"Stimulating" COBRA Requirements for Employers
As all of the media commentators have pointed out, there are many pieces to the stimulus puzzle known as the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, 2009. One of those pieces is a new requirement for employers under COBRA, the statute that requires employers to offer health insurance to employees who have experienced a “qualifying event” such as layoff, discharge or a significant reduction in hours. Also under COBRA, spouses and dependents can continue coverage after a covered employee’s death, divorce, legal separation or certain other events.
Prior to the new stimulus package, the full cost for the eligible employee’s health insurance continuation under COBRA was paid by the employee based on the employer’s premiums plus a small administrative fee. However, under the new law that “employee pay” formula has been modified in certain situations and the employee does not have to pay the entire premium for a portion of the COBRA continuation period. Instead, a qualifying employee only has to pay 35 percent of the premium and the employer must consider the premium paid in full. Although the employer absorbs the remainder of the premium cost temporarily, the employer can then obtain a reduction in its payroll taxes to cover the balance of the employee’s premium costs.
Several eligibility requirements for the reduced COBRA include:
- Employees must have been involuntarily terminated (for other than gross misconduct) between September 1, 2008, and December 31, 2009. Employees terminated on or after September 1, 2008, who were eligible for COBRA but did not elect continuation coverage, have additional time to change their election decision.
- The reduced premium period is limited to nine months beginning March 1, 2009. There is no retroactive coverage for premiums already paid.
- The reduced premium is fully available without tax consequences only to employees with an adjusted gross income of $125,000 or less ($250,000 for joint returns). Employees with an adjusted gross income of between $125,000 ($250,000 for joint returns) and $145,000 ($290,000 for joint returns) will have the subsidy effectively phased out through a pro rata increase in their income tax liability up to the full amount of the subsidy. Employees at this higher income level can waive the subsidy to avoid the increased tax liability.
Congress did not provide employers the typical amount of lead time for such a significant change. The Act became effective on March 1, 2009, and employers must update COBRA election notices and other documents to reflect the new requirements for COBRA notices used on or after March 1, 2009. In addition, employers must provide information about the subsidy to employees who were involuntarily terminated on or after September 1, 2008, but did not elect continuation coverage, and give them another chance to elect COBRA coverage. This notice must be provided by April 30, 2009 (60 days from the effective date of the Act). Employers also need to establish procedures for paying their insurance carrier the 65 percent subsidy amount and obtaining reimbursement from the federal government for those payments.
While the stimulus package’s impact on the economy is yet to be seen, it is clear that the COBRA portion of the new law has stimulated a great deal of work for employers in a very short period of time.
