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President Obama Signs Stimulus Plan with COBRA Expansion
February 18, 2009
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act. While the Act's goals are primarily to create jobs and restore economic growth, it also contains a number of important COBRA revisions that will apply to every employer that is subject to COBRA, effective immediately.
Plan sponsors need to be aware of these changes so they can start to implement the administrative steps discussed below.
The Act creates a COBRA premium subsidy for individuals who are eligible for continued medical coverage (other than a flexible spending account) under COBRA or state law because of a covered employee's involuntary termination of employment between September 1, 2008 and December 31, 2009 (assistance eligible individual). For any period of coverage beginning on or after February 17, 2009 (in most cases, March 1, 2009), assistance eligible individuals will pay 35 percent of the applicable COBRA premium with the remaining 65 percent being subsidized by the federal government. This subsidy period extends until the earlier of (i) the expiration of 9 months, (ii) the assistance eligible individual becoming eligible for any other group health plan or Medicare, (iii) the expiration of the maximum period of COBRA continuation coverage, or (iv) the assistance eligible individual's failure to pay the required 35 percent share of the premium. The person to whom COBRA premiums are payable (generally, the employer or insurance carrier) will receive the federal subsidy by reducing its remittance of payroll taxes to the federal government. If the amount of the subsidy is greater than the payroll tax liability, the employer or insurance carrier will receive a payment from the federal government for the difference.
Individuals who experienced a qualifying event in connection with a covered employee's involuntary termination of employment on or after September 1, 2008 but who did not elect COBRA or have dropped out of COBRA will have a new 60 day period to elect subsidized COBRA coverage. Employers must give notice of this "second chance" election to these individuals, and the 60-day election period will begin when that notice is received. This "second chance" coverage will not be retroactive but will commence, in most cases, on March 1, 2009.
For employers who bill COBRA premiums on a calendar month basis, the 65% subsidy applies to COBRA coverage beginning March 1, 2009. Because it is highly unlikely that employers will be able to reflect the subsidy for March on the COBRA premium invoices, employers have a two-billing cycle grace period during which they can charge the full premium. The assistance eligible individual must receive either a reimbursement for the excess premium paid or a credit against future premiums.
Employers have the option of allowing assistance eligible individuals to elect enrollment in coverage that is different than coverage under the plan in which the individual was enrolled at the time the qualifying event occurred. The coverage must be offered to the employer's active employees, and the premium for such coverage cannot be greater than the premium for coverage in which the individual was previously enrolled. The different coverage cannot be limited coverage (i.e., only dental, vision, counseling or referral services) or a flexible spending arrangement. If an employer offers different coverage, an assistance eligible individual will have 90 days after receiving notice of the plan enrollment option from the employer to elect to enroll in such coverage.
Employers, COBRA administrators or insurers have significant notice responsibilities under the new law. For any individual who, between September 1, 2008 and December 31, 2009, became or becomes eligible for COBRA coverage, notice must be given regarding the following:
- The availability of the 65 percent subsidy
- The option to enroll in different coverage (if the employer offers it)
- The "second chance" election
- The forms necessary for establishing eligibility for the subsidy
- The procedure for electing the subsidized coverage
- The individual's obligation to notify the plan of eligibility for subsequent coverage under another plan or Medicare
The Secretary of Labor is required to issue model notices by March 19. However, because the 60-day "second chance" election period begins when the individual receives the notice, employers may want to consider preparing and issuing the required notice as soon as possible.
Generally, the COBRA subsidy will be tax-free to the assistance eligible individual. However, premium subsidies for COBRA coverage for highly paid taxpayers, their spouses or dependents will result in a dollar-for dollar increase in income taxes. This additional tax is phased in for modified adjusted gross income between $125,000 and $145,000 for single filers ($250,000 to $290,000 for joint filers). A taxpayer may avoid this additional tax by making a permanent election to waive the right to premium assistance.
In order to comply with the new COBRA provisions, we recommend that plan sponsors contact their COBRA administrators and payroll vendors immediately to discuss the steps that must be taken. Such actions may include:
- Preparing and distributing required notices, including the "second chance" notice
- Adopting administrative procedures to identify assistance eligible individuals
- Preparing forms to allow high income individuals to opt out of the subsidy
IRS Circular 230 Disclosure: As required by United States Treasury Regulations, you should be aware that this communication is not intended or written by the drafter to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under United States federal tax laws.