The recently enacted federal stimulus package (the American Recovery and Reinvestment Act of 2009) includes significant changes to COBRA. These new provisions are effective immediately, without the benefit of any regulations or official guidance from the government. These changes will most certainly have a substantial impact on employers.

Most importantly, the new law provides for an income-tax free 65% federal subsidy of COBRA premiums for eligible persons. This 65% contribution is to be initially paid by the employer, which will then be eligible for an equal credit against payroll taxes.

The Department of Labor will prepare a sample notice for employers to provide to those persons terminated involuntarily since September 1, 2008 and to those to be terminated involuntarily in the balance of this year. Beneficiaries with COBRA rights also must be notified, with the same procedures used for other COBRA notices. Employers should consider acting quickly, even before the government releases its sample notice, to comply with the new law.

 

A BRIEF SUMMARY OF THE NEW COBRA RULES

  1. The law is supposed to help employees and beneficiaries who lost health coverage — including dental and vision insurance — due to involuntary employment termination during the period September 1, 2008 through December 31, 2010.
  2. The former employees and beneficiaries are eligible for an income-tax free 65% federal subsidy of COBRA premiums. The subsidy can extend for up to nine months, starting with the first “coverage period” after February 17; typically March 1 for plans which use group insurance. For self-insured plans, that is arguably the first payroll period starting after February 17, but it may be easier to say March 1 under the theory that their periods of COBRA coverage are monthly.
  3. Employers are required to advance the 65% subsidy to the insurer. Employers can then claim a credit against payroll taxes, but only after filling out forms (yet to be designed by the government), which identify the people involved and which confirm that the employer has already covered the 65% government share.
  4. The right to the 65% subsidy terminates for a former employee or beneficiary who becomes eligible for other health coverage, even if the person declines that other coverage. This is different from regular COBRA rules, which require COBRA continuation unless alternate health coverage is actually obtained.
  5. Employers should immediately prepare a list of all employees terminated involuntarily since September 1, 2008. This includes employees who elected COBRA, employees who declined COBRA, and beneficiaries who had COBRA election rights at the date of termination, whether exercised or not.
  6. Employers need to notify those persons identified about the subsidy – using either the government form when available or a customized form – no later than Saturday, April 18. Employers should use the same notice procedures as for regular COBRA notices. If an employee was terminated for “gross misconduct”, and the circumstances were such that the employee lost rights to COBRA coverage, the employee does not get subsidy rights. Employers should be cautious, however, when excluding employees for “gross misconduct,” as typically COBRA favors employees on this issue.
  7. The notice will advise that the former employee and beneficiaries can claim the 65% subsidy for the first COBRA coverage period starting after February 17, 2009. It will also advise that if COBRA was declined it can be elected as of the first coverage period starting after February 17.
  8. After receiving the notice, the former employee has 60 days to consider whether to claim the subsidy. At this point, employers are at risk (especially with a self-insured plan) of adverse selection. It is therefore imperative to send the notices out as soon as possible to start the 60-day period countdown.
  9. Employers must also attach the notice to future COBRA forms distributed to employees terminated involuntarily, without serious “cause,” during this calendar year.
  10. Although rules normally prohibit changes in coverage (except during open enrollments or due to HIPAA family events), you may allow these persons to “trade down” to a lower, more affordable coverage which you offer. However, the “trade-down” cannot be just to a Section 125 reimbursement account, or stand-alone dental, vision or counseling coverage that does not include major medical. An employer does not have to permit “trade downs.” There is no subsidy for a “trade up” to more expensive coverage. If “trade down” is allowed, an employee will have up to 90 days from the notice date to make that decision, which is more than the 60 days allowed for the decision to elect a subsidy.
  11. For those employees and beneficiaries who are already getting COBRA, it’s likely that employers’ COBRA bills to them for March (and even April) may not show that they only owe 35% and that the employer is covering 65%. If an employee overpays, there is a procedure for the employer to credit the overpayment against future invoices or refund it. Obviously the sooner an employer can correct the invoices to reflect the change, the better so as to avoid more paperwork.
  12. “High income” people are not eligible for this subsidy. There will be a procedure where they can waive the subsidy up-front by notifying their employer and the Internal Revenue Service. Alternatively, the “high income” employee will get an increase in their taxable income for 2009. The “high income” test is whether the person’s MAGI (modified adjusted gross income) exceeds certain limits. MAGI is adjusted gross income on line 37 of the 2009 Form 1040, not just wages, and it is increased by exclusions for foreign income. For single filers, the amount phases out ratable for MAGI between $125,000 and 145,000. For joint filers, the amount phases out ratable for MAGI between $250,000 and $290,000.

