President Obama signed the $787 billion stimulus package, formally known as the American Recovery and Reinvestment Act (the Act), on Feb. 17, 2009. Included within the Act are provisions related to the federal rules governing continuation of group health plan coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, widely known as COBRA, and comparable rules under several states' "mini-COBRA" laws. These new continuation coverage rules are intended to provide relief for individuals who have lost or will lose their group health coverage following their involuntary termination of employment, by:
• providing a federal government subsidy equal to 65 percent of the continuation coverage premium for up to nine months of coverage; and
• giving individuals a second opportunity to elect continuation coverage if they were involuntarily terminated on or after Sept. 1, 2008, and prior to Feb. 17, 2009, but did not have continuation coverage in effect as of Feb. 17, 2009.
Most employers and group health plan administrators will be required to take swift action in order to comply with the new continuation coverage rules of the Act. Although there are many nuances in these new provisions, as well as interpretative issues that may be resolved by future guidance, we have highlighted some of the key aspects of the Act's continuation coverage provisions in the questions and answers below. Please note: These questions and answers are geared toward group health plans for which employers are ultimately responsible under the law for administering the requirements of COBRA (rather than a Taft-Hartley-governed multiemployer plan, for example).
Who Is Eligible For The Relief Provided By The Act?
In general, the relief is available for any individual eligible for continued group health plan coverage by virtue of his or her involuntary termination of employment occurring between Sept. 1, 2008, and Dec. 31, 2009, and the covered spouse and dependents of such individual. However, this does not include coverage under flexible spending accounts.
Any individual with adjusted gross income (AGI) for federal income tax purposes in excess of specified amounts will lose some or all of the benefit of the federal government subsidy by an increase in his or her income tax liability for the year in which the subsidy was provided. (The benefit of the subsidy is phased out if the AGI of a single individual is $125,000 to $145,000, or $250,000 to $290,000 for those who file a joint tax return.) This additional tax liability can be avoided if the individual informs his or her employer that he or she wishes to permanently waive his or her right to the federal government subsidy.
What Is The Federal Government Subsidy?
If the eligible individual, or someone on his or her behalf other than the employer, pays 35 percent of the premium for continuation coverage, the federal government will pay the other 65 percent, beginning with the first coverage period commencing on or after the date of enactment of the Act (i.e., March 1, 2009, in the case of coverage provided on the basis of a calendar month), for nine months, until the continuation coverage period would otherwise expire or until the individual is eligible for coverage under Medicare or another group health plan (other than a plan that provides only dental or vision coverage, a flexible spending arrangement, or an employee assistance-type plan), whichever period is shorter. It is not clear whether the federal government subsidy is available, or for how much, if the employee pays less than 35 percent of the premium due to an employer-provided subsidy.
How Is The Federal Government Subsidy Provided?
The employer will advance the funds to cover the 65 percent of the premium not paid by the eligible individual, and the subsidy will be provided through a reduction in the employer's federal payroll tax deposits. The Internal Revenue Service has revised the Form 941 to reflect the new COBRA subsidy rules and has posted a series of questions and answers to its Web site to explain how the subsidy will be implemented through the payroll tax system.
What Are The Employer's Notice Requirements Under The Act?
There are different notice requirements, depending upon when the termination of employment occurred. The Act directs the U.S. Department of Labor to issue model notices by March 19, 2009.
• If the covered employee's involuntary termination of employment occurred on or after Feb. 17, 2009, but not later than Dec. 31, 2009, the normal continuation coverage election notice materials must be revised to include an explanation of the new rules, forms enabling the eligible individual to establish eligibility for the federal government subsidy, a description of the eligible individual's obligation to notify the plan if he or she becomes eligible for subsequent coverage under Medicare or another group health plan, and notice of the new tax penalty that can be imposed on an individual for not providing such notice (the penalty is 110 percent of any improper federal government subsidy for that individual).
In addition, the employer may, but need not, offer eligible individuals the right to elect continuation coverage that is different from the coverage in place at the time of the involuntary termination, even if the election is not within an "open enrollment" period. If the employer offers this choice to eligible individuals, an appropriate explanation must be included in the notice.
• If a covered employee's termination of employment occurred on or after Sept. 1, 2008, but prior to Feb. 17, 2009, a new notice must be issued that explains the matters described above and, in the case of an individual who did not make a timely election of continuation coverage under the normal rules or who made a timely election but subsequently lost coverage prior to Feb. 17, 2009, that explains the second opportunity to elect continuation coverage with the subsidy if the termination was involuntary.Any such election would be effective for the first coverage period beginning after Feb. 17, 2009 (i.e., March 1, 2009, in the case of coverage based on calendar months). This notice must be provided no later than April 18, 2009.Note:It appears that this notice must be distributed to any employee who experienced a termination of employment on or after Sept. 1, 2008 but prior to Feb. 17, 2009 (other than individuals terminated on account of gross misconduct and not offered COBRA continuation coverage at termination), even though the opportunity to make this special election is not available unless the termination was involuntary.
Due to the short time frame between the date of enactment of the Act and the effective date of coverage under this special election opportunity, the Act provides that an eligible individual will have 60 days following distribution of the notice to elect continuation coverage, retroactive to the first coverage period beginning after Feb. 17, 2009. If an eligible individual takes advantage of the special election opportunity, the gap between the date coverage was lost due to the involuntary termination of employment and the effective date of continuation coverage is not considered a break in coverage for purposes of applying the pre-existing condition rules under HIPAA.
What Should Employers Do Now In Light Of The Act's Continuation Coverage Rules?
It would be reasonable for employers to wait a short period of time for the DOL to publish model notices and for the federal government to provide further guidance about the Act before redesigning and issuing new COBRA forms. In the meantime, however, employers should take the following steps immediately in response to the Act:
• identify all employees who terminated employment on or after Sept. 1, 2008 (and their covered spouses and dependents), and who were entitled to elect continuation coverage;
• separately identify those in the above group whose terminations were involuntary, and separately identify within that sub-group (i) those who are receiving continuation coverage, (ii) those who did not make a timely election of continuation coverage, and (iii) those who made a timely election but subsequently lost coverage;
• separately identify those individuals currently receiving continuation coverage who are paying the full premium for their continuation coverage and those who are paying something less than the full premium due to an employer-provided subsidy;
• decide whether they will permit eligible individuals to elect a form of continuation coverage that is different from the coverage in effect at termination of employment (e.g., an HMO program that is less expensive than a PPO program);
• contact their group health plan insurance carriers (or third-party administrators, for self-insured plans) to determine what coordination will be necessary to implement the new continuation coverage provisions of the Act; and
• consider how they may take advantage of the federal government's premium subsidy in designing severance arrangements for involuntarily terminated employees.
James F. Podheiser is Co-chair of Stradley Ronon's Employee Benefits & ERISA Practice Group. He advises for-profit and not-for-profit organizations and individuals in the areas of: (1) employee benefit law; (2) deferred compensation arrangements; (3) stock plans;(4) employee vs. independent contractor issues; (5) all aspects of ERISA. John J. Hunter is Co-chair of the firm's Employee Benefits & ERISA Practice Group. His practice emphasizes employee benefits, deferred compensation arrangements and all aspects of ERISA.