COBRA Premium Subsidy – Employers Must Take Action
By Lorisa D. LaRocca, Esq.
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On February 17, 2009, President Obama signed his economic stimulus plan, the American Recovery and Reinvestment Act of 2009 (the "Act"), into law. However, what you may not know is that the Act significantly modifies the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") so as to provide a 65% government subsidy toward payment of COBRA premiums for certain employees, for up to nine months. Perhaps most importantly, the subsidy must be initially paid by employers who can then recoup these payments from the government as a credit against its federal payroll tax liabilities. In addition, employers are required to notify all affected individuals of their right to receive the subsidy, including all individuals involuntarily terminated from September 1, 2008 forward and in some cases, their dependents.
Given that the law became effective at the time of its signing, immediate action is likely required on your part to comply with the Act's requirements. Below are details that outline the specifics of the Act and prove some suggestions as to the steps you should take to comply. If you have any questions regarding this information, please do not hesitate to contact me.
COBRA Premium Subsidy
What is the subsidy?
The Act provides for a COBRA premium subsidy, whereby the federal government will pay sixty-five percent (65%) of the cost of a qualified beneficiary's COBRA premium if the qualified beneficiary:
i. experiences a qualifying event that is an involuntary termination during the period beginning September 1, 2008 and ending December 31, 2009;
ii. elects COBRA coverage; and
iii. pays thirty-five percent (35%) of the COBRA premium.
The employer must then pay the remaining sixty-five percent (65%) of the COBRA premium and will receive a credit for this amount against its federal payroll tax liabilities. If the amount of the credit exceeds the amount of payroll taxes owed, the Act provides that the Treasury Secretary will pay the excess directly to the employer.
With regard to the requirement that a qualified beneficiary be "involuntarily terminated" in order to be eligible for the subsidy, the term "involuntarily terminated" was not defined by the Act. However, it is clear that the termination must not be for gross misconduct. Layoffs or plant closings will qualify but it remains unclear whether an employee who takes advantage of a voluntary exit incentive program will qualify.
How is the subsidy calculated?
The thirty-five percent (35%) premium payment that the qualified beneficiary must make and the sixty-five percent (65%) premium subsidy are based on the COBRA premium that the qualified beneficiary is otherwise required to pay. For example, if an employer had already agreed to pay 10% of the total COBRA premium as part of a severance agreement, the employee will need to pay only 35% of 90% of the total COBRA premium, and the employer will receive a payroll tax credit for only 65% of 90% of the total COBRA premium. The employer would not be entitled to a payroll tax credit for the 10% of the premium that the employer was otherwise obligated to pay under the severance agreement.
How does the Act affect state Mini-COBRA Provisions?
The COBRA premium subsidy will also apply to health care continuation coverage provided by state and federal governments, or mandated by state law for group health plans with fewer than 20 employees. Accordingly, the subsidy applies to New York employers who employ between 2 and 19 employees and are covered by New York’s mini-COBRA regulation.
Are there any exceptions to the Act?
First, subsidies are not applied to payments for coverage under a health flexible spending account offered under a "cafeteria plan" (i.e., Section 125 plan).
Second, the Act conditions an individual's entitlement to the subsidy on an income threshold (per taxable year). Individuals whose income is $125,000 (or $250,000 for joint filers) are not eligible for the subsidy. If an individual's modified adjusted gross income for the taxable year in which the subsidy is received exceeds $145,000 ($290,000 for joint filers), then the amount of the premium subsidy that was provided to the individual, the individual's spouse or the taxpayer's dependents for all months during such taxable year must be repaid.
For taxpayers with modified adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the premium subsidy for the taxable year that must be repaid is reduced proportionately. The repayments are captured on the individual's federal income tax return. However, the Act allows each individual to make a permanent election to waive the right to the premium subsidy for all periods of coverage, thereby allowing any individual who is certain that he or she will surpass the income threshold to avoid being subject to the recapture tax. The income threshold applies on a per-taxable year basis.
When is the effective date of the Act?
The subsidy is effective for the first period of coverage beginning on or after February 17, 2009. Therefore, for employers who bill COBRA premiums on a monthly basis, the subsidy will commence March 1, 2009.
However, the Act provides a grace period for employers and plan administrators who are unable to modify their March or April COBRA bills in time to reflect the subsidy. The grace period allows the employer or plan administrator to charge the qualified beneficiary for the full COBRA premium for two billing periods following February 17, 2009. However, the employer must then either reimburse the qualified beneficiary for the amount equal to the subsidy or credit the qualified beneficiary for the amount of the subsidy toward future COBRA premium payments.
If the employer plans to credit a qualified beneficiary for their March or April payments, the employer must reasonably believe that the credit will be used by the qualified beneficiary within one hundred eighty (180) days of the date on which the employer or the plan administrator received the payment of the full COBRA premium amount from the qualified beneficiary.
When does the subsidy end?
