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COBRA Coverage Expansion: HR Action Steps to Take Now

The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law February 17, 2009, includes significant changes to the COBRA rules. To summarize, the ARRA:

Provides a 65% Federal subsidy of COBRA premiums for a maximum of nine months for certain individuals who are COBRA qualified beneficiaries because of a covered employee’s involuntary termination of employment.
Requires employers to pay the 65% portion upfront, and then allows the employer to deduct those costs from their Social Security and Medicare taxes.
Allows workers who became jobless as early as September 1, 2008, and rejected COBRA coverage to reconsider and receive COBRA benefits.
Extends COBRA coverage for certain individuals receiving Trade Adjustment Assistance benefits or Pension Benefit Guaranty Corporation pension benefits.

Plan administrators of group health care plans subject to COBRA need to act quickly to:

Implement administrative procedures necessary to provide the subsidy.
Provide notices required by the ARRA to COBRA qualified beneficiaries who are eligible for the subsidy.
Implement the extended COBRA coverage periods.

Additionally, group health plan documents must be amended to incorporate these changes.

COBRA Premium Subsidy

What is the COBRA premium subsidy?

Under the ARRA, the Federal government will subsidize 65% of the COBRA premium actually charged to an “assistance eligible individual” (AEI) for up to nine months.

How does this subsidy work?

COBRA subsidy program provides that a group health plan can require an AEI to pay only 35% of the appropriate COBRA premium. The Federal government will reimburse an employer for the remaining 65% of the COBRA premium by allowing a credit against the employer’s liability to deposit payroll taxes and Federal income taxes withheld from employees’ compensation.

Who are “assistance eligible individuals” (AEIs)?

An AEI is a COBRA qualified beneficiary who meets all three of these criteria:

Is eligible for COBRA coverage at any time on or after September 1, 2008 and on or before December 31, 2009.
Elects COBRA coverage either during the original COBRA election period or during the special election period (see below).
Is a COBRA qualified beneficiary because of an involuntary termination of a covered employee’s employment (other than for gross misconduct) that occurs on or after September 1, 2008 and on or before December 31, 2009.

An AEI also includes covered employee’s covered spouse or dependent child.

When does the subsidy begin?

The subsidy applies to periods of COBRA continuation coverage beginning after the enactment of the ARRA. A “period of coverage” is the monthly (or shorter) period for which COBRA premiums are charged. For group health plans using calendar months as the period coverage, the subsidy applies beginning March 1, 2009.

When does the subsidy end?

The subsidy stops (and normal COBRA premium can be charged) as of the earliest of:

The date the AEI becomes eligible for coverage (not actually covered) under another group health care plan (other than plans providing only dental, vision, counseling, or referral services, a health care flexible spending plan, or a health reimbursement arrangement) or Medicare coverage; or
Nine months after the first month to which the subsidy applies; or
The end of the maximum COBRA coverage period required by law (including permissible early terminations); or
For an AEI who elects COBRA during the special enrollment period (see below), the end of the maximum COBRA coverage period that would have applied if the AEI had elected COBRA coverage when first entitled.

ARRA requires an AEI who becomes eligible for coverage under another group health plan to notify the plan providing COBRA coverage in writing. Failure to provide the written notice results in a penalty of 110% of the subsidy provided for the AEI after the date the AEI became eligible for the other coverage.

Does the subsidy apply to COBRA premiums for all types of group health plans?

The subsidy does not apply to health care flexible spending accounts.

How does the subsidy apply in situations where AEI is required to pay less than the permissible COBRA premium?

The ARRA specifically states that 35% of the premium must be paid by the AEI or on the AEIs behalf by someone other than the AEIs employer and that an employer cannot claim a subsidy credit until the group health plan has actually received the 35% of the COBRA premium as required by the ARRA.

This means that an employer is permitted to claim only a subsidy of 65% of what the total COBRA premium would be if the amount actually paid by the AEI was 35% of the total COBRA premium. For example:

If the maximum permissible COBRA premium is $500 per month, but the employer requires the AEI to pay only $100 per month, the employer can claim a subsidy credit of only $185 ($100/35% = $285 x 65% = $185). The employer cannot claim a subsidy credit of $325 (65% of the maximum permissible $500 COBRA premium) or of $400 (the difference between the maximum permissible COBRA premium and the $100 actually paid by the AEI).

Employers that do not charge the full COBRA premium (e.g., under the terms of a separation agreement) will have to calculate the correct subsidy based on the amount actually paid by the AEI. If the employer pays 100% of the AEIs COBRA premium, the employer cannot claim any subsidy credit for that AEI.

