Plan sponsors, multiemployer plans, insurance carriers and their advisors are scrambling to implement the new COBRA subsidy, which was only recently signed into law, but requires action by April 18.
President Obama signed the American Recovery and Reinvestment Act (ARRA) on Feb. 17, 2009. ARRA provides a federal subsidy for up to 9 months of 65% of the COBRA continuation coverage premiums for individuals (and their family members) who have been "involuntarily terminated." For example, if a plan's COBRA premium is $1,000 per month, an eligible individual would need to pay just $350 per month to receive COBRA coverage.
While the subsidy ultimately is paid for by the federal government, employers (and, in some cases, multiemployer plans and insurers) are responsible for covering the 65% of premium not paid by the individual, and are later "reimbursed" by the government – typically through a credit against payroll taxes.
Individuals (and their family members) are eligible for the COBRA subsidy if – between Sept. 1, 2008 and Dec. 31, 2009 – the individual is both (1) involuntarily terminated from employment, and (2) eligible for COBRA continuation coverage. Important rules to bear in mind are:
Individuals who already elected COBRA due to an involuntary termination between Sept. 1, 2008 and March 1, 2009 are eligible to receive the subsidy going forward. Individuals who were eligible to elect COBRA between Sept. 1, 2008 and March 1, 2009 due to an involuntary termination of employment, but did not elect COBRA, must be given a special second chance election to elect COBRA and receive the subsidy prospectively.
Plan sponsors (and multiemployer plans and insurance carriers) have an ongoing responsibility to provide notices and to allow eligible individuals to elect subsidized continuation coverage within COBRA's normal time frames.
An immediate priority for employers is to review the reasons why employees terminated employment (including those who terminated employment since Sept. 1, 2008), and identify and keep careful records of those who are involuntarily terminated and may be eligible for the subsidy.
And, employers should keep in mind that guidance from the Internal Revenue Service has made clear that "involuntary termination" is to be interpreted very broadly, including employees who quit in advance of a threatened layoff, seasonal employees, and even those employees who quit instead of being relocated by their employer.
While there are many key issues to consider and prepare for, at this point, the most critical deadline to keep in mind is April 18, 2009, because notice and election rights must be provided by that date. Model notices are available from the Department of Labor at http://www.dol.gov/ebsa/COBRAmodelnotice.html.
Plan sponsors, however, should consider tailoring the model notices to meet the needs of their employees and be prepared to explain any issues that may be specific to their plan.
Once election forms for the subsidy have been returned, employers will need to work carefully with their COBRA service provider or insurance carrier to ensure that the subsidy is applied correctly, and to enroll the terminated employees who elect continuation coverage during the second chance special election period.
Likewise, employers, multi-employer plans and insurance carriers need to review how they file payroll tax returns to plan for obtaining the payroll tax credit as reimbursement for the subsidy.
The COBRA subsidy scramble is sure to continue over the next several months, but with careful planning and dedicated resources, plan sponsors, multi-employer plans and insurance carriers can – and will – comply with the multi-faceted COBRA subsidy requirements.
