Exempt Organizations Advisory - Changes to COBRA Rules in Stimulus Package Require Immediate Action for Health Plans

Anne E. Moran  (amoran@steptoe.com)

Background and Summary.  COBRA is the acronym for the law that requires most group health plans to offer terminated employees the option to continue health care coverage at their own expense.  This coverage is generally available in the case of an employee who is terminated (whether or not voluntarily) for a period of 18 months or until he is otherwise covered under another plan or Medicare.

As part of the American Recovery and Reinvestment Act (the “Act”) signed yesterday, the government will subsidize, on a limited basis, up to 65% of the cost of “COBRA” premiums for eligible workers who are “involuntarily terminated” other than for cause.  This means an employee who is involuntarily terminated from employment and who meets the eligibility requirements for a subsidy will only pay 35% of his COBRA premium for COBRA coverage.  Since the Act is effective retroactive to terminations occurring on or after September 1, 2008, and with the subsidy beginning for  periods of coverage generally starting March 1, 2009, employers need to implement the provisions immediately.

Expanded Scope of the Subsidy.  It is important to note that the Act expands the subsidy beyond the plans generally subject to the Federal COBRA rules.  Continuation coverage that qualifies for the subsidy also includes continuation coverage required under State law that requires continuation coverage comparable to that required under the Federal COBRA rules.  This means that individuals who participate in certain small (under 20 employee) health plans otherwise exempt from COBRA or health plans maintained by the Federal government or a State government may be eligible for the subsidy, and those plans will have to administer the new rules, including the notice and reimbursement provisions discussed below.

Description of the Subsidy.  The new law temporarily provides a 65% subsidy for COBRA premiums paid by an “assistance eligible individual” for a period of up to 9 months.  That means such individuals generally pay only 35% of their premium cost.     

Eligibility for the Subsidy.  An individual is eligible for the subsidy if he (1) loses group health plan coverage due to an involuntary termination (other than for gross misconduct) between September 1, 2008 and December 31, 2009; (2) is eligible for COBRA coverage; and (3) does not have modified adjusted gross income that exceeds $145,000 (or $290,000 for joint filers) in the taxable year that he is receiving the subsidy.  Individuals earning more than $125,000 ($250,000 for joint filers) but not more than the cap are eligible for only a portion of the subsidy.  Note that unlike the regular COBRA eligibility rules, eligibility for the subsidy requires “involuntary termination” (other than for gross misconduct) but the new rules provide no definition of involuntary termination.  

It appears that it is intended that the qualified beneficiary is responsible for monitoring the income requirement.  The mechanism for recapture of premiums for high income individuals is an increase in the taxpayer’s income tax liability for the year equal to such amount.   An individual could be ineligible one year (e.g., the year he is terminated) and eligible in the next.   High income individuals may permanently waive the right to the subsidy if they notify the entity entitled to reimbursement.  They may want to do this to avoid having to report the subsidy on their tax returns.  

Length and Effect of Subsidy.  The subsidy is paid for 9 months but can end earlier if the maximum required COBRA period ends, or if the individual becomes eligible for another group health plan or Medicare.  The criterion here is eligibility, not actual coverage (as is the case for general COBRA eligibility).   Eligibility for coverage under another group health plan does not terminate eligibility for the subsidy if the other group health plan provides only dental, vision, counseling, or referral services (or a combination of the foregoing), or is a health flexible spending account, or health reimbursement arrangement.  The qualified beneficiary must notify the group health plan of such eligibility under the other plan or Medicare; failure to do so can result in a penalty equal to 110% of the subsidy provided after termination of eligibility.  The notification must be provided to the group health plan in the time and manner to be specified by the Secretary of Labor.

Any subsidy provided is excludible from the gross income of the covered employee, and not counted as income for purposes of other income-related government programs.  For purposes of determining the gross income of the employer and any welfare benefit plan of which the group health plan is a part, the amount of the premium reduction is intended to be treated as an employee contribution to the group health plan.

Election Period and Rules.  The individual has a special 60-day period to elect such coverage beginning on the date notice is provided.  In addition to the information required for COBRA notices, the notice of COBRA continuation coverage to a person eligible for a subsidy must include information about the qualified beneficiary’s right to the premium reduction (and subsidy), the conditions for the subsidy, and a description of the obligation of the qualified beneficiary to notify the group health plan of eligibility under another group health plan or eligibility for Medicare benefits, and the penalty for failure to provide this notification.  The Department of Labor is to issue a model notice within 30 days.

