New COBRA/Minnesota continuation rules require quick employer action.
The economic stimulus package signed on Tuesday, February 17, 2009, by President Obama contains new COBRA subsidy rules that will require quick action by employers. Under these rules, employees who have terminated employment involuntarily are entitled to a subsidy of up to 65% of the normal COBRA premium for up to nine months.
The following are some of the specifics:
The subsidy is available to employees and their families (assistance eligible individuals or AEIs) who are otherwise entitled to COBRA continuation coverage and who have been involuntarily terminated from employment for reasons other than gross misconduct between September 1, 2008 and December 31, 2009.
The subsidy applies to premiums for federal COBRA continuation coverage as well as for similar state health insurance continuation coverage. Therefore, it applies to employers who are too small to be required to comply with federal COBRA, but who must provide health continuation coverage under Minnesota law. The subsidy also applies to state and local government employers subject to continuation requirements under the Public Health Services Act.
The amount of the subsidy is 65% of the amount that the AEI would otherwise be required to pay for coverage. If the AEI is being charged 102% of the normal employer and employee premium (the maximum that can be charged under COBRA), the employee will receive a subsidy of 65% of that amount. If the employer otherwise reduces the amount the AEI must pay for the continuation coverage, for example, in connection with a severance plan or agreement, the COBRA subsidy is 65% of the amount the AEI is otherwise obligated to pay under such plan or agreement. The employer cannot charge the employee a reduced amount and take advantage of the COBRA subsidy based on the maximum premium that could be charged.
The subsidy is available for up to nine months or until COBRA coverage would have ended based on the initial termination of employment or until the AEI is offered coverage under another group health plan, even if the AEI chooses not to take that coverage. The AEI will have to pay as a penalty 110% of the amount of the subsidy if the AEI fails to inform the employer that other coverage was offered or accepted.
Employers are required to provide a new COBRA election period to qualified AEIs who did not elect COBRA or who allowed COBRA to lapse for nonpayment of premiums. The election period extends from the first day of the COBRA coverage period after the date of enactment (March 1, 2009, for plans with monthly coverage periods) until 60 days following the date notice is given. If elected, coverage would begin with the first COBRA period after the date of enactment, typically March 1, 2009. The time period that the AEI was without coverage cannot be considered a break in coverage for purposes of applying preexisting conditions limitations.
Employers have 60 days after enactment of the legislation in which to provide notice of the new COBRA subsidy and special election period. This notice must be sent to all employees whose employment was terminated during the period described above and who were eligible for continuation coverage. The U.S. Department of Labor (DOL) is required to establish an expedited review procedure that will determine claims for the COBRA subsidy within 15 business days of a request for review. Such a claim may be made, for example, if an employer refuses to provide the subsidy because the employer determines that the employee's termination was voluntary, rather than involuntary.
Within 30 days of the date of enactment of the legislation, the DOL is required to prepare a notice that employers can use to send to AEIs. That notice is not yet available. Employers who do not want to wait for the DOL's notice can draft their own.
Employers are permitted to continue charging the normal COBRA premium to AEIs for up to two months after the date of enactment, or for the March 1 and April 1 COBRA payments. The employer must then either refund the additional COBRA premiums paid or reduce the amounts charged for future months so long as the employer expects the AEI to recover the excess payments within 180 days of the date of overpayment.
The employer is permitted - but not required - to allow the AEIs to chose coverage under a different, lower cost plan than the one under which the AEIs were covered at the time the employee terminated employment.
The employer claims the subsidy by taking a credit for its payroll taxes, including the employer and employee portions of Social Security taxes (FICA) or federal wage withholding otherwise deposited with the U.S. Treasury.
At the end of the year the employer must certify that the employee associated with each AEI on whose behalf the subsidy is being claimed was involuntarily terminated and the amount of the subsidy claimed. The employer must also submit a list of the AEIs with Social Security numbers on whose behalf the employer claimed the subsidy.
AEIs whose income is more than $125,000 ($250,000 on a joint return) will be required to repay all or a portion of the subsidy on their individual returns as increased income taxes. The full amount of the subsidy will have to be repaid by AEIs with incomes at or above $145,000 ($290,000 on a joint return). The IRS is to issue guidance on how such a higher income AEI can instead waive the subsidy.
There are many unanswered questions regarding the subsidy, including the extent to which an employee who chooses a voluntary reduction in force or who quits for good reason will be considered to have terminated involuntarily. The time period that AEIs who make the new election will have in which to pay their portion of the initial premium is also unclear. We hope that the notice being prepared by the Department of Labor will address these issues.
The new law does not contain proposed changes to COBRA that would have allowed employees who had reached age 55 or employees with at least 10 years of service to continue coverage until Medicare entitlement. Although the House version of the bill included these provisions, the Senate version and the final compromise bill did not.
Employers with questions about the new law can contact their COBRA providers or any member of the Leonard, Street and Deinard Compensation and Employee Benefits practice group.
Save the date: On Wednesday, March 4, 2009, we'll be hosting a webinar on the new COBRA subsidy rules. Check our website for more details.