The American Recovery and Reinvestment Act (ARRA), which was passed on February 17, 2009, created a temporary subsidy to assist laid-off employees in continuing employer-provided health care benefits under COBRA and comparable state and governmental continuation coverage requirements. The subsidy does not apply to health flexible spending account benefits. Since the law's enactment, both the Department of Labor (DOL) and the Internal Revenue Service (IRS) have issued guidance regarding the new requirements, and further guidance is expected.
Before the newly enacted changes to COBRA, employees electing COBRA continuation coverage had to pay up to 102 percent of the cost of the premiums for such coverage. The new law provides that—effective March 1, 2009, for most plans—COBRA continuation premiums for employees who are involuntarily terminated between September 1, 2008, and December 31, 2009, may not exceed 35 percent of the cost to the plan, with the remaining percentage to be subsidized by employers. Employers may then claim a tax credit against wage withholding and payroll taxes (FICA) to cover the COBRA subsidy.
Subsidy Based on Premium COBRA Enrollees Are Required to Pay
In order for employers to claim the full 65 percent credit, they must first have collected the individual's 35 percent share of the COBRA premiums. This means that an employer that charges an individual less than 35 percent of the full cost of the COBRA premiums will not receive the full 65 percent subsidy. For example, let's say an employer typically pays the full COBRA premium on behalf of involuntarily terminated individuals who enroll in COBRA for the first three months of COBRA continuation coverage. Because the employer has not received 35 percent of the COBRA premium from the COBRA enrollee for those three months, the employer could not claim a credit for subsidizing the enrollee's COBRA for those three months—even if the enrollee would otherwise qualify for the subsidy. Under the terms of the statute, the employer is entitled to a subsidy of 65 percent of whatever portion of the COBRA premium cost it requires its subsidy-eligible COBRA enrollees to pay. To take another example, if an employer's full COBRA premium is $1,000 per month and the employer charges COBRA enrollees the active employee premium rate for COBRA ($250 per month), the employer can only receive a subsidy of 65 percent of the $250 it charges its COBRA enrollees (or $162.50). Because of this issue, employers may need to restructure their existing severance arrangements if they wish to take full advantage of the COBRA subsidy.
The IRS has revised payroll tax Form 941 to reflect this credit. When filing Form 941, employers will only be required to report the number of individuals provided with the subsidy and the total dollar amount of the subsidy. However, employers claiming the credit will need to maintain other documentation specified by the IRS, including information regarding receipt of the 35 percent share of eligible individuals' premiums, attestation of involuntary termination, COBRA eligibility and election forms for eligible individuals, and proof of premium amount and coverage.
Eligibility Factors Include Income, Termination Date and Eligibility for Other Coverage
The COBRA subsidy is recaptured as additional income tax if the employee's income during the year the subsidy is provided exceeds $145,000 (single filers) or $290,000 (joint filers), with a phase-in of the recapture starting at annual adjusted gross incomes exceeding $125,000 ($250,000 for joint filers). Individuals who expect their incomes to exceed these maximums in a given taxable year may make an irrevocable election to waive the premium subsidy.
The premium subsidy lasts for up to nine months for eligible employees (and their covered family members) whose employment is or was involuntarily terminated (other than terminations for gross misconduct) between September 1, 2008, and December 31, 2009. Employees who are eligible for Medicare or other group health plan coverage are not eligible for the subsidy. For example, this means that individuals who are eligible for coverage through a spouse or who are eligible for retiree medical cannot receive the subsidy. Employees who are eligible for other coverage will need to notify their employers immediately so that they do not improperly receive the subsidy. Similarly, individuals who are initially eligible for the subsidy but later become eligible for Medicare or coverage under another group health plan will lose their eligibility for the COBRA subsidy and must notify their former employers of the change. Individuals who fail to notify their former employers and continue to receive the subsidy may be forced to pay a fine of 110 percent of the amount of the subsidy they receive after their eligibility for the subsidy terminates. The DOL has provided a model form that individuals may use to notify the employer of eligibility for other coverage.
Involuntary Termination of Employment
Employees who voluntarily terminate employment are not eligible for the subsidy. However, the new law does not contain a definition of involuntary termination, so there are likely to be disagreements about whether particular individuals were voluntarily or involuntarily terminated.
