Department of Labor Issues Model COBRA Notices to Implement

the COBRA Subsidy Legislation

As part of the American Recovery and Reinvestment Act of 2009 (also known as “the Stimulus Package”), employees who are involuntarily terminated between September 1, 2008, and December 31, 2009, and who elect COBRA healthcare continuation (“Assistance Eligible Employees”) are entitled to a government subsidy for the cost of COBRA premiums for themselves and their eligible dependents for up to nine months. This federal subsidy does not apply where there has been a different COBRA qualifying event, such as a reduction in hours or a voluntary resignation.

What notice must employers provide to employees? Updated COBRA notices must be sent by April 18, 2009, to all employees who have been terminated since September 1, 2008, even if they are not eligible for the subsidy. The updated notice must include an explanation of the individual’s rights and offer a new 60-day period in which to elect COBRA. Even if these former employees did not elect COBRA initially, or allowed coverage to lapse, they are entitled to start coverage now. In addition to notifying individuals who are eligible already, employers will need to include with future COBRA notices information about the availability of the subsidy. The U.S. Department of Labor issued model notices on March 19, 2009 to satisfy the above obligations, which can be found at http:/www.dol/ebsa/COBRAmodelnotice.html.

How will this affect employers? Under the ARRA, the federal government will subsidize 65 percent of the COBRA premium cost for up to nine months for Assistance Eligible Employees. To facilitate this subsidy, where COBRA is elected, the employer must pay 65 percent of the premium up front and collect only 35 percent of the cost from Assistance Eligible Employees. The employer can then deduct the premium amounts it paid from its federal payroll taxes or obtain a direct reimbursement from the federal government.

Who is eligible? Assistance Eligible Employees include those who are laid off (or otherwise terminated involuntarily) on or after September 1 of last year, whether they elected COBRA coverage or not. The subsidy is phased out for those earning over $125,000 per year, or $250,000 if married.

Retroactivity issues. The subsidy requirement took effect March 1, 2009. It is retroactive in the sense that employees laid off back to September 1, 2008, are eligible for the subsidy; but the subsidy itself is not retroactive. In other words, if an employee was laid off last October and elected COBRA coverage, that employee is eligible for the subsidy for a nine-month period; but the subsidy only applies prospectively from March 1, 2009, and for nine months thereafter. You do not have to go back and reimburse that former employee for 65 percent of the premiums paid for months prior to March 2009.

If an employer is already paying part or all of a COBRA premium for an eligible employee, such as part of a severance or termination program, the calculation is based on the reduced amount paid by the employee, not the full cost of covering the individual. In other words, if an employer agreed to pay the full COBRA premium on behalf of an eligible employee, no reimbursement is available from the federal government because there is no employee payment to subsidize.

How long does the subsidy last for an individual? Although the subsidy is available for a maximum of nine months, it can end sooner in individual circumstances. The following are events that may end an individual’s eligibility:

Expiration of the maximum COBRA continuation coverage period, as the law did not extend the period;
The individual becomes eligible for (1) coverage under another group health plan; or (2) Medicare; or
The individual stops paying his or her portion of the premium.

Option to offer different coverage. Under regular COBRA rules, a terminated employee is typically only entitled to the type of coverage he/she had at the time of separation. The new law permits (but does not require) employers to offer a less expensive health plan option if one is available, and if the plan meets specified minimum coverage criteria. This is intended to reduce the cost to the employee and the federal government (since the government is ultimately picking up 65 percent of the premium). If an employer elects to offer different coverage options, it must provide notice to the eligible individuals. They then have 90 days to make an election change. The different coverage must also be offered to active employees at the time the election is made.

How does the employer obtain reimbursement from Uncle Sam? Reimbursement will be in the form of a tax credit against your periodic future deposits for wage withholdings and FICA payroll taxes. To the extent that an employer's claims for COBRA subsidy payments exceed the amount of those payroll taxes and withholdings, the employer is entitled to a direct payment from the federal government. The law provides that any entity seeking reimbursement (whether in the form of a tax credit or direct payment) will need to submit a report to the Treasury Department. The law does not yet specify the details and timing of these reports, and says that the reports must be submitted “at such time and in such manner” as the Secretary of the Treasury may require. However, the law provides that required reporting may include (1) an attestation of the involuntary termination of employment for employees for whom reimbursement is sought; (2) the amount of payroll taxes offset for the reporting period and an estimate for the next reporting period; and (3) a report containing the taxpayer identification numbers for all covered employees, the amount of COBRA premium assistance provided to each covered employee and qualified beneficiary, and a designation with respect to each covered employee as to whether the COBRA premium assistance provided is for individual or family coverage.