American Recovery and Reinvestment Act of 2009 Imposes New COBRA Burdens on Employers
March 10th, 2009
The American Recovery and Reinvestment Act of 2009, signed by President Obama on February 17, 2009, imposes new obligations related to COBRA or Wisconsin’s continuation of coverage law on employers. Under the Act, eligible individuals who are involuntarily terminated will only have to pay a small portion of their continuation of coverage premiums and employers must, at least initially, pay the remainder of the premium cost.
IMPORTANT: The continuation of coverage subsidy provisions of the Act apply to all Wisconsin employers offering group health plans to their employees, even those employers with fewer than 20 employees that are not generally subject to COBRA.
Some of the key details of the Act’s continuation of coverage provisions are discussed below.
Subsidy, Tax Credit and Reimbursement
Under the Act, eligible individuals who elect continuation of coverage under COBRA or state law need only pay 35% of the cost of the premium, with the employer initially picking up the remaining 65%. In most cases not involving a multi-employer group health plan, the eligible individual pays the reduced premium to the employer and the employer remits that amount plus the remaining amount of the premium to the insurer. The employer then is entitled to a credit against its payroll taxes for the amount of premiums it paid on behalf of eligible individuals. If the credit exceeds the amount of the taxes, the employer is then reimbursed by the federal government for the remainder.
Definition of Eligible Individuals
An individual is eligible for the continuation of coverage premium subsidy if he or she is involuntarily terminated between September 1, 2008 and December 31, 2009, is otherwise eligible for continuation of coverage under COBRA or state law, and timely elects continuation coverage. Individuals who were involuntarily terminated on or after September 1, 2008, but who have not yet elected continuation coverage or who initially elected and then dropped such coverage are still entitled to make such an election if they do so within 60 days of being notified of their eligibility for the premium subsidy.
The premium subsidy is available to an eligible individual for a maximum of nine months after election of continuation coverage. The subsidy will end earlier if the individual becomes eligible for coverage under any group health plan (even if the employee does not elect such coverage), becomes eligible for social security benefits, or if continuation of coverage expires under any other existing COBRA or state law provision.
Plan administrators of group health plans, which in many cases are the employers sponsoring the plans, must provide notification of the premium subsidy to all former employees who are eligible for COBRA or state continuation of coverage and who lost or who will lose coverage due to involuntary termination between September 1, 2008 and December 31, 2009. This means that, in addition to providing notice of the subsidy rights to employees who are terminated after February 17, 2009, employers must also track down former employees who were involuntarily terminated and otherwise eligible to elect continuation coverage between September 1, 2008 and February 17, 2009, and provide them with notice of their subsidy rights under the Act, and, if the former employee did not previously elect continuation coverage or elected and then dropped coverage, offer a second opportunity to elect subsidized coverage. The employer must send the notice to all such former employees within 60 days of February 17, 2009. The Labor Department will provide model notices within 30 days of February 17, 2009. Employers will want to tailor the notices for their individual use.
Under the Act, if an employer pays any portion of the employee’s 35% share of the premium, the subsidy may be lost. This means that severance packages which include this as a benefit may need to be modified.
An employer may offer eligible individuals the option to switch to any health plan option the employer offers with premiums equal to or lower than the individual’s coverage at the time of the qualifying event. An employer may also require eligible individuals to remain on the plan that covered them while they were employed.
To prepare for and comply with the new law, employers should take the following steps:
- Revise COBRA or Wisconsin continuation of coverage eligibility notices to include information about subsidy eligibility and the extended “second chance” deadline for eligible individuals who previously declined continuation coverage. The Department of Labor will be issuing model notices in mid-March.
- Identify former employees who were involuntarily terminated between September 1, 2008 and February 17, 2009.
- Within 60 days of February 17, 2009, notify these former employees of their eligibility for the subsidy and, for those who initially declined continuation coverage, the extended deadline for electing such coverage.
- Modify system procedures for: paying 65% of the premiums; reflecting the beneficiary’s subsidized share on premium statements if applicable; reporting and processing payroll taxes in order to receive credits and reimbursements.
- Determine if any COBRA participant has already overpaid premiums through March or April and, if so, determine whether those amounts need to be reimbursed or applied as a credit towards future premiums.
- If more than one plan option is currently offered to active employees, decide whether or not to allow an alternative coverage option to subsidy-eligible individuals.
- Determine whether to eliminate employer contributions to continuation coverage premiums from severance packages, since a payment of any part of the eligible individual’s 35% by the employer may trigger loss of the subsidy.
If you would like help with working your way through the necessary action steps, or if you have any other employment-related questions, please contact Meg Vergeront at 608.259.2663 or firstname.lastname@example.org.
Filed Under: Government Law