 

SPECIAL ISSUES

Even carefully drawn legislation leaves room for technical corrections. For this statute, we will be especially alert for new interpretations. Five issues to be aware of:

  1. Mini-COBRA: The new law is not limited to COBRA, and provides the subsidy for “state programs that provide comparable continuation coverage.” This is hugely important for small employers who had less than 20 employees in the previous year, and are not covered under federal COBRA. Massachusetts and New Hampshire, for example, have “mini-COBRA” statutes which require COBRA-like continuation when employers are too small to be under federal COBRA. It is possible that small employers in mini-COBRA states are subject to this new law. However, it is unclear how employers are to recapture the amounts they advance on the 65% share. Additionally, the law states that reimbursement goes to the carrier in non-federal COBRA situations – that is, it is not recouped through payroll tax credits, as is the case with COBRA employers. It is unclear whether the insurers advance the premiums in mini-COBRA states or not. Clearly further clarification of the law is needed.
  2. Paid severance: The law specifically requires that the individual (or a person other than the employer of the severed employee) pay 35% to get the 65% credit. What if a severance arrangement includes an employer subsidy for COBRA? It seems unwise for an employer to pay money that could have been paid by the government. Renegotiation of subsidized severance arrangements, possibly with a taxable cash-out or a deferral of the subsidy to 2010, may make sense for arrangements in effect now. (Be careful about 409A if you lump sum or postpone.) For future terminations in 2009, severance arrangements should take the subsidy into account. For “high income” individuals, this is less important due to the recapture rules discussed in paragraph 12, above.
  3. No flexible account coverage: Although flexible 125 plan accounts are subject to COBRA, the new law does not extend this special subsidy to flexible accounts. It is unclear as to whether the subsidy was intended to apply to stand-alone vision and dental plans, but the law seems to read that it does and employers should interpret it as such until notified otherwise.
  4. Non-federal dependents: The statute provides a 65% subsidy for COBRA coverage related to “assistance eligible individuals.” Using the COBRA terms required by this statute, which includes a heterosexual spouse and a “dependent” child (undefined in COBRA). It is unclear as to whether the full 65% subsidy is available to continue coverage for a family unit that includes same-sex spouses, civil union partners, and non-dependent children who are on extended coverage protection due to state law. One would expect so, however, a case could be made that the subsidy applies only to the cost of individual coverage in a situation where other beneficiaries are not explicitly COBRA beneficiaries. If the government takes that approach – called for by the terms of this statute – employers could run the risk of overpaying if they reimburse 65% of the family COBRA cost.
  5. Medicare “eligibility” or “entitlement”? Rights to the subsidy seem to end when a person is “eligible” for Medicare, regardless of “entitlement” (enrollment). The Medicare eligibility date is the first day of the month of the 65th birthday. This is a departure from normal COBRA, which does not cut COBRA coverage off for Medicare unless there is “entitlement,” i.e., Social Security retirement payments have started, or the person has applied for Medicare to start. Also, although Medicare prior to a termination does not disqualify a person from electing COBRA, that presumably won’t matter for the subsidy. Therefore, unless the Department advises otherwise, there is no subsidy for months of the 65th birthday and beyond.

 

MORE COSTS FOR THE WORKPLACE

The statute shifts significant health care liabilities to the workplace. Those who have been without insurance will have 60 days from the date they get the new notice to decide if they want to sign up, retroactive to March 1, 2009, for a modest 35% of total cost. As such, there is the possibility of adverse selection. Hopefully, the government will issue the necessary forms as soon as possible for employers to claim the credit against payroll taxes.

This summary is a brief overview of the new law. As always, employers are advised to review their procedures with counsel and make the necessary changes consistent with the new rules.

 


CONTACT

Please contact a member of our Employment Law Practice to discuss the impact of these new laws on your company’s policies and practices.

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