Congress has recently considered several bills that are aimed at extending the COBRA subsidy program that was created earlier this year under the American Recovery and Reinvestment Act of 2009 (ARRA).
- On December 19, 2009, President Obama signed the Department of Defense Appropriations Act, 2010 (the DOD Act), which includes a short extension of the COBRA subsidy program class through the end of February 2010 and an expansion of the COBRA subsidy period to 15 months.
- In addition, the House of Representatives has passed the Jobs for Main Street Act of 2010 (the Jobs Act), which would further expand the COBRA subsidy program class through the end of June 2010 if enacted. The Jobs Act is expected to be taken up by the Senate in the coming year.
For a detailed analysis of when and how the COBRA subsidy currently applies, please refer to our previous 2/17/09, 3/23/09, 3/27/09, 4/3/09 and 4/9/09 WorkCite articles on this topic. A summary of key DOD Act and Jobs Act provisions regarding the COBRA subsidy program extension (and potential further extensions) is set forth below.
The DOD Act COBRA Subsidy Extension
The COBRA subsidy extension provisions of the DOD Act are effective immediately and are retroactive to the effective date of the original COBRA subsidy program under ARRA.
Extension of Eligible Class
The window for determining eligibility for participation in the program has been extended by two months. The revised program will apply to individuals who lose their group health plan coverage due to an involuntary termination of employment between January 1, 2010 and February 28, 2010. Under ARRA, the deadline was December 31, 2009.
Extension of Subsidy Period
The DOD Act extends the duration of the subsidy by six months. Under the DOD Act, all assistance eligible individuals (AEIs) may participate in the COBRA subsidy program for a total of 15 months, rather than the previous nine months, subject, of course, to the restrictions on continued coverage imposed by ARRA. If an AEI’s nine-month ARRA COBRA subsidy period has lapsed, the new rules are effective retroactively to the date the prior period ended. However, the new rules do not extend the normal 18-month COBRA continuation period.
Special Rules Relating to Current AEIs
The new rules require employers to continue to track AEIs who were assistance eligible under the prior ARRA rules.
- AEIs who dropped their COBRA coverage when the ARRA COBRA subsidy expired must be given the opportunity to regain subsidized COBRA coverage by paying COBRA premiums retroactively. Employers must now treat these individuals as eligible for the extended period of COBRA coverage if they pay the reduced premium amount for the entire period since the lapse of their COBRA coverage by February 17, 2010 or, if later, 30 days after they receive proper notice of their new rights under the law.
- AEIs who continued to pay full COBRA premiums for coverage following the lapse of the ARRA subsidy are entitled to reimbursement for their payment of the 65% subsidy. Under the DOD Act, employers must either make a reimbursement payment equal to the excess portion paid or credit that amount toward future premiums payable, provided that it is reasonable to believe that the credit will be used within 180 days.
The DOD Act requires that two types of notification be given to AEIs. The Department of Labor intends to issue model notices for both types of notification in January.
- The first notice required under the DOD Act describes the parameters of the subsidy program’s extension. It must be given to AEIs who either: (i) were eligible for assistance on or after October 31, 2009 or (ii) become AEIs due to a voluntary or involuntary termination of employment on or after that date. This notice must be given no later than February 17, 2010 or within the timeframe mandated under ARRA if the individual becomes eligible for assistance after December 19, 2009.
- The second notice describes the AEI’s right to pay retroactive premiums to reinstate coverage and the right to reimbursement for overpayment. It must be given to individuals who are in their “transition period”. This is the period that begins immediately after the end of the nine-month ARRA COBRA subsidy period. This second notice must be provided within the first 60 days of the individual’s transition period.
The Jobs Act Potential Further Subsidy Expansion
Early in 2010, the Senate is scheduled to review the Jobs Act, which, as passed by the House, would contain additional changes to the COBRA subsidy program if ultimately enacted. The following describes the Jobs Act’s salient provisions.
Extension of Eligible Class
The Jobs Act would extend the window for determining eligibility for participation in the program by an additional four months from the DOD Act deadline (February 28, 2009) to June 30, 2010.
In addition to expanding the window of eligibility, the Jobs Act would expand the class of employees who are eligible for assistance. Employees who lose group health plan coverage due to a reduction in hours that is followed by an involuntary termination of employment would be considered AEIs if other requirements for eligibility are met.
Retiree Health Plan Coverage
Under current law, individuals who are eligible for post-employment coverage under certain types of retiree health plans are not eligible for the COBRA subsidy. The Jobs Act would clarify that retiree health coverage does not automatically disqualify an individual from eligibility for a COBRA subsidy.
Employer Payroll Tax Liability
Under current law, employers are at risk for improper payroll withholding when they make an incorrect determination regarding an AEI’s eligibility for the COBRA subsidy. The Jobs Act would minimize the risk of payroll tax liability in this event by providing a safe harbor for those employers that maintain proper documentation and attest to the involuntary nature of the termination. However, such employers must base their decisions on a reasonable interpretation of the provisions under ARRA and other related administrative guidance.
The Jobs Act would require employers to distribute an additional explanation of the changes created by the legislation. Thus, employers would be required to supply one or more notices in addition to those that are required in the DOD Act.
Penalties for Non-Compliance
Despite creating a safe harbor for employers for payroll tax withholding, the Jobs Act would expose employers to increased penalties for violations of ARRA provisions. The Jobs Act would create a civil penalty of $110 per day where a COBRA subsidy is not provided within 10 days of an agency determination that an individual is entitled to a subsidy. This penalty could be assessed in addition to the other penalties under ERISA and the Internal Revenue Code.
The passage of the DOD Act creates a considerable number of new questions concerning the requirements under the revised COBRA subsidy program. As noted above, we expect that the agencies will be responsive in answering these questions as soon as possible.
McGuireWoods will publish future WorkCites on the COBRA subsidy program as the government publishes further guidance and as new information unfolds regarding the legislative status of the Jobs Act. In the interim, employers and service providers should continue to familiarize themselves with the new rules and should start to assemble lists of AEIs to whom DOD Act notices will need to be sent in the near future.