June 2009, Focus: Human Resources
COBRA and the stimulus bill
Much of the American Recovery and Reinvestment Act of 2009 (ARRA) is focused on stimulating the economy, but it also includes important information for you and your former, currently unemployed workers covered by COBRA.
“There is a new federal subsidy in place to partially offset the cost of health care premiums for unemployed workers,” says Patrick Georgia, vice president and Wisconsin Employee Health & Benefits Practice Leader for Aon. “Essentially, employers are fronting that money and getting it back as an offset of their payroll tax.”
Unemployed workers, and some dependents, involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009 qualify for a nine-month subsidy of 65 percent of their COBRA premiums if certain conditions are satisfied. This subsidy applies to group health plans, but not health FSAs.
“The new subsidy generally overlays existing COBRA rules,” says Georgia.
The subsidy is based on the COBRA premium amount charged to former employees, not including employer supplements. The amount charged must be based on the costs of the plan for active employees. Employers can also include a two-percent load on the premiums.
“But you can’t charge more for the premiums,” says Georgia. “You need to receive the documentation and the payment before your company is eligible for the payroll tax credit.”
There are limitations on eligibility for the subsidy for higher income individuals and there may be tax implications for them. If so, the subsidy will need to be repaid via their federal income tax returns.
A phase-out applies if the modified adjusted gross income is between $125,000 and $145,000 for individuals and $250,000 and $290,000 for joint returns.
These individuals will have their federal income tax liability increased by the amount of excess subsidy. This liability will be recaptured on their IRS Form 1040.
“Individuals also have an option to decline the subsidy,” says Georgia. “But in doing so, they need to realize that this is a permanent refusal.”
The subsidy coverage period started as early as Feb. 17, 2009, which was the date ARRA was signed into law. For most individuals, the first coverage period started on March 1, 2009.
“It’s important to remember that this does not extend the individual’s COBRA continuation period,” he says. “It still ends based on the original qualifying event.”
However, there are a number of other factors that can end the subsidy prior to that time, including: The nine-month period after the start of the subsidy; the former employee becoming eligible for another group health plan or Medicare; the COBRA coverage period expires or non-payment of the former employee’s portion of the COBRA premium.
“Sometimes the former employee will not formally notify the company that he or she is eligible for another health care plan,” says Georgia. “Instead, they’ll simply stop paying their portion of the premium. The lesson there is that you should always ensure that your company has received that payment before you continue coverage for the next month.”
The law also provides for a special, extended COBRA enrollment period for individuals involuntarily terminated on or after Sept. 1, 2008 and prior to Feb. 17, 2009 and who had not elected COBRA coverage or elected and subsequently discontinued COBRA coverage. In this case, these terminated employees have another 60-day period to elect COBRA coverage from the date they receive the new employer notification.
The U.S. Department of Labor has provided four model notices that business can use to inform individuals about the new ARRA COBRA provisions:
A general notice to be given to qualified beneficiaries covered by plans subject to the federal COBRA at the initial COBRA election opportunity.
An abbreviated general notice, which may be furnished to individuals who elected and are still covered by COBRA.
An alternative notice to be sent by issuers of group health insurance coverage subject to state continuation coverage laws.
A notice of extended election periods for eligible individuals who declined or discontinued COBRA coverage.
Samples of these notices can be found at http://www.dol.gov/ebsa/cobra.html.
Laurie Arendt is editor of CRW. She can be reached at crweditor@crwmag.com