Skip to main content

News & Updates

Major Changes to COBRA In Recent Stimulus Legislation

Date

March 1, 2010

Read Time

9 minutes

Share


In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act ("COBRA') in order to require employer-sponsored health plans to provide continuation of group health coverage that otherwise might be terminated. COBRA requires an employer-sponsored health plan to give employees and their families who would otherwise lose coverage as a result of a termination of employment and certain other events (e.g. divorce, death or disability) a chance to continue to maintain coverage under an employer's health plan for a limited period after that event. The period of continued health coverage under COBRA is generally 18 months but may be up to 36 months depending on the reason for the loss of coverage. The plan may generally charge up to 102% of the cost of coverage for active participants (the "COBRA Premium").

The most significant modifications COBRA since its adoption were recently made by The American Recovery and Reinvestment Act of 2009 (the "Act"), which was the economic stimulus bill that was signed into law by President Obama on February 17, 2009. The changes to COBRA contained in the Act will require immediate actions to be taken by employers to ensure that their health plans comply with these new COBRA requirements.

ACTION ITEMS

  • Prepare a list of the individuals who must receive the special COBRA election notice (i.e. individuals who terminated employment on or after September 1, 2008 and do not have a COBRA election in effect) and notify them of their special CORBA election rights within sixty (60) days from February 17, 2009 (the date the Act was signed into law).
  • Revise the current form of COBRA notices (or develop a supplemental notice) so that the notices to be sent to all persons entitled to receive COBRA coverage on or after February 17, 2009 (the date the Act was signed into law) will include a description of the COBRA Premium subsidy, the special COBRA election rights and otherwise meet the other notice requirements set forth in the Act. Although the U.S. Department of Labor has been instructed to issue a model notice within thirty (30) days after the Act was signed into law, plan sponsors may wish to draft new notices due to the timing requirements set forth in the Act.
  • Review plan documents and related communication materials (e.g. SPD's, online summaries, etc.) to determine what changes are necessary due to the Act.
  • If COBRA is administered by a third party, talk with the COBRA administrator about how it plans to implement the COBRA Premium subsidy rules and provide the information necessary to obtain the payroll tax credit for the subsidy. If the plan is a fully insured plan, check with the insurance carrier to discuss their obligations to provide the COBRA Premium subsidy and to comply with the notice and payroll reporting obligations.
  • Review severance arrangements to determine how these plans and programs will be affected by the requirements of the Act. Since the COBRA Premium subsidy is not available if the employer provides free post-termination COBRA coverage, companies should consider whether it is more beneficial to require the employee to pay for continued COBRA coverage during the period that the COBRA Premium subsidy is available and offer some other severance benefits for employees who are terminated before December 31, 2009.

DISCUSSION

The Act provides for a subsidy of 65% of the COBRA Premium for certain employees (and their family members) who were terminated by their employer (other than as a result of gross misconduct) on or after September 1, 2008 and before January 1, 2010 (referred to in the Act as "Assistance Eligible Individuals"). This COBRA Premium subsidy is not paid in cash; instead the Assistance Eligible Individuals will be deemed to have paid the full COBRA premium if they pay 35% of the required COBRA Premium. Thus, if the employer, as part of a severance agreement, pays the full amount of the COBRA Premium on behalf of the Assistance Eligible Individual, the COBRA Premium subsidy will not be available. The party who is obligated to cover the remaining portion of the COBRA Premium not paid by the Assistance Eligible Individuals (which, in the case of a self-insured plan, the employer sponsoring the plan and, in the case of a fully insured plan, the insurance company) is entitled to be reimbursed for the amount of the COBRA Premium subsidy. The amount of the reimbursement for the remaining portion of the COBRA Premium not paid by the Assistance Eligible Individuals is either (i) credited against the payroll tax obligations of the employer or the insurance company who is obligated to provide the subsidy or (ii) to the extent the COBRA Premium subsidy amounts exceed the payroll tax obligations of the employer or the insurance company, paid in cash.

