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H.R. Alert

April 2009

The following is a summary of the COBRA changes that went into affect two weeks ago.

Background

On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (ARRA). One of the provisions of ARRA results in modifications to the rules in relation to the Consolidated Omnibus Budget and Reconciliation Act (COBRA). These changes include subsidized COBRA premiums, an extended COBRA election period and an employer’s option to allow an individual to elect within certain restrictions a plan other than the one the individual was covered under at the time of the qualifying event.

Cobra Premium Subsidy

ARRA provides that persons known as "assistance eligible individuals" will be considered to have paid the required COBRA premium if they pay 35 percent of the total cost of the coverage. The remaining 65 percent will be paid on their behalf generally by the former employer who will be reimbursed by the government in the form of a credit to employment taxes owed by the employer to the Internal Revenue Service.

The amount that an individual receives as a COBRA premium subsidy will not be considered taxable income to the individual.

An assistance eligible individual is a person who lost coverage under an employer’s plan as a result of an employee’s involuntary termination between the period of September 1, 2008 and December 31, 2009 and who elects to continue coverage under COBRA.

Subsidy Income Limitations

An individual whose modified adjusted gross income in any year in which the subsidy is received exceeds $145,000 when filing as single or exceeds $290,000 if married and filing jointly, is not eligible for the subsidy at all. If the individual’s modified adjusted gross income in any year in which the subsidy is received is between $125,000 and $145,000 if filing single or is between $250,000 and $290,000 if married and filing jointly, they are eligible to receive a partial subsidy. If an individual anticipates their adjusted gross income for any year in which they are otherwise eligible to receive the subsidy will exceed the limits, they may opt out of receiving the subsidy. If an individual fails to opt out and their modified adjusted gross income exceeds these limits, they will owe an additional tax on their Federal tax return equal to the amount of the subsidy in which they were not entitled to receive.

Refund Of Excess Premiums Paid By Indivdual During Subsidy Period

Where an individual qualifies for the COBRA premium subsidy in any month for which that individual has paid in excess of the 35 percent premium, the entity that the COBRA "payment is payable" must either (1) refund the amount in excess of the 35 percent COBRA premium required or (2) provide a credit to the individual that reduces one or more subsequent payments that the individual would be required to pay for COBRA coverage for future months. For example, a COBRA premium for an individual is $1,000 for March of 2009 and the employee paid the full amount. The individual subsequently elects the subsidy effective back to March 1 and as a result must only pay $350.00 for the March premium. The employer may (1) refund the individual $650.00 or (2) credit $650.00 toward the individual’s future COBRA premiums.

However, unless it reasonable for the employer to believe that the credits will be applied to toward COBRA premiums within 180 days, the employer must refund the credit back to the individual within 60 days. Further, if at any time during the 180 day period, the employer no longer believes that the credit will be used for COBRA premiums during that 180 day period, the employer must refund any remaining credit to the individual within 60 days of coming to that determination.

Reimbursement Of Employer Paid Premium

The "person to whom premiums are payable under COBRA" are entitled to be reimbursed the 65 percent subsidy. In cases where the employer’s plan is subject to COBRA, ARRA identifies that entity as being the employer not withstanding the fact the actual premiums may be received by a third-party such as ADP on the employer’s behalf.

COBRA Subsidy Paid by Employer - The COBRA premium subsidy paid by the employer is treated as being payroll taxes submitted by the employer as of the date that the assistance eligible individual’s premium payment is received, in amount equal to the COBRA subsidy amount paid by the employer.

Overstatement of COBRA Subsidy - If the amount of COBRA premium subsidy paid is overstated by the employer, the overstated amount will treated as an underpayment of payroll taxes and "may be assessed and collected … in the same manner as payroll taxes." This would appear to indicate that the penalties associated with underpaying payroll taxes would apply in the case of overstatements of the COBRA premium subsidy paid.

Reimbursement Dependent on Payment of Remaining Premium - The COBRA premium subsidy paid by the employer may not be claimed as being payroll taxes paid by the employer "until after the reduced premium… has been received."

Period Of Premium Subsidy

The 65 percent subsidy is available until the earliest of the following events: (1) once the subsidy has been provided for nine months; (2) the first date that the individual becomes ELIGIBLE for coverage under any other group health medical plan including Medicare; (3) the date which the individual’s COBRA coverage entitlement is exhausted or terminated for coverage to pay the required premium in a timely manner.

It is important to note that eligibility for coverage under the following types of plans (or a combination of) will NOT cause loss of eligibility for the COBRA subsidy:

Dental, vision, counseling, referral services, employer on site medical treatment (consisting primarily of first-aid, wellness and preventive care). In addition, an individual may be eligible and covered under a health care spending account without causing a loss of COBRA subsidy eligibility.

An individual is considered to be eligible for coverage under a group health plan as of the first date on which the individual could be covered under the plan.

Duty of Assistance Eligible Individual - If an assistance eligible individual should become eligible for coverage under a plan that would disqualify them in relation to receiving the COBRA premium subsidy, ARRA requires them to notify the plan of this fact. Failure to do so may result in a penalty being assessed to the ineligible individual receiving the subsidy in the amount of 110 percent of the subsidy received. It is the responsibility of the Department of Labor (DOL) to provide guidance in relation to how and when notification must be made, however, at the time of this writing; the DOL has not yet issued the required guidance.

