The American Recovery and Reinvestment Act of 2009, signed by President Obama on February 17, 2009, provides COBRA subsidies for eligible terminated employees and their beneficiaries. Employers who sponsor group health plans should immediately review the new COBRA subsidy provisions to determine their obligations. (Please note that these obligations also apply to small employers obligated to provide continuation coverage under state law). Below is a brief summary, in Q&A format, of the COBRA subsidy provisions.
What changes are made to COBRA coverage?
- The Act provides for a 65% subsidy by the federal government of up to nine (9) months of COBRA premiums for eligible terminated employees and their beneficiaries.
- This subsidy is not taxable to the employee, but will be “recaptured” by certain individuals (i.e., individuals with income above $125,000 and couples with income above $250,000).
- Eligibility for the COBRA subsidy is limited to employees whose employment is (or has been) involuntarily terminated between September 1, 2008 and December 31, 2009, and the beneficiaries of such employees.
- Under the subsidy provisions, a group health plan may only require an eligible terminated employee to pay 35% of applicable COBRA premiums, with the employer paying the remaining 65%. The federal government then reimburses the employer for the 65% subsidy through employment tax withholding credits and/or direct reimbursement.
- These percentages are applied to the premium the employee would have been required to pay for COBRA coverage, generally 102% of the employer’s premium.
When are the new COBRA subsidy provisions effective?
- Employers sponsoring group health plans must take all necessary actions to provide the COBRA subsidy beginning March 1, 2009. COBRA notices must be modified to inform eligible employees of their rights with respect to the COBRA subsidy.
- Special phase-in provisions permit group health plans to accept 100% COBRA premium payments from eligible individuals for up to two months after March 1, 2009, and then credit or refund the subsidized amounts thereafter.
What must employers do to comply with the new COBRA subsidy provisions?
- Identify terminated employees who are eligible for COBRA subsidy benefits. Employees who lost health plan coverage due to a reduction in hours, voluntary termination or retirement are not eligible for the COBRA subsidy.
- Identify individuals who must be sent additional COBRA notices regarding COBRA subsidy eligibility – including individuals currently receiving COBRA coverage and individuals who would otherwise have been eligible for the COBRA subsidy but who did not elect COBRA coverage.
- Implement the COBRA subsidy for electing individuals and coordinate payroll tax crediting for subsidy amounts.
- Determine if special rules apply – e.g., for employers who pay all or a portion of COBRA premiums for terminated employees and their beneficiaries.