The COBRA premium subsidy will end on the earliest of the following dates:
i. nine (9) months after the first day that the individual became eligible for the subsidy;
ii. the date the individual becomes eligible for coverage under any other group health plan** (other than coverage consisting of only dental, vision, counseling or referral services, or a combination thereof), coverage under a flexible spending arrangement or coverage of treatment that is furnished in an on-site medical facility maintained by the employer that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof);
iii. the date the individual is eligible for Medicare;
iv. the date following the expiration of the maximum period of continuation coverage required under the applicable COBRA continuation coverage provision; or
v. the date following the expiration of the period of continuation coverage elected pursuant to the special COBRA election opportunity (as discussed herein).
**An individual must notify the plan of a loss of COBRA entitlement due to eligibility for other health plan coverage. Failure to do so will result in a penalty imposed on the individual equal to 110% of the improperly paid subsidy amount.
What if the employer offers alternative coverage following involuntary termination?
The Act does not address whether the subsidy will still apply if an employer offers alternative coverage independent from COBRA, following involuntary termination. For example, if an individual is involuntarily terminated on December 1, 2009 and the employer provides for a 6-month period of non-COBRA continued coverage and the COBRA coverage does not begin until the employer-provided coverage expires (i.e., on June 1, 2010), it is unclear whether the COBRA premium subsidy will still apply for nine months (i.e., through February 28, 2011), assuming that the other subsidy termination events listed above do not occur earlier. It is likely that this will be addressed by the Department of Labor or the Legislature at a later date.
What is the “Special COBRA Election”?
The Act also provides that qualified beneficiaries who would otherwise be eligible for the COBRA premium subsidy but who did not elect COBRA continuation coverage prior to February 17, 2009, will have an additional opportunity to elect COBRA. This “Special COBRA Election” period began on February 17, 2009 and ends sixty (60) days after notice is provided to the qualified beneficiary of this Special Election opportunity. Coverage elected pursuant to this election right begins on March 1, 2009 and ends no later than the date that the original maximum COBRA continuation coverage period would have expired. For example, if an individual who was involuntarily terminated from employment on October 1, 2008, but did not elect COBRA continuation coverage, and such individual is otherwise eligible for the COBRA premium subsidy, the individual would have sixty (60) days after notification of this special COBRA election opportunity to elect COBRA coverage and receive the subsidy. If the individual makes the election, the coverage would begin March 1, 2009 and end no later than the maximum required COBRA continuation period (18 or 36 months) after October 1, 2008. This Special Election right is also available to a qualified beneficiary who elected COBRA coverage but who is no longer enrolled on the date of enactment because, for example, the beneficiary was unable to continue paying the premiums.
By what date must employers provide notice of the Act to affected employees?
In addition to their standard COBRA notices, employers must inform COBRA eligible individuals about their new COBRA rights under the Act by April 18, 2009. The new information must be provided to any individual who becomes a qualified beneficiary-not just to individuals who were involuntarily terminated- during the period beginning September 1, 2008 and ending December 31, 2009. Employers must also send new COBRA notices to individuals who are entitled to the Special COBRA Election opportunity describing those individuals' rights. The Secretary of Labor is scheduled to provide model notices by March 19, 2009 but, in the event that such model notices are not issued in a timely manner, the April 18, 2009 deadline for employers still applies so it is critical that affected employers immediately begin drafting such notices.
How do employers go about receiving their subsidy credit?
To claim the payroll tax credit, employers must file a report that includes an attestation of the involuntary termination, a report of the payroll tax credits for the current period and the estimated credits for any subsequent period, the taxpayer identification numbers of the terminated employees, the amount of the subsidy reimbursed with respect to each qualified beneficiary, and information as to whether the subsidy provided was for one or more qualified beneficiaries.
What should employers do now?
Given the relatively short deadline for employer compliance with the Act, employers should take several immediate steps:
Identify individuals eligible for COBRA who were terminated on an involuntary basis on or after September 1, 2008, as well as the qualifying dependents of these individuals;
Begin drafting new and/or revised COBRA notices and notify all affected individuals of their new COBRA rights under the Act;
Update COBRA premium payment methods to take into account the employer’s payment for the sixty-five percent (65%) share of the COBRA premium;
Revise payroll systems and other procedures so that the employer will be ready to obtain reimbursement from the federal government without delay; and
Develop any procedures necessary to determine when the premium subsidy ends for each affected individual and to reinstate the full COBRA premium charge with respect to such individual.
Please feel free to contact any member of the Woods Oviatt Labor & Employment Practice Group with questions:
Gordon S. Dickens, Esq., Chair
(585) 987-2851
William G. Bauer, Esq.
(585) 987-2811
Greta K. Kolcon, Esq.
(585) 987-2812
Andrew J. Ryan, Esq.
(585) 987-2809
Lorisa D. LaRocca, Esq.
(585) 987-2834