Review of Denials of Premium Assistance - Where an individual requests the COBRA subsidy and the group health plan denies the request, the individual has the right to appeal the denial to the governmental agency charged with hearing and deciding such appeals. ARRA requires that a determination of the individuals appeal must be decided "within 15 business days after receipt of such individual’s application for review." All determinations made the responsible governmental agency are final and "a reviewing court shall grant deference to such…determination."

Extension Of Election Period

ARRA provides a second chance for certain individuals who have not elected continuation coverage under COBRA as of the ARRA date of enactment but would be an assistance eligible individual if that election were in effect. This extension of the election period begins on the ARRA enactment date and ends 60 days from the time the individual is notified of their rights to the extended election period.

Effective Date of COBRA - Any COBRA continuation coverage elected by an individual during an extended election period will "commence with the first period of coverage beginning on or after the date of enactment" of ARRA. Consequently coverage retroactive to a period prior to ARRA enactment will not be allowed. Example: An individual originally was involuntarily terminated on September 1, 2008 was offered COBRA but COBRA was not elected. The individual is offered a second chance to enroll in COBRA as a result of ARRA. The individual elects in a timely manner and the first period of coverage beginning after the enactment of ARRA for the individual’s former employer’s plan is March 1, 2009. The individual’s first date of COBRA coverage would be March 1, 2009. It is important to note that the "period of coverage" will be dependent on the date that the individual’s COBRA coverage began. For instance, an individual’s first day of coverage was January 25th and COBRA is offered for 18 months from that date, the first period of coverage commencing after the enactment of ARRA (2/17/09) would be February 25th, 2009.

Length of COBRA Time Period - Although COBRA coverage elected under the extension of the election period is effective as of the first period of coverage commencing after ARRA becomes law, the amount of time allowed under COBRA is measured from the date of the original qualifying event. Example: An individual’s employment ended (and so did plan coverage) on September 1, 2008 and the individual was not covered under COBRA on date of ARRA enactment. The individual elects COBRA under the extended election provision. The COBRA coverage will begin on March 1, 2009 and end 18 months from September 1, 2008 or March 1, 2010. The actual amount of time the individual is covered under COBRA is the 12 month period beginning March 1, 2009 and ending as of March 1, 2010.

Preexisting Condition Impact – The 63-day break in coverage in relation to preexisting conditions will be disregarded with respect to an individual who elects COBRA under the extended COBRA election period.

Option To Enroll In Different Plan

Generally an individual who is COBRA eligible is only allowed at the time of electing COBRA to enroll in the plan they had on the day prior to the event which caused the termination of coverage. However, under ARRA, the employer has an option to allow an individual to elect a coverage that is different than what they had prior to termination of employment subject the following restrictions.

Period to Elect Option – Where the employer provides the different coverage option, the individual offered that option, has up to 90 days to enroll in a different coverage as measured from the date the individual was provided with the notice informing the individual of his or her rights to elect a different coverage.

Employer Provided Notices Required

General Notice - ARRA mandates that employers when providing the required COBRA Election Notice provided to individuals who lost coverage under their plan due to an employee’s involuntary termination must include information in relation to the availability of the premium subsidy and if the employer has elected, the option to enroll in a different coverage option than what the individual had at the time of involuntary termination of employment. The employer may include the additional information by modifying their existing COBRA Election Notice or by the inclusion of a separate document sent with the required CORA Election Notice.

Specific Notice Requirements- The specific information required to be included in a revised COBRA Election Notice or by a separate document accompanying the required COBRA Election Notice is as follows.

Extended Election Period Notice – In the case of any assistance eligible individual that became entitled to elect COBRA continuation coverage prior to the date of the enactment of ARRA, the plan (or an entity on its behalf) within 60 days of the enactment of ARRA must provide a notice which includes the specific requirements noted above. Failure to do so will constitute a failure to provide the required COBRA Election Notice and will subject to penalties.

Model Notices – ARRA requires that the DOL and Health and Human Services (HHS) create and provide model notices designed to meet the applicable notice requirements not later than 30 days after the enactment of ARRA.

Government Outreach

ARRA requires that the DOL and HHS provide an outreach program consisting of public education and enrollment assistance relating to the COBRA subsidy. The goal of the program is to educate employers, group health plan administrators, public assistance programs, States, insurers and "other entities as determined appropriate." The initial efforts of the outreach will focus on individuals electing COBRA continuation coverage and the provision of the information on the COBRA subsidy. These outreach efforts will include information provided on the DOL and HHS websites.

Government Reports

Interim Report - Under the new law, the Secretary of the Treasury is required to submit "interim reports" to the United States House and Senate which include the following information.

Final Report - As "soon as practicable" after the last period of COBRA continuation coverage for which a COBRA subsidy is paid, the Secretary of the Treasury must submit a final report which includes the following information.


If you have any questions please call me.

Larry Levy

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