The House Ways and Means Committee has issued answers to frequently asked questions on the COBRA premium reduction. The questions and answers define involuntary termination as termination that is at the direction of the employer, and further provide that death is not considered involuntary termination. The DOL has indicated that it plans to issue further guidance regarding this issue. The DOL's March 24, 2009, webcast provided only informal guidance that the following situations might be considered involuntary terminations, depending on the facts and circumstances:
- An employee's voluntary termination in response to a material negative change in the terms of employment (e.g., material reduction in hours, relocation of job to another state)
- An employee's retirement or resignation in response to an employer's solicitation before layoffs
- An employee's loss of health coverage due to a furlough or lay-off with rehire rights
The IRS has issued guidance providing that an employer-initiated layoff is generally considered to be an involuntary termination of employment for purposes of eligibility for the subsidy, and is expected to issue more guidance on this issue shortly.
Employers who have difficulty classifying a particular employee's termination would be well advised to treat such terminations as voluntary and not eligible for the subsidy. Individuals whose health plans deny them eligibility for the subsidy will have recourse through a newly created expedited appeal process at the DOL. The DOL will have 15 business days to review the employee's eligibility for the subsidy. Because of this limited timeframe for review, DOL has indicated that it expects to require a formal application from all claimants requesting review. Once issued, the application will be available on the DOL Web site. If the DOL finds that an individual was, in fact, eligible for the subsidy, the employer may then issue a refund for any premium overpayments.
Second Election Opportunity for Certain Individuals
Because the law applies to employees who were involuntarily terminated on or after September 1, 2008, all such employees who did not previously elect COBRA (and those who previously elected but subsequently discontinued COBRA) will now be provided with a new 60-day election period during which they can elect the newly subsidized COBRA coverage.
Any COBRA continuation coverage that is elected during this special election period begins on March 1, 2009, and does not apply retroactively to any prior period. The new law also does not extend the maximum COBRA continuation coverage period otherwise available. The normal 18-month continuation coverage period will still be measured from the individual's loss of coverage as a result of his/her involuntary termination of employment.
Employers are responsible for notifying individuals who became or become eligible for COBRA between September 1, 2008, and December 31, 2009, of the new election rights. The DOL has issued four model notices, which are available on its Web site.
There are two versions of a model "General Notice." The abbreviated General Notice covers individuals who previously elected COBRA and are still covered after experiencing a qualifying event sometime on or after September 1, 2008, and advises such individuals of the subsidy. The full version of the General Notice includes COBRA election information and is intended to be used to prospectively notify individuals who are newly eligible for COBRA; this version should also be sent to anyone who received an election notice on or after February 17, 2009, that did not include the additional information required by ARRA. The model "Alternative Notice" is designed for plans subject to state continuation coverage laws. The model "Notice in Connection with Extended Election Periods" is meant for employees who were involuntarily terminated between September 1, 2008, and February 16, 2009, and do not currently have COBRA continuation coverage (i.e., those who are being offered a second chance to elect COBRA, as described above); this notice must be issued no later than April 18, 2009.
Coverage Can Be Changed to Less Expensive Option
The new law provides that employers may allow eligible individuals to change their health plan coverage option under the plan to a less expensive option in conjunction with electing COBRA. Prior to this change, COBRA eligible individuals could only elect to continue coverage under the same health plan option they had been covered under as an active employee.
Action Steps for Employers
- If you have not already done so, you should compile a list of all individuals who were involuntarily terminated from employment on or after September 1, 2008, and who were enrolled in your medical, dental or vision plan at the time of their termination.
- You will need to coordinate this first step with your COBRA administrator. Some COBRA administrators may have only coded reductions in force as involuntary terminations. The COBRA subsidy is available to a broader group of COBRA-qualified beneficiaries who had involuntary terminations during the qualifying timeframe for ANY reason (other than gross misconduct).
- Review the DOL's model notices and decide whether to make any revisions.
- Decide whether to offer employees a special enrollment right to switch to a lower-cost option, and communicate this new option as necessary. Make sure to discuss this with your COBRA administrator, as some administrators have indicated that they cannot administer this new option.
- Work with your COBRA administrator to ensure that the new and revised COBRA notices are being properly distributed.
- Review whether individuals who paid the full COBRA premium for March and April may be entitled to a refund of premiums, or a credit against future premiums, if they qualify for the subsidy. The law specifically contemplates that subsidy-eligible individuals may have to pay the full COBRA premium for March and April while employers are just beginning to implement the new law.
- Decide whether you will offer the subsidy to any individuals who are not legally entitled to COBRA (such as domestic partners). If you provide the subsidy to such individuals, you will need to report the value of the subsidy to the individuals as taxable income and will not be able to obtain the credit for the subsidy that is otherwise available.
- Consider how the new subsidy affects any severance programs/reductions in force you have offered over the past few months, or plan to offer during 2009.