Employment Law Bulletin
COBRA PREMIUM SUBSIDY
The American Recovery and Reinvestment Act of 2009 (“2009 Recovery Act”) includes temporary changes to COBRA, the federal law that provides terminated employees the right to purchase group health insurance and continue the coverage that had been provided by their former employer. Until December 31, 2009, certain individuals and their families who are eligible for COBRA continuing coverage under federal law, and some state mini-COBRA laws, will receive subsidized premium reductions. Under the 2009 Recovery Act, employers and plan administrators are required to provide additional notices to terminated employees regarding the COBRA premium reductions. The subsidy requirements apply to all group health plans and self-insured plans that are subject to the federal COBRA and some state mini-COBRA laws, including Massachusetts and Connecticut.
The 2009 Recovery Act provides that employers (or in certain circumstances multi-employer plans or insurers) subject to the COBRA continuing coverage requirements must offer eligible individuals a 65% reduction in the cost of the COBRA premiums. When an employer receives from an eligible individual a payment of 35% of the premium cost, the employer must pay the remaining cost of the COBRA continuing coverage. After receipt of the payment from the eligible individual, the employer can take a credit on its quarterly payroll tax return for its payment of the COBRA premium.
To qualify for the subsidy, the individual must:
- be eligible for COBRA continuing coverage as a result of an involuntary termination of employment, except for gross misconduct, between September 1, 2008 and December 31, 2009;
- elect COBRA coverage; and
- have a modified adjusted gross income below $125,000 (individual) or $250,000 (jointly).
While the 2009 Recovery Act was enacted to provide a stimulus to the economy and assist laid off workers, employees whose employment has been terminated for cause also have a right to the subsidy. Unless the United States Department of Labor (“DOL”) issues an interpretation clarifying involuntary termination of employment, it appears that any involuntary termination, except gross misconduct, will qualify for the subsidy.
The premium reduction applies to periods of COBRA continuing coverage beginning on or after February 17, 2009 and extending for up to nine months. Eligibility for the premium reduction will stop:
- nine months after the first day of the first month for which the subsidy applies;
- the end of the maximum COBRA coverage period; or
- when an individual becomes eligible for coverage under any other group medical health plan (such as a new employer or a spouse’s employer) or Medicare.
Individuals receiving the subsidy who become eligible for coverage under any other group medical health plan must notify the employer of that eligibility. Anyone who continues to receive the subsidy after being eligible for coverage under any other group medical health plan during the nine month period will pay a penalty to the IRS of 110% of the premium reduction (the amount of the subsidy paid by the employer).
The premium subsidy is not taxable income. The premium reduction begins to phase out for individuals whose modified adjusted gross income exceeds $125,000 or $250,000 for joint tax returns, and is totally phased out at $145,000, or $290,000 for joint tax returns.
Employers are not required to determine whether an individual’s income makes him or her ineligible for the subsidy. However, individuals can notify the employer of their income ineligibility and pay the full COBRA premium.
Switching Benefit Options
If an employer offers more than one coverage option to active employees, the employer may, but is not required to, offer eligible individuals the opportunity to switch the coverage option chosen when they became eligible for COBRA. In order to remain eligible for the premium subsidy, the eligible individual must switch to a coverage option that has the same or lower premium as the individual’s original coverage.
DOL Review Process
The 2009 Recovery Act includes a review process for individuals who are denied the subsidy. If a plan administrator, employer or insurer denies eligibility for the premium reduction, the individual can request an expedited 15-day review by the DOL. The DOL will develop the review process and the application form.
Special COBRA Notices to Former Employees
Employers must provide eligible former employees who were involuntarily terminated during the time period of September 1, 2008 through February 16, 2009 and who did not elect COBRA when it was offered, or who did elect COBRA but are no longer enrolled, a special COBRA election notice informing them of the premium reduction. The special notice must be provided by April 18, 2009. Individuals who received the special notice are given 60 days to elect coverage. Coverage for individuals who elect COBRA during this special election period will begin the first period of coverage after the election.
This special election period does not apply to state mini-COBRA laws. State legislation will be necessary to require a second election period under state mini-COBRA laws.
COBRA Notices to Employees Involuntarily Terminated on or before December 31, 2009
Employers must amend or supplement their COBRA notices to include information regarding the premium reduction. These amended notices must be given to all employees involuntarily terminated on or after February 17, 2009 and before December 31, 2009. The DOL has developed model notices, which are available at www.dol.gov/cobra.
Employers can obtain reimbursement for the COBRA subsidy as a tax credit on the updated quarterly IRS Form 941 (Employer’s Quarterly Federal Tax Return). Employers must maintain supporting documentation for the tax credit claimed including, but not limited to:
- Information regarding the employer’s receipt of the 35% share of the premium, including dates of receipt and the amounts of the premium;
- With insured plans, copies of invoices from the insurance carrier and proof of timely payment of the full premium to the insurance carrier;
- With self-insured plans, proof of the premium amounts and proof of coverage provided to each eligible individual;
- Proof of the involuntary termination for each individual receiving the subsidy;
- Proof of eligibility for COBRA coverage during the time period of September 1, 2008 to December 31, 2009, and his/her election of COBRA coverage;
- Record of the social security numbers of all former employees who received the subsidy, the amounts of the subsidy reimbursed with respect to each former employee, and whether the subsidy covers one or more individuals; and
- Other documents necessary to verify the correct amount of the tax credit.
In handling termination of employments, employers subject to the federal COBRA or state mini-COBRA will have to deal with the various issues created by the 2009 Recovery Act and should consult with their legal counsel to assist with responding to these temporary requirements.
If you have any questions regarding the new COBRA requirements or any other employment issues, please contact Mary Jo Kennedy, who is the Coordinator of the Employment Law Practice Group, or Chip Doherty, a member of the Employment Law Practice Group. Mary Jo is at 413-272-6242 or [email protected]. Chip is at 413-272-6313 or [email protected].