The American Recovery and Reinvestment Act of 2009 (the “Act”), enacted February 17, 2009, provides for health premium assistance and extended election periods for benefits under COBRA and state “mini-COBRA” laws. As a result, many recently terminated employees will be required to pay only 35% of their COBRA premiums for a period of up to nine months. The federal government will pay the other 65% in the form of a payroll tax credit to the employer.
This alert will answer several important questions about the COBRA-related provisions of the Act and describe what employers need to do to comply with the new notice and administrative requirements.
Who is eligible?
Assistance is available to a qualified beneficiary (including his/her covered dependents) who:
- is eligible for COBRA (or mini-COBRA) continuation coverage between September 1, 2008 and December 31, 2009;
- was “involuntarily terminated” between those dates; and
- elects COBRA coverage.
Individuals who meet these criteria are referred to as “assistance eligible individuals” (“AEIs”).
How long does the subsidy last?
Assistance is available for 9 months, until an AEI’s COBRA benefits expire or the AEI becomes eligible for benefits under
another plan (including Medicare), whichever occurs first. AEIs must notify their employer in writing if they become eligible for benefits under another plan.
How is the subsidy calculated?
The AEI’s 35% share of the premium may be paid by a family member, charity or state agency, but it may not be paid by the AEI’s employer.
When do the provisions take effect?
For most plans, assistance became available on March 1, 2009 (the beginning of the first “period of coverage” after February 17, 2009). In the event an AEI pays the full premium amount for March and/or April 2009, the AEI’s employer must either (1) reimburse the AEI the overpayment or (2) credit the overpayment to the AEI’s future premium payments(provided the credit will be exhausted within 180 days).
What is the extended election period?
AEIs who were involuntarily terminated between September 1, 2008 and February 16, 2009, who either did not elect COBRA or who elected COBRA but let it lapse have an extended 60 day period to elect coverage. The subsidy, however, may not be applied to any “period of coverage” prior to February 17, 2009.
Are there any income restrictions?
AEIs whose “modified adjusted gross income” for the year in which the subsidy is received exceeds $145,000 ($290,000 for joint filers) must repay all of the assistance they receive. AEIs whose “modified adjusted gross income” is between
$125,000 and $145,000 ($250,000 and $290,000 for joint filers) must repay a percentage of the subsidy. AEIs may waive assistance by notifying the entity to whom premiums are reimbursed.
What is the Alternate Benefits Option?
If their former employer permits, AEIs may elect an alternate plan, provided it (i) is offered to current employees, (ii) is less expensive than the AEI’s current plan, and (iii) does not limit coverage to dental, vision or counseling services, a flexible spending account, or services provided at an employer’s on-site medical facility.
What notices does the employer have to provide?
Employers must provide a general notice of the subsidy and extended election rights to all individuals who became entitled to elect COBRA between Sept. 1, 2008 and Dec. 31, 2009. This includes individuals who had a qualifying COBRA event other than involuntarily termination and individuals who did not elect coverage or let their coverage lapse.
Employers must also send an “extended election notice” to individuals who became entitled to COBRA between September 1, 2008 and February 16, 2009, but did not elect coverage or elected coverage but let it lapse. This notice must be sent by April 18, 2009 and must include a description of the employee’s right to the extended election period, premium assistance, and additional coverage options (if applicable).
How is the assistance administered?
For single employer plans, the employer is responsible for (i) calculating and billing the reduced amount to the AEI, (ii)
paying the full premium amount, and (iii) seeking reimbursement through a payroll tax credit on IRS Form 941. Employers need not wait to file for a tax credit on a quarterly basis, but they may not claim a credit until receipt of the AEI’s portion of the premium. For multiemployer plans, the plan administrator is responsible for the administration and for insured plans subject to mini-COBRA laws, the insurance company is responsible.
What should employers do now?
- Identify former employees who had a COBRA qualifying event on or after September 1, 2008.
- Identify former employees who had a qualifying event between September 1, 2008 and February 16, 2009, but did not elect COBRA coverage or who elected coverage and let it lapse.
- Decide whether to permit and offer the plan enrollment option.
- Prepare necessary notices or obtain the model forms from the Department of Labor.
- Identify overpayments made in March and April and process reimbursement or credit.
- Plan and implement a compliance program with your payroll department, payroll provider and/or COBRA administrator, including revision of regular COBRA notices and procedures for tracking AEIs, elections, premium payments, tax filings, denials of eligibility and appeals, and waivers.
- Evaluate severance policies and separation agreements carefully to determine whether any changes should be made in light of the subsidy.
Because the process for administering the premium assistance and extended election period is still evolving, there remain many unanswered questions, including what may happen when employers contractually agree to pay an AEI’s COBRA premium.
For additional information, contact the following members of our employment and corporate practices:
Jack A. Eiferman
Adrienne M. Markham
Wayne H. Miller
This client advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
© 2009 Goulston & Storrs – A Professional Corporation All Rights Reserved