COBRA and the American Recovery and Reinvestment Act (H.R. 1)

Background

The American Recovery and Reinvestment Act (H.R. 1) known as the economic stimulus package was signed by President Obama on February 17, 2009. Included in the law are provisions that provide a COBRA premium subsidy to certain qualified beneficiaries. The subsidy also applies to certain health care continuation as required by state law if it is comparable to COBRA.

Effective Date?

The subsidy is effective for “any premium for a period of coverage beginning on or after the date of enactment (February 17, 2009).” In most situations that would make the effective date March 1, 2009, for coverage on a monthly billed basis.

Who is eligible to receive the subsidy?

To be considered “assistance-eligible individuals” an individual must be a qualified beneficiary as a result of a worker’s involuntary termination of employment occurring between September 1, 2008, and December 31, 2009. Assistance-eligible individuals who failed to initially elect COBRA would be given an additional 60 days after receipt of notice to elect COBRA and receive the subsidy. The subsidy applies to workers and their covered dependents. The subsidy phases out for certain high-income individuals; however, employers do not have to determine whether a person is subject to the phase out. Subsidies paid by the government with respect to such individuals are recaptured when the individuals file their income taxes.

What is the amount of the subsidy?

The individual is responsible for 35 percent of the premium. Medical, dental and vision are considered eligible coverage. The remaining 65 percent is subsidized by the employer. The employer may claim the amount against wage withholdings or payroll taxes.

There are two exceptions as to who applies for the subsidy:

• If the continuation is under a multi-employer plan (i.e. a collectively bargained multiple employer plan), the plan is eligible for the payroll tax credit:
• In the case of a fully insured plan when the continuation is the result of state law, the insurer receives the credit.

How long does the subsidy last?

The subsidy applies to nine months of continuation coverage. The provisions do not alter the duration of COBRA under existing COBRA law. The subsidy will terminate if the individual becomes eligible for other group health plan coverage or Medicare. Individuals must notify the plan if their eligibility ceases or they will face a tax penalty.

Special Election Period Required

Employers will need to determine individuals who lost their coverage since September 1, 2008, in order to provide a second notice of their continuation rights explaining the new subsidy option. If an eligible person elects COBRA, his/her coverage would not be effective retroactively. However, once elected, the gap in coverage between the date of the original qualifying event and March 1, 2009, is not considered a gap in coverage for purposes of applying a plan’s pre-existing condition limitation.

Option for lower cost plan

At the discretion of the employer, eligible individuals must be allowed to apply the premium subsidy to any health plan option offered by their employer to active employees, provided the coverage has the same or lower premium as the individual’s continuation coverage.

What should employer sponsored health plans be doing now?

Employers will need to determine individuals who lost their coverage since September 1, 2008, in order to provide a second notice of their continuation rights explaining the new subsidy option.

Note: The law as written requires this notice to go to all individuals who were eligible for COBRA not just those who are eligible for the subsidy. They will need to provide those individuals who are actually eligible for the subsidy with a special 60 day election period. All COBRA notice materials will need to be modified going forward to inform individuals of the premium subsidy according to the requirements outlined in the legislation.

Employers should be working with their human resources and payroll departments, COBRA administrators and insurers on the mechanics of the premium subsidy including tracking of eligible individuals, application of the premium subsidy and implementation of tax reporting requirements. They should determine how this subsidy interacts with any amounts they may be voluntarily paying for individuals on continuation today.