The American Economic Recovery and Reinvestment Act: Critical COBRA Changes Retroactive to September 2008
On February 17, 2009, the United States Congress signed into law the American Economic Recovery and Reinvestment Act (the Act). The Act includes premium reductions and additional election opportunities for health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. Under the Act, “assistance eligible individuals” pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. The premium reduction applies to periods of health coverage beginning on or after February 17, 2009 and lasts up to nine months.
COBRA Prior To The Act
COBRA generally applies to all group health plans maintained by private-sector employers having 20 or more employees, and state and local governments. COBRA provides workers who lose their jobs, and thus their health benefits, the right to purchase group health coverage provided by the health plan maintained by the private-sector employer. COBRA requires continuation coverage of 18 to 36 months to be offered to covered employees, their spouses, their former spouses, and their dependent children, when group health coverage otherwise would be lost by the occurrence of certain events. Such events include termination or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct. Employers may require persons who lose their jobs and elect COBRA continuation coverage to pay the full cost of the health care coverage, plus a 2 percent administrative charge.
Under the Act’s COBRA subsidy provisions, assistance eligible individuals may receive COBRA continuation coverage on payment of no more than 35 percent of the COBRA continuation premium for up to nine months. Stated otherwise, the Act reduces premiums for COBRA continuation coverage by 65 percent for assistance eligible individuals.
An assistance eligible individual is the employee or a member of his/her family who:
- is eligible for COBRA continuation coverage at any time between September 1, 2008 and December 31, 2009;
- elects COBRA coverage; and
- is eligible for COBRA as a result of the employee’s involuntary termination between September 1, 2008 and December 31, 2009.
The Act treats assistance eligible individuals who pay 35 percent of their COBRA premium as having paid the full amount. If an individual’s modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for joint returns), then the amount of the premium reduction during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint returns), the amount of the premium reduction that must be repaid is reduced proportionately.
The 65 percent subsidy is paid by the:
- insurer, in the case of a fully insured plan;
- plan, in the case of a multiemployer plan; or
- employer/plan sponsor, in the case of a self-insured plan.
The entity paying 65 percent of the premium is entitled to a credit against certain employment taxes. If the tax credit is greater than the taxes due, the Secretary of Treasury will directly reimburse the employer, insurer or plan for the excess.
Special COBRA Election Opportunity
Individuals involuntarily terminated from September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, must be provided an election notice by April 18, 2009, and must be given 60 days following receipt of the election notice to elect COBRA continuation coverage. Those who elect COBRA continuation coverage during the special election opportunity are eligible for the 65 percent premium reduction for COBRA continuation coverage. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee’s involuntary termination). This special election period opportunity does not apply to coverage sponsored by employers with less than 20 employees that is subject to state law.
Employer Action Required
Under the Act, COBRA notices must now include information on COBRA premium assistance. In addition, special notices must be sent by April 18, 2009 to both those entitled to the special election period and to assistance eligible individuals already receiving COBRA continuation coverage.
The Secretary of Labor, in consultation with the Secretary of Treasury and the Secretary of Health and Human Services, recently issued model notices to help plans and individuals comply with the Act. We recognize every client is unique and solutions must be individually crafted to meet their business needs. We look forward to assisting both our current and prospective clients with the new aspects of COBRA.