Trial and ARRA: New COBRA Changes Require Prompt Employer Action With Little Government Guidance

February 17, 2009

Today President Obama is expected to sign the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA includes sweeping changes to COBRA continuation coverage provisions. Under ARRA, workers who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009 (and their qualified beneficiaries) may pay reduced COBRA premiums for a period of up to nine months. The federal government will subsidize 65% of the premium, and individuals are responsible for the remaining 35%.

The burden of administering and, to some extent, paying for this subsidy falls on employers that sponsor group health plans, especially those that sponsor self-insured arrangements where premiums will generally not cover the entire cost of providing benefits. Further, employers (and in some cases, COBRA third party administrators) must respond immediately to these new requirements without the benefit of IRS and Department of Labor guidance on many issues.

Once President Obama signs ARRA, the new rules are effective immediately, and premium subsidies become available for periods of coverage beginning on and after the date of enactment. For most plans, that will be March 1, 2009, thereby requiring swift administrative changes by employers and their COBRA administrators.

Key Provisions

1. Nearly All Employers Covered. Virtually all employers providing group health plans must comply with the following changes. This includes private and governmental employers that are subject to the federal COBRA rules, and small employers that are subject to any of the 40+ state mini-COBRA laws currently in effect.

2. Eligibility Limited to Involuntary Termination Qualifying Event. “Assistance eligible individuals” (“AEIs”) are qualified beneficiaries who become eligible for COBRA continuation coverage between September 1, 2008 and December 31, 2009 resulting from their involuntary termination of employment. Therefore, individuals who have another COBRA qualifying event, such as reduction in hours, divorce or attainment of a certain age or who voluntarily resign from their employment are not eligible for the subsidy.

Also, the subsidy phases out for AEIs whose federal modified adjusted gross income (MAGI) exceeds $125,000 ($250,000 for joint filers), so that AEIs whose MAGI exceeds $145,000 ($290,000 for joint filers) are not eligible for any subsidy amount. Note: the IRS will recapture ineligible subsidy payments by increasing the individual’s income tax for the tax year, rather than by penalizing the employer for underpayment of payroll tax deposits (see Reimbursement Procedures, below). Individuals may elect to permanently waive subsidy eligibility by notifying the employer of such election. The IRS intends to provide more guidance on this waiver procedure.

3. AEI Payments Will Quickly Change. Under ARRA, AEIs are subject to the same timing and procedures for paying their portion of the COBRA premium. AEIs may pay the reduced COBRA premiums for periods of coverage beginning on or after the date of enactment (March 1st for most plans). With the short transition period, some AEIs may have already paid, or will submit, the full premium for coverage during the next two periods of coverage (generally March and April). If this occurs, the employer must either reimburse the AEI or provide a credit towards future premium payments.

4. COBRA Subsidy Amount Changes If Employer Already Subsidizes Premium. ARRA provides that the subsidized premium amount is determined based on the COBRA premium that the AEI is actually required to pay. For example, if the employer is already subsidizing COBRA and pays 40% of the COBRA premium, the AEI is required to pay 35% of the remaining 60% of the premium (21% of the entire premium), not 35% of the entire premium. Employers may then seek reimbursement for the government subsidy (39% of the entire premium – i.e., 65% x 60%).

5. Subsidy Duration Up To Nine Months. AEIs may receive subsidy payments for a maximum period of nine months, effective as of the first period of coverage beginning on or after the date of enactment. Subsidy eligibility for an AEI ends on the earliest of: (1) nine months after the subsidy first becomes available to the individual, (2) expiration of the AEI’s maximum coverage period expires under current COBRA continuation coverage provisions, (3) expiration of the AEI’s maximum coverage period under the extended election period, as discussed in the next paragraph, or (4) the date on which the AEI becomes eligible for coverage under another group health plan or Medicare. Note that this last date differs from normal COBRA rules which require the qualifying beneficiary to actually obtain coverage under a subsequent employer’s plan. Penalty provisions apply to AEIs who fail to timely provide notice of new coverage eligibility, as provided in future Department of Labor guidance.

6. Extended Election Period For AEIs Not Currently Enrolled. AEIs not enrolled in COBRA continuation coverage prior to the enactment of ARRA may enroll during an extended election period. This provision includes AEIs who never enrolled in COBRA and AEIs who enrolled, but terminated coverage prior to the enactment of ARRA. The extended election period opens the date of enactment and ends 60 days after the plan administrator provides the individual notice of the extended election period. COBRA continuation coverage, if elected under this extended election period, is effective as of the first period of coverage beginning on or after the date of enactment. For example, if the group health plan coverage period begins on the first day of the calendar month, the effective date would be March 1, 2009. However, the maximum length of coverage is determined as if the individual had timely elected continuation coverage after the qualifying event and without regard to the actual enrollment date during the extended election period.

7. Optional Plan Changes. Employers may allow all AEIs, not just AEIs enrolled during the extended election period, to elect a different benefit coverage option within 90 days of the notice date, as described below. This provision is not required and is similar to the election among existing coverage options that employers may provide to qualified individuals after a qualifying event.

8. New Notice Requirements. In addition to providing notice of COBRA continuation coverage following a qualifying event under ERISA, during the subsidy period plan administrators must also provide notice of the: (1) availability of premium reductions and (2) option to enroll in different plan coverage, if the employer permits such option for AEIs. For AEIs who elected COBRA continuation coverage between September 1, 2008 and the date of enactment or who are eligible to do so during the extended election period, plan administrators must issue the additional notice requirement within the next 60 days. The IRS will provide model notices within 30 days.

9. Employer Reimbursement Procedures. After receiving reduced COBRA premiums from AEIs, employers may offset periodic payroll tax deposits (wage withholding and FICA) by the remaining subsidy amounts. If an employer is entitled to subsidy amounts greater than payroll tax liability, the IRS will credit or refund the excess amount to the employer as if an overpayment occurred. Additionally, the IRS will treat an overstatement of reimbursements as an underpayment of payroll taxes, allowing for collection and assessment.

10. Employer Reporting Requirements. Employers seeking subsidy reimbursements must submit reports to the IRS with information that includes: (a) an attestation that involuntary termination of covered employees triggered the basis for AEIs’ eligibility; (b) the amount of payroll taxes offset by subsidy reimbursements for the current reporting period and estimated offsets for the following reporting period; (c) Taxpayer Identification Numbers for all covered employees; (d) the subsidy amount reimbursed for each covered employee and qualified beneficiary; and (e) a designation for each covered employee indicating whether the subsidy reimbursement covers one individual or two or more individuals. Forthcoming IRS guidance and regulations will set the exact time and manner for the reporting requirements.

Recommended Action Steps

In light of the new ARRA provisions, initial steps for employers to comply with the new COBRA premium subsidy provisions should include the following:

  • Contact COBRA administrators, both internal and external, to allocate responsibility for compliance with the new rules.
  • Contact payroll departments about getting the necessary information for reporting requirements, including how to identify all AEIs.
  • Determine what constitutes an “involuntary termination” (no ARRA guidance provided) and how to identify affected employees for terminations occurring from September 1, 2008 through the end of 2009.
  • Start the search for employees involuntarily terminated on or after September 1, 2008 and who do not have a current COBRA election in effect for purposes of the extended election period.
  • Provide an interim method for any AEI to waive the right to subsidy assistance until the IRS provides additional guidance.

McGuireWoods Employee Benefits group will host a complimentary teleconference to provide an in depth discussion relating to the new COBRA requirements and to assist participants with compliance questions. Details will follow shortly. In addition, we will publish a more detailed action list for employers to consider.

For additional information, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment teams, or the authors.