On February 17, 2009, President Obama signed the American Economic Recovery and Reinvestment Plan into law. Included in the variety of programs designed to promote overall economic recovery are significant changes to the group health plan coverage continuation provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 “COBRA”). Generally, the new law provides government-funded assistance equal to 65% of the applicable COBRA premium for Assistance Eligible Individuals, as described below. The subsidy is available for any group health plan coverage (including dental, vision, etc.) other than flexible spending account coverage offered through a cafeteria plan.
Assistance Eligible Individuals. The first step in complying with the new rules is identifying those individuals who are “Assistance Eligible Individuals” (“AEIs”). An AEI is any qualified
beneficiary eligible for COBRA continuation by virtue of a covered employee’s termination of employment (for reasons other than gross misconduct) occurring during the period from September 1, 2008 through December 31, 2009. Although the termination must be involuntary, it is not limited to terminations which are part of a reduction in force. For example, an employee who is fired for poor performance will qualify for the subsidy. As under prior law, “qualified beneficiaries” include spouses and dependent children as well as the employee. Therefore, even if the covered employee does not elect COBRA, a covered spouse or child of an involuntarily terminated employee will qualify for the subsidy.
How the Subsidy Works. Under the new law, an AEI will only have to pay 35% of the applicable COBRA premium in order to get continuation coverage. Eventually, reimbursement for the 65% premium assistance will be made by the government in the form of an offset in payroll taxes. (The exact procedures for this offset are yet to be developed.) The entity entitled to the offset is the insurer (in the case of a fully-insured plan), the employer (in the case of a plan that is fully or partially self-insured), or the plan itself (in the case of a multi-employer plan). In order to receive the reimbursement, the entitled entity will be required to satisfy certain reporting requirements, including an attestation of involuntary termination of employment for each employee with respect to whom the subsidy is claimed, and a reconciliation of the corresponding payroll tax offsets. (Although individuals earning more than $125,000 (or $250,000 for joint returns) are technically entitled to the subsidy, their income tax will be increased for all or a portion of the subsidy they receive. These individuals can waive their rights as AEIs to avoid this “recapture.”)
Duration of the Subsidy. AEIs are entitled to the COBRA subsidy for up to 9 months (as compared to the 18 months for which COBRA coverage is generally available). However, entitlement to the subsidy ends if the AEI becomes eligible for other group health plan coverage (or benefits under Medicare), even if such other coverage is not elected by the AEI. Of course, the subsidy also ends if COBRA coverage ends under other circumstances (e.g., nonpayment of the individual’s 35% portion of the COBRA premium).
Notice Requirements. Initially, plan administrators must recognize that there are two general categories of notice recipients with respect to which different notice requirements will apply:
Group #1 consists of all qualified beneficiaries who experience a qualifying event during the period from February 17, 2009 through December 31, 2009. In addition to the standard information included in prior COBRA election notices, members of Group #1 must receive a notice including (a) forms establishing eligibility for the COBRA subsidy, (b) the name, address and phone number of the plan administrator and any other person maintaining information relevant to the premium reduction, (c) a description of the qualified beneficiary’s obligation to notify the plan if the individual becomes eligible for coverage under another group health plan or Medicare, including the penalty for failure to do so, (d) a “prominent” description of the qualified beneficiary’s right to the reduced premium and any applicable conditions, and (e) a description of any special enrollment options (described below).
Employers are permitted to either incorporate the above-listed information into existing notices, or include the information in a supplemental notice sent along with the existing notice. Importantly, although the new law is generally aimed at AEIs (those who terminate involuntarily), the law does not limit Group #1 to AEIs. Therefore, the notice of the subsidy must be sent to all qualified beneficiaries who are eligible for COBRA due to the covered employee’s termination of employmenton or after February 17, 2009, including those who terminate voluntarily.
Group #2 consists of those qualified beneficiaries who experienced a qualifying event that was the covered employee’s involuntary termination of employment between September 1, 2008 and February 16, 2009. Group #2 members who failed to make a COBRA election, have yet to make a COBRA election, or made a COBRA election but lost coverage prior to February 17, 2009 (e.g., due to inability to pay premiums), are entitled to a special election period. In these cases, a new notice including the information listed above must be sent within 60 days of the passage of the law (i.e., by April 18, 2009). The notice must also describe the special election period available to those who had not made an election as of February 17, 2009 (which election period is 60 days after receipt of the new notice). The notice must also make clear that while COBRA coverage is available on the first day of the first coverage period beginning after February 17, 2009 (March 1, 2009 in most cases), the COBRA coverage period (usually 18 months) will be measured from the date of the original qualifying event.
The new law directs the Department of Labor to issue model notices within 30 days of the date of the enactment of the law (i.e., by March 19, 2009). Since the deadline for issuing the notices is April 18, 2009, employers will have a period of at least 30 days after the issuance of the models to get the required notices prepared and sent. As employers are not required to use the DOL models, however, some employers might prefer to begin work on their notices immediately.
Different Coverage Options. Under the new law, an employer may, but is not required, to allow an individual eligible for the COBRA subsidy to change the individual’s coverage option when making a COBRA election. This is a departure from prior rules which only allowed qualified beneficiaries to elect the coverage they had at the time of the COBRA qualifying event. Since this option is subject to a number of different requirements under the new law, interested employers should implement this option only after careful consideration of the applicable conditions.
In conclusion, employers should keep their eyes open for further guidance, including model notices from the Department of Labor. In the meantime, it is not too early to start the process of
identifying AEIs and modifying COBRA procedures to comply with the new rules.