A primer on the new COBRA subsidy

The "stimulus" bill signed by President Obama on Feb. 17 (the American Recovery and Reinvestment Act of 2009 or "ARRA") includes provisions providing for a premium assistance subsidy for COBRA coverage to certain terminated employees.

Eligibility: An individual is eligible for the COBRA premium subsidy if that person loses health coverage as a result of being "involuntarily terminated" from employment between Sept. 1, 2008 and Dec. 31, 2009, and is or was eligible to elect COBRA during that time. The terminated person's spouse and dependents are also eligible.

Any assistance eligible individuals ("AEIs") who initially elected COBRA continuation coverage, but whose COBRA was terminated (e.g. for nonpayment of premiums) are also entitled to make new elections and to take advantage of the premium subsidy.

Subsidy payment: The ARRA gives AEIs a 65 percent subsidy of the COBRA premiums that they would be required to pay for any group health plan in which they participated at the time of their termination.

Eligible individuals who elect COBRA can benefit from the subsidy for up to nine months.

AEIs pay 35 percent of their COBRA premiums. The 65 percent premium assistance subsidy is fronted by the recipient of the COBRA premiums. The party eligible to apply the subsidy as a credit toward its employment tax liability depends upon the type of plan. If the plan is not a multiemployer plan: (1) for self-insured plans, the employer provides the subsidy and receives the credit; (2) for insured plans subject to federal COBRA (20 or more full-time employees), the employer provides the subsidy and receives the credit; and (3) for insured plans which provide state continuation coverage (also known as small employer plans), the insurer provides the subsidy and receives the credit. For multiemployer plans, the plan provides the subsidy and receives the credit.

The employer is entitled to apply the amount of premium assistance it pays as an offset against its payroll taxes. The credit will be taken on the quarterly Form 941 that is filed for the period during which the subsidized premium is paid. To claim this offset, the employer must file a report with the IRS that includes:

* An attestation of involuntary termination of employment for each covered employee

* A report of the amount of payroll taxes offset for the applicable payroll tax reporting period and the estimated offset of payroll taxes for the subsequent period; and

* A report containing the tax ID numbers of all covered employees, the amount of subsidy reimbursed for each employee and family member, and a designation with respect to each employee as to whether the subsidy reimbursement is for coverage for one individual or two or more.

If the amount of the premium subsidy is greater than the payroll tax liability for that period, that additional amount due to the entity will be treated as a refund or a credit of payroll taxes as if it was an overpayment of payroll taxes.

Election period: Employers must provide a special election period for any individuals who were involuntarily terminated from employment on or between Sept. 1, 2008 and Feb. 17, 2009 and who failed to elect COBRA initially. Employers must give these individuals a 60-day period to elect COBRA and receive the premium assistance, beginning on the date they receive notice of their rights to make the election.

Although the period of premium assistance applies prospectively from March 1, 2009, the maximum 18-month COBRA continuation period for these individuals is still measured from their date of the termination

of employment, not from the date they elect COBRA. Notices of the special election period must be distributed no later than April 18, 2009 (60 days after enactment of the law).

Individuals who have already elected COBRA on the date of enactment and would be entitled to premium assistance must receive a notice of their right to premium assistance. For any individual who is paying more than 35 percent of the COBRA premium, an employer could, until April 18, 2009, choose either to reimburse the individual for any excess payment within 60 days of receiving the full premium payment or provide a credit against their future premium payments. If the employer chose to provide a credit, the excess credit must be used within 180 days of the date the full premium payment is received. The employer must reasonably believe that the credit will be used within the 180 day period.

Amending coverage under COBRA: An employer may (but is not required to) allow a COBRA recipient

eligible for the subsidy to change his or her health insurance coverage option to a less expensive coverage option when making a COBRA election under the act. Those who previously elected COBRA coverage may also be given the right to elect coverage under an option other than the option by which they were covered at the time of termination.

The alternative option must have the same or lower premiums (pre-subsidy), must be available to active employees under the plan as well, and cannot be a health FSA or coverage consisting only of dental, vision, or certain other limited services. The election to change must be made within 90 days of receipt of the COBRA election notice.

Notice requirements and penalties for noncompliance: Employers must provide notice regarding the availability of the subsidy to all individuals who became entitled to elect COBRA between September 1, 2008 and December 31, 2009. Notices must be sent to all individuals, not just individuals who were involuntarily terminated during that time period. Failure to timely provide these additional notices is treated as a failure to provide COBRA notice, and can result in severe penalties.

Additional notice must also be given to all AEIs who became entitled to elect COBRA on or after Sept. 1, 2008 but before Feb. 17, 2009, of the availability of COBRA reduction as well as the extended election period discussed above. This notice must be sent whether or not the employee elected COBRA at the time of termination.

Additionally, going forward, information about the premium subsidy and the option to enroll must be added to current COBRA notices, or provided to employees in a separate document. The notice must include certain specific information. To assist employers and plans with compliance, model notices were issued by the Department of Labor. The model notices can be found at: www.dol.gov/ebsa/COBRAmodelnotice.html.

Termination of premium assistance: Premium assistance ends on the earliest of: eligibility for another group health plan (note that this does not end COBRA coverage, just eligibility for the premium assistance subsidy), eligibility for Medicare, nine months after assistance begins, when COBRA coverage otherwise ends.

Effective date: The subsidy will apply to periods of COBRA continuation coverage beginning on or after the date of the act's enactment (i.e. Feb. 17, 2009). Under most plans, this will mean March 1, 2009.

Timothy E. Rowe is a partner with McDonald Carano Wilson LLP and focuses his practice primarily in the areas of employment law and litigation and the defense of employers in workers compensation related matters. Denise Pasquale is an associate at McDonald Carano Wilson and works primarily in the areas of commercial, and general civil litigation.