On February 17, 2009, President Obama signed into law a $787 billion economic stimulus package entitled the American Recovery and Reinvestment Act of 2009 (the “ARRA”). The ARRA made some significant changes to COBRA. The ARRA provides for a sixty-five percent (65%) government subsidy of COBRA premiums for up to nine months for certain employees (and their dependents) involuntarily terminated during the period from September 1, 2008 to December 31, 2009. The 65% premium subsidy initially must be paid by employers who thereafter will be reimbursed by the government.
The COBRA Premium Subsidy
Under COBRA, terminated employees and their qualified beneficiaries may continue their health insurance at the group rate plus a two percent (2%) administrative fee. Under ARRA, the federal government for up to nine months will pay 65% of the cost of a qualified beneficiary’s COBRA premium if the qualified beneficiary (1) experiences a qualifying event that is an “involuntary termination” during the period September 1, 2008 to December 31, 2009; (2) elects COBRA coverage; and (3) pays 35% of the COBRA premium. The employer must initially pay the 65% of the COBRA premium and receive a credit for such amount against its federal payroll tax liabilities. Involuntary termination is not defined. However, it is clear that layoffs qualify but terminations for gross misconduct do not.
Employers agreeing to pay a portion of their employees’ COBRA premiums as part of a severance package should take note: employees are only obligated to pay 35% of their premium obligation. Moreover, employers will only be reimbursed by the federal government for 65% of their employees’ contributions. In other words, if as part of a severance package the employer agrees to pay all of a former employee’s COBRA contributions, the employer will not be reimbursed at all by the federal government. If an employer agrees to pay forty percent (40%) of the employee’s COBRA contributions, the employee only needs to pay 35% of his or her 60% obligation and the employer is only entitled to obtain reimbursement for 65% of the employee’s 60%. Stated differently, the employer will not be entitled to a payroll tax credit for the 40% of the premium the employer agreed to pay pursuant to a severance agreement.
There is an income threshold. If the individual’s modified adjusted gross income exceeds $145,000, or $290,000 for joint filers, the government’s premium subsidy must be repaid by the employee. The repayment is reduced proportionately for income between $125,000 and $145,000. Individuals can elect to waive the premium subsidy if they are above the income threshold to avoid being subject to a recapture tax.
Period of COBRA Premium Subsidy
The subsidy applies to periods of COBRA coverage that begin after February 17, 2009. If a company’s period of coverage under its plan is a calendar month, the employer will have to start providing the subsidy beginning March 1, 2009.
The subsidy is available for up to nine months so long as the individual remains eligible to continue COBRA coverage, but will end earlier if the individual becomes eligible for any other group health coverage or Medicare. Under COBRA, an individual eligible for Medicare does not need to terminate COBRA coverage. However, under ARRA, the subsidy will end.
There is a grace period under ARRA. For employers who charge qualified beneficiaries for the full COBRA premium for up to two billing periods after February 17, 2009, the employer must then either reimburse the qualified beneficiary for the amount of the premium subsidy or credit that amount toward future COBRA premium payments.
New Election Opportunity
Those who were terminated on or after September 1, 2008, who originally did not elect COBRA will have an additional opportunity to elect. They have sixty (60) days to make the election after notice is provided. The notice must be sent by April 18, 2009 to all qualified beneficiaries (not just to individuals who were involuntarily terminated). Coverage begins on February 17, 2009 (or March 1, 2009) but ends no later than the date that the original maximum COBRA continuation coverage period would have expired.
- Identify those individuals who have been involuntarily terminated since September 1, 2008.
- Those involuntarily terminated individuals who elected COBRA must be given a subsidy starting with the next COBRA payment period (February 17, 2009 or March 1, 2009).
- Those involuntarily terminated employees who did not elect COBRA coverage (and the qualifying dependents of those individuals) must be notified of their special election rights by April 18, 2009.
- Revise premium notices for those qualifying for the subsidy to reflect the 35% premium amount.
- Determine how you will allow high-income employees to waive the COBRA subsidy.
- Revise your COBRA election notice or prepare an attachment to use with your existing notice. These revisions should be used until December 31, 2009.
- Should anyone overpay their COBRA premiums beginning March 1, 2009, decide whether you will refund the overpayment or apply it as a credit towards future COBRA premiums.
- Review employee manuals, summary plan descriptions, etc. to reflect the ARRA changes.