American Recovery And Reinvestment Act Of 2009 Imposes Significant COBRA Changes

Tuesday, March 31, 2009 - 01:00

With great fanfare, the American Recovery and Reinvestment Act of 2009 (the "Act") was signed by President Obama on February 17, 2009. Although many of the provisions of the Act relate to increased government spending or income tax credits, employers and human resource personnel should be aware of the potential ramifications of certain changes made through the Act to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Under the applicable provisions of the Act, employees whose employment is terminated during the 2009 calendar year, and those employees whose employment was terminated in the latter part of the 2008 calendar year, may be entitled to a financial subsidy of their COBRA premium payments, with such subsidies being paid by their former employer. Because of the potential financial ramifications of such subsidy payments, employers will need to take such continued costs into account as part of the employment termination costs. In addition, and as the Act imposes certain notice requirements upon employers, any employer who terminates the employment of (or who has recently terminated the employment of) an employee will need to ensure that the company's COBRA administration is compliant with current applicable federal law.

Under the applicable provisions of COBRA, an employee and his/her dependents who are covered under a company-sponsored group health insurance plan are permitted to elect to continue health insurance coverage following the termination of the employee's employment with the plan sponsor, provided that the company typically employs at least twenty (20) individuals. In general terms, such continued group health coverage (if properly and timely elected by the terminated employee) will continue for a period of at least eighteen (18) months provided (i) that the covered individual makes timely payments of all required group health insurance premiums; and (ii) the covered individual does not elect to be covered under another health insurance policy or plan. The COBRA regulations permit an employer to require a covered individual to pay the entire cost of the insurance premiums during the continuation period, along with an administrative fee.

The aforementioned provisions of the Act dramatically impact the cost structure of the COBRA continuation coverage premiums for certain eligible individuals. Specifically, if an employee of an employer (which is subject to the COBRA continuation coverage provisions) is involuntarily terminated between September 1, 2008 and December 31, 2009, the employee will be deemed to have paid the entire premium amount associated with COBRA continuation coverage if he/she pays 35 percent of such premium amount on a monthly basis during the continuation period. Under the applicable provisions of the Act, the employer that sponsors the group health plan under which a COBRA continuation coverage election is made must subsidize the remaining portion of the monthly premium (65 percent) during the applicable period. The Act provides that such subsidies must continue for a period that is the lesser of: (i) nine (9) months from the employee's employment termination date; and (ii) the date upon which the covered individual becomes eligible for coverage under another group health plan or similar arrangement.

The Act provides that the subsidized portion of the COBRA continuation coverage insurance premiums by an employer will be "reimbursed" to the company through the crediting of a payroll tax payment by the company in an amount equal to the amount of the COBRA continuation coverage premium subsidy.

In addition to the subsidy provisions, the Act also provides for an extended 60-day election period for certain qualified beneficiaries ( i.e. , employees, spouses and dependents) who are eligible for subsidized COBRA coverage. Specifically, an individual who did not have a valid COBRA continuation coverage election in effect on the date of enactment of the Act, but who otherwise would have been eligible to receive a COBRA subsidy benefit if the Act had been in effect, has 60 days from the date that he/she is provided with the appropriate notice of this COBRA subsidy (as discussed below), commencing as of the effective date of the Act (February 17, 2009). A qualified beneficiary who elected COBRA coverage before the effective date of the Act, but who ceased receiving continued health insurance coverage as of the effective date of the Act due to non-payment of premiums, is entitled to elect COBRA continuation coverage during this extended election period. However, nothing in the Act is intended to permit a qualified beneficiary to elect to receive COBRA continuation coverage beyond the statutorily mandated dates for such coverage ( i.e., beyond the date that is 18 months after the employee's employment termination date, unless a subsequent qualifying event occurs).

As noted above, the Act provides that applicable COBRA notice provisions will only be met if the COBRA notice that is provided to the terminated employee (as well as spouse and dependants, if applicable) includes notification of the availability of the aforementioned premium payment subsidy, and a description of the manner in which a covered individual may elect to enroll in different coverage options, if so permitted under the terms of the group health insurance plan. The additional notification requirement may be met either by amending the plan's existing notice forms or by including a separate document with this notice. Details regarding the information that must be included in the premium subsidy notice is found in the Act, and model forms of such a notice are required to be issued by the United States Department of Labor by March 17, 2009. However, the Act provides that penalties may be assessed against an employer that fails to satisfy its COBRA premium subsidy notice requirements currently.

Under the general provisions of the Act, the amount of COBRA continuation coverage premium subsidy payments made on behalf of a qualifying individual will not constitute additional taxable income to the recipient. However, in the event that the recipient individual's taxable income for the calendar year exceeds certain limits ($150,000 for an individual taxpayer; $250,000 for joint taxpayer), the amount of his/her COBRA continuation coverage premium subsidy may (in whole or in part) be deemed to be taxable income in the year in which it is received.

Because of the complexity of these newly enacted COBRA continuation coverage provisions, we recommend that all employers review their current COBRA group health insurance practices to determine that they will satisfy all applicable provisions of the Act. In addition, group health plan sponsors that terminated the employment of employees since September 1, 2008 should determine whether COBRA continuation coverage premium subsidies should be offered to such recently terminated individuals.

Charles A. Bruder, a Member of Norris McLaughlin & Marcus, P.A., is the Co-Chair of the Executive Compensation & Employee Benefits Group.

Please email the author at cabruder@nmmlaw.com with questions about this article.