Are all AEIs eligible for the subsidy?

Although all AEIs are technically eligible for the subsidy, any AEI who is a “high-income individual” or the spouse or dependent of a high-income individual will be required to repay the subsidy as an additional tax on the high-income individual’s individual tax return for the year in which the subsidy was provided.

A “high-income individual” is a single taxpayer with modified adjusted gross income in excess of $145,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $290,000. The subsidy “recapture tax” begins to phase in for a single taxpayer with modified adjusted income in excess of $125,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $250,000.

A plan administrator must allow an AEI who is a “high-income individual” to waive the subsidy permanently in the manner to be prescribed by the Secretary of the Treasury.

Actions Required

What does a group health plan administrator have to do now?

A group health plan administrator must take all actions to provide the 65% subsidy to AEIs beginning March 1, 2009. This means ensuring that an AEI is required to pay only the reduced COBRA premiums for periods of coverage beginning on or after March 1, 2009.

The plan administrator probably will not be able to make timely notification to all AEIs about the reduced amounts effective for March premium payments, therefore, AEIs may pay the full COBRA premium for the first or second period of coverage beginning after ARRA enactment (i.e., periods of coverage for March and April 2009). The employer must credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums with 180 days) or refund the subsidized portion within 60 days.

What does a group health plan administrator have to do in the near future?

Post ARRA, for an individual who becomes a COBRA qualified beneficiary:

The group health plan administrator must include specific information about the availability of the subsidy with all COBRA election notices and forms.
The group health plan administrator must provide separate notices to the two groups of AEIs defined below within 60 days after the enactment of the ARRA.

The first notice is required for all AEIs who currently have COBRA continuation coverage to advise them of the availability of the subsidy and the qualification requirements.

The second notice must go to an individual who is entitled to the special enrollment period. An individual is eligible for this special enrollment period if the individual qualifies as an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the ARRA. This includes an individual who previously made a COBRA coverage election but whose COBRA coverage ended before the enactment date because of non-payment of premiums. This notice must advise the individual of the availability and the requirements to qualify for the subsidy as well as additional information required by the ARRA. This notice must contain the appropriate COBRA special election forms.

The act requires the U.S. Department of Labor to provide model notices for plan administrators to use within 30 days after the enactment of the ARRA.

Special COBRA Election Period

What is the special election period?

An individual who would be an AEI except that the individual did not elect COBRA coverage must be given a second chance to elect COBRA coverage. This special election period begins on March 1, 2009 and ends 60 days after the plan administrator provides the required notice described above to the individual.

When does coverage begin for an AEI electing COBRA during the special election?

COBRA coverage for an AEI electing in the special election period begins on the first day of the first COBRA coverage period beginning after March 1, 2009, for group health plans using calendar months as COBRA coverage periods).

COBRA coverage is not retroactive to the date the AEI originally lost coverage.

When does COBRA coverage end for an AEI elects COBRA during the special election period?

The COBRA coverage period for an AEI who elects COBRA during the special election period ends when COBRA coverage would otherwise have ended if the AEI had elected COBRA when initially eligible to do so after qualifying event. For example:

An AEI who lost coverage and became entitled to elect COBRA continuation coverage that would have begun on October 1, 2008 elects COBRA under the special election. This AEIs COBRA coverage period begins on March 1, 2009 and ends on March 31, 2010 (which is 18 months after the date the AEIs COBRA coverage would have begun because of the original qualifying event). The AEIs 18 month maximum COBRA coverage period is not measured from the date of enactment of the ARRA.

Can pre-existing condition exclusions be applied to an AEI electing during the special enrollment period?

ARRA provides that the period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period beginning after the date of enactment of the ARRA is disregarded when determining if the AEI had a 63-day significant break in coverage for purposes of applying pre-existing condition exclusions.

Employer’s Option to Offer Additional COBRA Coverage Options

What is the ARRA’s “Plan Enrollment Option”?

A COBRA qualified beneficiary is permitted only to elect COBRA coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event. The act permits (but does not require) an employer to allow AEIs (including AEIs that have COBRA coverage without the special election) to elect a heath care coverage option different from the health care coverage originally offered to the AEI under COBRA.

What requirements apply to the different coverage option?

The COBRA premium for the different coverage cannot exceed the COBRA premium for the coverage in which the AEI was enrolled when the COBRA qualifying event occurred.
The different coverage must be coverage the employer is offering to its active employees at the time the AEI elects the different coverage.
The different coverage cannot provide only dental, vision, counseling or referral services and cannot be a health care flexible spending account or an on-site facility primarily providing first aid, prevention, or wellness care.

