Human Resources: COBRA Changes due to American Recovery and Reinvestment Act (ARRA)

On February 17, President Obama signed the American Recovery and Reinvestment Act (ARRA) which has significant impact on existing COBRA rules and regulations.

Below is important information describing the changes and what is expected of employers. Deadlines are approaching soon!

Employees Impacted

Under the American Recovery and Reinvestment Act of 2009 (ARRA) certain employees (and their qualified beneficiaries) whose employment is involuntarily terminated will be able to continue health coverage under COBRA by paying only 35% of the ordinary COBRA premiums for up to nine months. The employer is required to pay 65% of the premium. To qualify as an AEI, an employee must be involuntarily terminated from employment between September 1, 2008, and December 31, 2009, and be eligible to elect COBRA continuation as a result. Employees that are terminated for any reason other than involuntarily are not eligible for the COBRA premium subsidy.

Subsidy Effective Date

The COBRA premium subsidy is effective for the first period of coverage for eligible individuals on or after the enactment date of February 17, 2009. For premiums that are paid on a monthly basis, the subsidy applies to coverage on and after March 1, 2009. ARRA will provide a grace period of two billing cycles to credit or refund COBRA premium amounts paid by eligible individuals if in excess of the 35% of the premium. An employer may have the eligible individual pay their premiums for two months and then provide the reimbursement to the eligible individual.

Employer Checklist

Identify employees who were plan participants and who were involuntarily terminated after September 1, 2008, as well as their spouses and dependents. These employees are ones who did AND did not elect COBRA coverage.
On or before April 17, 2009, provide a special enrollment notice to eligible individuals and their qualified beneficiaries who were involuntarily terminated on or after September 8, 2008, but who either did not previously elect COBRA or did elect COBRA but lost such coverage due to nonpayment of premiums and permit them a 60-day special election period after such notice is provided in which to elect COBRA and receive the subsidy.
Modify your existing Qualifying Event Notice to include information about the subsidy.
On or before April 17, 2009 provide notice of the subsidy to all current eligible individuals who were on COBRA coverage as of February 17, 2009.
Determine the amount of reduced COBRA premiums to be paid by the eligible individuals and charge reduced premiums as soon as administratively possible on or after March 1, 2009.
Reimburse any COBRA premiums to eligible individuals who paid the full COBRA premiums
Determine reporting requirements
Establish record keeping process

Tax Consequences

An eligible individual's receipt of the COBRA subsidy is not taxable for federal purposes. The one exception to federal tax is if the eligible individual is a "high-income" individual (see note) *. Under current California law, the premium subsidy is not taxable for state purposes since it qualifies as employer-provided health coverage.

Duration of Subsidy

Nine months after the first day of the first month during which the subsidy becomes available to the eligible individual.
The date the eligible individual becomes eligible for coverage (even if they do not enroll) or becomes eligible for Medicare.
The end of the maximum continuation period under COBRA (or the state program Cal COBRA in California).
The end of the period of continuation coverage allowed for eligible individuals entitled to the 60-day special election period.

Severance and The Subsidy

Employers should review their severance arrangements and health plan documents to determine how these plans and programs will be affected by the new law. It is not clear whether the subsidy will be available if the employer provides free post-termination coverage or the employee pays less than 35% of the COBRA premium. Therefore, employers should consider whether it is more beneficial to pay for continued coverage as part of a severance arrangement or to only offer employee-pay-all COBRA.

Areas Where The Statute Requires Regulatory Clarification

There are multiple areas where the law is not yet clear regarding the subsidy. Model notices are to be published by March 19, 2009 which will provide more clarification. Areas hopefully to be addressed:

The time and manner in which an eligible individual receiving the subsidy must notify the group health plan of his or her loss of eligibility for the subsidy.
The time and manner in which an employer entitled to reimbursement must submit the required reports to the federal government.
The time and manner in which a high-income individual may waive the right to premium assistance.
Regulations regarding the prevention of fraud and abuse and the expedited review of denials of subsidized COBRA.

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* High-income individuals who take advantage of the subsidy face an increase in their income tax liability equal to the amount of the subsidy (subject to a phase-in formula). A "high-income individual" is a person whose modified adjusted gross income exceeds $125,000 ($250,000 for married individuals filing jointly). "Modified adjusted gross income" means adjusted gross income plus amounts excluded for US citizens and residents living abroad or in certain US territories. High-income individuals may elect to waive the subsidy.

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For more information call:

Rick Thorpe

HR Options, Inc
1401 Willow Pass Road
Suite 820
Concord, California, 94520

925-265-8715
rthorpe[at]hroptions.com
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