COBRA Coverage Changes Require Immediate Employer Action

24 February 2009

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA, a.k.a. the Stimulus Bill) into law. The bill contains a series of new provisions modifying the Consolidated Omnibus Budget Reconciliation Act (COBRA) group healthcare continuation coverage provisions.

Under ARRA, the federal government will subsidize 65% of the COBRA premium for workers who are involuntarily terminated between September 1, 2008 and December 31, 2009. The requirements for employers and COBRA administrators are complex. To make matters more difficult, these provisions are effective immediately, impacting March COBRA invoices.

The key details are summarized below:

Covered Employers
Nearly all employers offering group health plans must comply with the changes. This even includes small employers that are subject to the mini-COBRA laws effective in many states.

Subsidy
The subsidy is 65% of the premium that is paid by the assistance eligible individual. The subsidy generally continues for nine months, but may be shorter. ARRA does not extend the maximum period of COBRA coverage beyond its ordinary expiration date. The subsidy will end when the COBRA coverage itself ends. In addition, the subsidy will end when an individual becomes eligible for coverage under Medicare or another group health plan.

Assistance-Eligible Individuals (AEIs)
This is defined as those employees who are involuntarily terminated between September 1, 2008 and December 31, 2009. They are
eligible for the 65% subsidy. By comparison, the subsidy does not apply to an employee who terminated prior to September 1, 2008, an employee whose termination was due to gross misconduct, or an employee whose COBRA rights arose for any reasons other than involuntary termination (i.e., reduction in hours, voluntary termination, death, divorce).

Coverage Affected
The 65% subsidy applies to medical coverage (other than flexible spending accounts) for the employee as well as any family members who independently elect COBRA due to an involuntary termination of an AEI.

Effective Date
The 65% subsidy is effective for the first period of coverage for AEIs on or after February 17, 2009. This generally means that for employers who bill COBRA premiums monthly, the 65% subsidy applies to COBRA coverage on and after March 1, 2009. Since it is nearly impossible to reflect the new subsidy on bills for March COBRA coverage, the legislation provides a two-billing cycle grace period to credit or refund overpaid COBRA premiums.

Second Chance to Elect
For AEIs who became eligible for COBRA after September 1, 2008 and either did not elect COBRA or already dropped out of COBRA due to failure to pay the premiums, there is a second chance to elect COBRA and receive the subsidy. This election window for second-chance employees runs for 60 days after receipt of a notice regarding this second-chance opportunity.

No Reach Back
AEIs who take advantage of the "second chance" election will not receive retroactive coverage. Instead, their coverage will commence, typically, on March 1, 2009 and will continue to the end of their originally scheduled COBRA end date.

Notice Requirements
All individuals who lost COBRA coverage on and after September 1, 2008 must be notified. The notice must include specified information regarding the opportunity for a premium discount. Plan administrators must also alert those who have already elected COBRA and those who are eligible for the discount but have not elected COBRA of their rights under ARRA. This notice can be incorporated into the regular COBRA election-rights package or provided through a separate notice that is sent along with the regular COBRA election-rights package. The enhanced enrollment notice must be distributed by April 18, 2009. The government is required to issue model notices sometime in mid March.

Reimbursement
AEIs pay 35% of the ordinary COBRA premium. After receipt of the subsidized payment, the employer reduces its payroll tax deposits by an amount equal to the remaining 65% of the COBRA premium. Entities that do not collect payroll taxes will receive a credit or refund check directly from the Secretary of the Treasury in an amount equal to the 65% subsidy.

Grace Period
Since these new rules apply almost immediately, the legislation provides a grace period for employers who are unable to modify March or April COBRA bills for AEIs in time to reflect the 65% subsidy. The grace period permits charging the full COBRA premium for two billing periods, followed by an appropriate credit in subsequent billing periods equal to the missed 65% subsidy or, alternatively, a reimbursement to the AEI.

Income Limitations
The 65% subsidy is limited to AEIs whose adjusted gross income is below $145,000 ($290,000 for joint filers) and there is a phase out once income exceeds $125,000 ($250,000 for joint filers). These limits will be monitored through the AEIs federal income tax return.

Additional Guidance
Due to the complexity and urgency of the new legislation, it is likely that additional guidance may modify ARRA’s COBRA provisions. Additional Client Advisories will be forthcoming as such guidance becomes available.

If you have any questions about the COBRA coverage changes or any other employment law issue, please contact Kimberly W. Daniel or Ryan P. Waid at (804) 967-9604 or by e-mail: kdaniel@hdjn.com or rwaid@hdjn.com.  Additional information about Hancock, Daniel, Johnson & Nagle, P.C. is available on the firm’s website at www.hdjn.com

VAHU would like to make members aware the following updates to www.dol.gov/COBRA were just posted:

• Model notices
• FAQs for Employers on the COBRA Premium Reduction
• Expanded FAQs for Employees on the COBRA Premium Reduction
• Updated FAQs for Employees on General COBRA Provisions

For full detail on the COBRA Continuation Coverage Assistance Under The American Recovery And Reinvestment Act Of 2009, you can also visit www.nahu.org for full presentations and resources.


This content has been provided by Hancock, Daniel, Johnson & Nagle, PC.  The information contained in this advisory is for general educational purposes only. It is presented with the understanding that neither the author nor Hancock, Daniel, Johnson & Nagle, PC, is offering any legal or other professional services. Since the law in many areas is complex and can change rapidly, this information may not apply to a given factual situation and can become outdated. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice. Under no circumstances will the author or Hancock, Daniel, Johnson & Nagle, PC be liable for any direct, indirect, or consequential damages resulting from the use of this material.