The full amount of the COBRA Premium subsidy is only available to Assistance Eligible Individuals with modified adjusted gross income of less than $125,000 for Assistance Eligible Individuals who file individual tax returns or $250,000 for Assistance Eligible Individuals who file joint tax returns. A reduced COBRA Premium subsidy is available if the Assistance Eligible Individual's modified adjusted gross income is between $125,000 and $145,000 ($250,000 and $290,000 for joint filers). Assistance Eligible Individuals earning more than $145,000 ($290,000 for joint returns) will have their income tax increased by the total amount of COBRA Premium subsidy they receive and Assistance Eligible Individuals earning more than $125,000 but less than $145,000 (or more than $250,000 but less than $290,000 for joint returns) will have their income tax increased by a percentage of their total COBRA Premium subsidy received in that year. An Assistance Eligible Individual who is concerned that he or she may exceed the modified gross income limitations for qualifying for the COBRA Premium subsidy is entitled to waive his or her right to receive the subsidy; however, an Assistance Eligible Individual who waives his or her right to receive the COBRA Premium subsidy cannot claim it in a subsequent year if their income level changes. As a result, Assistance Eligible Individual who will not qualify in 2009 (due to income) may choose to pay the taxes to be incurred by receiving the COBRA Premium subsidy rather than permanently waiving their right to receive the COBRA Premium subsidy in 2010 if their income level changes.

The COBRA Premium subsidy is available starting with the first COBRA Premium due after the Act was passed (March 1, 2009 for most plans) and will remain available until the earlier of (i) nine (9) months from the date the subsidy first became available, (ii) the date COBRA coverage for the Assistance Eligible Individuals is terminated or (iii) the date upon which the Assistance Eligible Individual becomes entitled to receive Medicare coverage or health coverage under another employer's health plan, flexible spending account arrangement or on-site medical facility. The Act provides for a penalty equal to 110% of the COBRA Premium subsidy amount if the Assistance Eligible Individuals fails to notify the employer or insurance company which is providing the COBRA Premium subsidy that he or she have become eligible for health coverage under Medicare or if they become employed by a new company which provides health coverage.

The Act also requires that an additional COBRA election be offered to Assistance Eligible Individuals who are not currently receiving COBRA coverage and are not eligible for any other health coverage even if they were previously offered COBRA coverage and either (i) failed to elect or affirmatively declined COBRA coverage or (ii) obtained COBRA coverage for a limited period of time and let it lapse (e.g., they were unable to pay a COBRA Premium). These Assistance Eligible Individuals must be allowed to make this special COBRA election sixty (60) days following the date they are notified of their rights to make this additional COBRA election; however, this special COBRA election period does not extend the period of COBRA coverage beyond the time that COBRA coverage would normally have been terminated for the Assistance Eligible Individual making the special COBRA election (generally 18 months after coverage was originally lost). Furthermore, any COBRA continuation coverage elected pursuant to this special COBRA election begins on the first period of coverage following the enactment date of the Act (March 1, 2009 for most plans) and does not include any period prior to that period of coverage. In addition, the period of time following the original loss of coverage does not count as a gap in coverage that would permit the application of any preexisting condition limitation provisions of the plan under which COBRA coverage will be provided pursuant to the special COBRA election.

The Act requires that any Assistance Eligible Individuals who became entitled to receive COBRA coverage from September 1, 2008 through February 17, 2009 (the date the Act was signed into law) receive a notice explaining the right to obtain the COBRA Premium subsidy and the right to make a special COBRA election within sixty (60) days of the adoption of the Act. The Act also requires that the regular COBRA notices sent to any persons (not just Assistance Eligible Individuals) who become entitled to receive COBRA coverage between February 17, 2009 (the date the Act was signed into law) and December 31, 2009 include a description of the COBRA Premium subsidy as well as the rights to make a special COBRA election (even though the special election rights only apply to Assistance Eligible Individuals who became entitled to COBRA before the Act was adopted). These new notice requirements can be met by either incorporating the description of the COBRA Premium subsidy and special COBRA election rights into the plan sponsor's current form of COBRA notice or by sending a separate notice. The Act provides that the U.S. Secretary of Labor is to provide a form of model notice for this purpose within thirty (30) days of the adoption of the Act. However, since the COBRA Premium subsidy will generally be available starting March 1, 2009 and the sixty (60) day notice period for Assistance Eligible Individuals who became entitled to receive COBRA coverage prior to February 17, 2009 (the date the Act was signed into law) has already begun, group health plan sponsors may wish to develop a form of notice to comply with the requirements of the Act immediately.

We expect that the IRS and the U.S. Department of Labor will be issuing future guidance on these new COBRA rules. The Labor and Employment attorneys at LP will continue to monitor any new developments and will keep our clients informed when any new guidance is issued. If you have any questions regarding these issues please contact David Solomon.


Filed under: Employment & Executive Compensation

June 20, 2022

Levenfeld Pearlstein’s Employment & Executive Compensation Group Expands with Addition of Partner Kevin Burch

Read More

June 01, 2022

Chicago Employers: New Sexual Harassment Policy and Training Requirements Take Effect July 1

Read More