News
COBRA Subsidies Required by Stimulus Bill
February, 18 2009
President Barack Obama signed the American Recovery and Reinvestment Act of 2009 on February 17, 2009. Popularly known as the “Stimulus Bill” and designed to aid the slumping economy, the new law contains new requirements for employers under COBRA.
Employers must subsidize COBRA premiums
Any employee who was involuntarily terminated on September 1, 2008 through December 31, 2009 is eligible for a subsidy of 65% of the COBRA premium for up to nine months. The subsidy applies to individual and dependent coverage. For employers who self-insure or purchase insurance to provide group health coverage, this means the employer must provide the subsidy to the former employee. The employer can later claim a credit against its quarterly employment taxes to recoup the subsidy from the federal government.
Optional coverage available
Employers with former employees eligible for the subsidy are permitted by the new law to offer the former employees different coverage than the former employee had when terminated. Current law provides that employers must offer the coverage the employee had in place at the time of his termination. The change allows the former employee to elect coverage that costs less or that costs the same but has different features. There are some restrictions:
- The former employee is not guaranteed the right to elect different coverage; he is permitted to elect it if the employer offers it;
- Premiums for the different coverage must not exceed the premium for coverage the former employee had in place when he was terminated;
- The different coverage also must be offered to active employees; and,
- The different coverage may not consist solely of dental, vision, counseling, or referral services, coverage under a Flexible Spending Arrangement, or coverage at on-site medical facilities.
Employees must notify employers if eligibility for subsidy ends
The law requires former employees who receive the subsidy to notify employers if an event occurs that ends their entitlement to the subsidy. The subsidy can end sooner than the nine-month maximum or maximum remaining period of COBRA coverage, whichever is less, for the following reasons:
- The former employee becomes covered under another group health plan;
- The former employee becomes covered under a health flexible spending account;
- The former employee receives coverage for treatment at certain on-site facilities of an employer; or
- Entitlement to Medicare or Medicaid.
The Department of Labor is expected to issue regulations soon setting out the form for such notices. An employee who does not comply can be subject to a penalty of 110% of the premium subsidy.
Employer notice requirements and special election period
Employers are faced with two significant notice requirements. First, employers must begin including in notices to newly-separated employees information about the subsidy. The second major notice requirement comes from the law’s application to employees who have already been terminated as far back as September 1, 2008. Employers will also have to provide notices to these former employees.
The notices must provide the following:
- Information on the right to the subsidy, which must be prominently displayed;
- Information on the option to enroll in different coverage, if offered by the employer;
- Any forms required by the employer to enroll and take advantage of the subsidy;
- Description of the extended election period for former employees;
- Information about the employee’s obligation to notify the employer of an event that ceases his eligibility for the subsidy;
Under the law, employers must send the new notices to former employees within 60 days of enactment of the law. However, the Department of Labor has 30 days from enactment to provide model notices for employers to use. That means employers who will rely on the DOL model notices for guidance will only have 30 days to get the notices out, assuming the DOL issues the notices in a timely manner.
The law also takes into account that former employees terminated before the law passed (but on or after September 1, 2008) may not have elected COBRA when they had the chance because it was too expensive. To account for that, the law provides for a special election period for such former employees. The special election period begins on February 17, 2009 – the date of enactment of the law – and ends 60 days after the notices required by the law are sent by the employer to the former employees. For a former employee who elects the coverage during this period, the coverage will begin with the first period of coverage following February 17, 2009, and is not retroactive to the employee’s termination (or loss of coverage following termination). For plans whose coverage periods run by calendar month, the first period of coverage will be March 1, 2009. However, the maximum COBRA coverage period (usually 18 months) continues to be calculated from the date of the employee’s termination (or loss of coverage following termination). The law also handles pre-existing condition exclusions by disregarding the period between the former employee’s termination and enactment of the law for purposes of determining creditable coverage under HIPAA.
Employees terminated before the law passed (but on or after September 1, 2008) who elected COBRA coverage are entitled to the subsidy prospectively, i.e., beginning the first coverage period after enactment of the law. If the former employees pay the full amount of the premium when he was entitled to the subsidy, the employer must refund the subsidy amount, or issue a credit for the subsidy amount. To issue a credit instead of a refund, however, the employee must reasonably be able to use the credit in the next 180 days.
Reimbursement for subsidies
Employers who must provide subsidies under the law may apply the amount of the subsidies as a credit against their quarterly payroll taxes. This means that although the federal government will ultimately pay the subsidy, employers must advance the employees the subsidy. If the employer’s payroll tax liability is less than the subsidies it can claim as a credit for the quarter, the IRS will reimburse the employer directly for the difference.
It is not entirely clear how the reimbursement process will work. The text of the law requires employers to provide the subsidy, but provides that for insured plans, the insurance company receives the reimbursement from the government. The IRS and DOL will need to clarify issues such as this one in the coming days.
Employers who seek reimbursement will be required to provide certain information concerning the subsidies paid, including an attestation that each former employee for whom the employer seeks reimbursement of the subsidy was involuntarily terminated. Employers will also have to provide reports on the total amount of reimbursement claimed during the quarter and an estimate for the next quarter, and a report detailing the taxpayer identification number (SSN for most employees), the amount of subsidy provided and whether the subsidy was for one individual or two or more (as would be the case if the former employee or qualified beneficiary elected dependent coverage).
No extension of COBRA period
Previous versions of the Stimulus Bill extended the maximum continuation coverage period under COBRA for certain employees. The version that was enacted into law does not contain these extensions.
If you have any questions about your organization’s responsibilities under this law, please contact us.
Gignilliat, Savitz & Bettis, LLP
900 Elmwood Avenue, Suite 100
Columbia, South Carolina 29201
p. 803-799-9311 f. 803-254-6951
firm@gsblaw.net Contact Us
900 Elmwood Avenue, Suite 100
Columbia, South Carolina 29201
p. 803-799-9311 f. 803-254-6951
firm@gsblaw.net Contact Us