also, please contact the Labor and Employment Department at Bingham McHale for further guidance.

*COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985, provides for a temporary extension of employer-provided group health coverage, commonly called COBRA continuation coverage.

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