When is an AEI permitted to elect different coverage?

If an employer decides to offer the different coverage option to an AEI, the employer must provide the AEI an election notice and allow an election period of not less than 90 days.

COBRA Coverage Period Extension

How does the ARRA extend the COBRA coverage period?

The act extends the initial COBRA coverage period for two distinct groups of COBRA qualified beneficiaries following a termination of employment or reduction in hours of a covered employee COBRA qualifying event:

If the covered employee has (as of the qualifying event date) a non-forfeitable right to receive any pension benefits directly from the Pension Benefit Guaranty Corporation (PBGC), the maximum COBRA coverage period for the covered employee ends on the covered employee’s date of death. The maximum COBRA coverage period for the covered employee’s surviving spouse or dependent children ends 24 months after the covered employee’s date of death.
If the covered employee is a Trade Adjustment Assistance-eligible individual (as of the date COBRA coverage would otherwise end because of the regular 18-month or 36-month COBRA coverage periods), the maximum COBRA coverage period ends on the date the covered employee ceases to be a Trade Adjustment Assistance-eligible individual.

Is there a limit on these extended COBRA coverage periods?

The ARRA provides that a COBRA coverage period cannot be extended beyond December 31, 2010 under either of the provisions above.

When do the extended COBRA coverage periods become effective?

The extensions to the maximum COBRA coverage periods for these groups of qualified beneficiaries apply to any COBRA coverage periods that would otherwise end on or after the ARRA enactment date.

Department of Labor — ARRA Web page

The DOL has established a dedicated Web page: http://www.dol.gov/ebsa/cobra.html to help employers, workers and their families understand the provisions of ARRA. Under the “For Employers” section, there is a link to the four model notices, www.dol.gov/ebsa/COBRAmodelnotice.html, where you can access:

General Notice — For COBRA qualified beneficiaries whose COBRA qualifying event occurs during the period that begins on September 1, 2008, and ends on December 31, 2009.
Abbreviated Notice — For COBRA qualified beneficiaries currently enrolled in COBRA coverage whose qualifying event occurred on or after September 1, 2008. This Notice may be sent instead of the General Notice.
Alternative Notice — Insurance issuers that provide group health insurance coverage must send the Alternative Notice to persons who became eligible for continuation coverage under a State law.
Extended Election Notice — For COBRA qualified beneficiaries who are Eligible Beneficiaries and whose qualifying event occurred during the period that begins on September 1, 2008, and ends on February 16, 2009, but who are not currently enrolled in COBRA coverage. This applies to Eligible Beneficiaries who either did not elect COBRA coverage during that period or who allowed it to lapse.

Conclusion

The new COBRA provisions established by the ARRA require employers and plan administrators to take prompt action and make quick decisions to implement new COBRA procedures including:

Identify all potential AEIs — employees who were covered by the group health plan whose employment was involuntarily terminated (other than for gross misconduct) beginning September 1, 2008 (and their covered spouses and dependents) — and their last known addresses.
Identify which individuals are AEIs currently receiving COBRA coverage and which are entitled to the special enrollment period.
Adopt the method (when provided by the Secretary of Treasury) for permitting “high-income individuals” to waive the premium subsidy permanently.
Determine the correct subsidy applying to AEIs who are not being required to pay the maximum permissible COBRA premium.
Develop a method for either applying the excess of any COBRA premiums above the 35% AEI portion received from an AEI for March and April 2009 COBRA premiums to future premiums or refunding the excess.
Adjust administrative procedures to reflect the maximum nine months of COBRA subsidy and the maximum COBRA coverage period for AEIs who elect COBRA continuation coverage during the special enrollment period.
Develop and provide the notices required by the ARRA (noting that the Department of Labor is to provide model notices within 30 days of the ARRA).
Determine whether to implement the special coverage option for AEIs.
Determine if any covered employee has a non-forfeitable right to receive pension benefits from the PBGC or is Trade Adjustment Assistance eligible and adjust administrative procedures to reflect the extended maximum COBRA continuation coverage period that may apply to the covered employee or the covered employee’s surviving spouse and dependent children.

We recommend an immediate response to these new rules. If you use a third party COBRA administrator, you should contact their COBRA administrator to coordinate a response. If you have questions, please do not hesitate to contact: Sylvia Bell, JD, Tax Senior Manager of Employee Benefits Services Group, at 412.281.2501 x335 or sbell@alpern.com.

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