Option to Change Coverage.  Although under COBRA a qualified beneficiary is generally only entitled to the type of coverage he had elected before the qualifying event, the law permits a group health plan to provide a special enrollment right that allows persons to change coverage options to elect a less expensive option under the plan in conjunction with electing COBRA continuation coverage.  This differs from the current COBRA rules and is designed to reduce the employee’s (and government’s) costs.  This does not change the basic COBRA requirement that a group health plan must allow an eligible individual to choose to continue with the coverage in which the individual is enrolled as of the qualifying event.  However, once the election of the other coverage is made, it becomes COBRA continuation coverage under the applicable COBRA continuation provisions.  

Effective Date and Transition Rules.   The new rules are effective immediately.  This means that employers must modify their COBRA notices as soon as possible to explain the subsidy.   Recognizing that plans may need time to implement the new law, the law allows plans to charge 100% of the premium for 60 days after enactment and “make up” the subsidy with either a reduction in future premiums or a flat payment (if the reduction is not workable because, for example, the coverage period has ended).  

Because the law is retroactive, it must address how to deal with employees who were previously terminated.   As noted above, the law requires a special 60-day election period for a qualified beneficiary to elect the subsidized coverage.  However, the special 60-day election period does not extend the period of COBRA continuation coverage beyond the original maximum required period (generally 18 months after the qualifying event).  Most importantly, any COBRA continuation coverage elected pursuant to this special election period begins on the date of enactment and does not include any period prior to that date.  The legislative history illustrates the effect of these rules on a subsidy that retroactively qualifies.  For example, if a covered employee involuntarily terminated employment on September 10, 2008, but did not elect COBRA continuation coverage and was not eligible for coverage under another group health plan, the employee would have 60 days after date of notification of this new election right to elect the coverage and receive the subsidy.  If the employee made the election, the coverage would begin with the date of enactment and would not include any period prior to that date.  However, the coverage would not be required to last for 18 months.  Instead the maximum required COBRA continuation coverage period would end not later than 18 months after September 10, 2008.   

Reimbursement Procedures.  Whichever entity receives the COBRA premiums -- the employer, the insurer, or the multiemployer health plan -- will be reimbursed by the amount of the premium for COBRA continuation coverage that is not paid by the eligible individual.  No reimbursement will be paid until the entity has received the reduced premium payment from the eligible individual.  If the entity has liability for income tax withholding from wages or FICA taxes with respect to its employees (for example, an employer with a self-insured plan), the entity will receive a credit against its liability for these payroll taxes.  If such amount exceeds the amount of the entity’s liability for these payroll taxes, the excess is paid as a credit or refund in the same manner as overpayment of payroll taxes.  It appears that where the employer currently covers the cost of COBRA coverage, the employer is not entitled to reimbursement because the subsidy is based on 65% of the premium required to be paid by the employee.

Reporting Requirements. The entity entitled to reimbursement for premium assistance will have to comply with new reporting requirements and provide:
an attestation of involuntary termination of employees for whom reimbursement is claimed;
a report of payroll taxes offset for the reporting period, and an estimate for the next period;  
a report with TINs of all employees covered, amount of subsidy reimbursed for each covered employee and beneficiary, and designation with respect to each covered employee on whether coverage was single coverage of for 2 or more individuals.

Summary. Employers, plan administrators and health plan providers face numerous challenges in implementing this new law, in addition to the obvious
challenge of providing notices and amending health plans.  Small employers that administer this law may have difficulties because they are likely to lack
sophisticated administrative procedures.  All employers will have new responsibilities for describing the eligibility provisions, and interpreting what
constitutes an involuntary termination, the amount of the subsidy, and the eligible employees.

A new enforcement right is created in the provision providing for expedited review by the Secretary of Labor or Health and Human Services (in consultation with the Secretary of the Treasury) of denials of the premium subsidy.  Such review must be completed within 15 business days.

Finally, the new reimbursement mechanism will present challenges. Overstatement of reimbursement is a payroll tax violation.  So if the employer makes a mistake in implementing this new and confusing law it can be subject to penalties.