Small Business: Taming The COBRA: New Changes Require Hasty Actions
May 28, 2009
By Philip I. Frankel, Small-Biz Focus, May/June 2009
This article first appeared in the May/June 2009 issue of Small-Biz Focus produced by Support Services Alliance, Inc. (SSA).
The Economic Stimulus Package known as the American Recovery and Reinvestment Act of 2009 ("ARRA") was signed into law by President Obama on February 17, 2009 and includes important changes to the health plan continuation coverage requirements known as COBRA. Under the traditional COBRA rules, individuals entitled to elect COBRA continuation coverage based on a "qualifying event1" resulting in the loss of health coverage must pay the full premium cost of the continued health coverage. ARRA provides that eligible individuals may be able to pay a reduced COBRA premium for up to nine months. Additionally, eligible individuals who declined COBRA continuation coverage after termination are given a second opportunity to elect COBRA coverage. Below is a summary of these rules.
Who Is Eligible for the Premium Reduction?
The premium reduction is available to anyone eligible for COBRA coverage because of involuntary termination of employment between September 1, 2008 to December 31, 2009. The premium reduction must be available to an employee and his/her qualifying spouse and dependents (even if the termination was due to poor performance). While COBRA coverage may be denied to an employee terminated for gross misconduct, employers should be cautious when relying on this exception. Because each COBRA "qualified beneficiary" has an independent right to elect COBRA, an employee's spouse or beneficiary may elect to receive the premium reductions even if the terminated employee declined coverage.
How Much is the Premium Reduction and How is it Administered?
Under the ARRA, the federal government will subsidize 65% of the premium. The covered individual is responsible for the remaining 35%. The employer or the plan sponsor will initially pay 65% of the required premium and then recoup the amount in the form of an offset against its payroll tax liability. A claim for reimbursement must be made when the entity's payroll taxes are submitted.
What Type of Coverage is the Premium Reduction Available For?
The premium subsidy is available for any COBRA coverage, other than continued coverage under a flexible spending arrangement. Thus, the subsidy is available for medical, dental, vision or employee assistance plan coverage continued under COBRA. An employer may allow individuals to choose a different coverage option available under the plan, provided certain regulations and guidelines are followed.
How Long Does the Premium Reduction Last?
The premium reduction lasts for up to nine months. After the expiration of the subsidy, the covered individual will be responsible for the full COBRA premium. The subsidy may end earlier than nine months if the individual becomes eligible for other health coverage or Medicare. For example, if an individual obtains new employment and can participate in the new employer's medical plan, he/she is no longer entitled to the COBRA subsidy, even if the individual does not enroll in the plan. However, the individual is still eligible to continue COBRA coverage at his/her own expense.
What are the New Notice Obligations?
A qualified individual must be given notice that includes, among other things, contact information for plan administrators, a description of their rights to the subsidy, their obligations, and the forms to obtain the subsidy. The Department of Labor has created model notices and forms to help plans and individuals comply with these requirements2. Each model notice is designed for a particular group of qualified beneficiaries and contains information to satisfy ARRA's notice provisions.
What Should Employers Be Doing Now?
Because notices must be provided no later than April 18, 2009, employers and plan administrators should take immediate action to comply with the new COBRA rules. These actions should include:
- (1) Identifying individuals who were eligible to elect COBRA due to involuntary termination of employment on or after September 1, 2008;
(2) Developing the notices required to be provided and implementing procedures to deliver them;
(3) Consulting with payroll administrators/providers on procedures to claim credit for the subsidy on payroll tax filings; and
(4) Consulting with insurers, third party administrators and other involved parties to insure that the ARRA's COBRA provisions are being followed.
However, the rules and regulations enacted to implement the new COBRA premium subsidy are still subject to further changes and modifications.
1 A "qualifying event" can include termination of employment, reduction in hours, or disability.