ARE YOU COMPLYING WITH THE NEW COBRA SUBSIDY REQUIREMENTS?

The Economic Stimulus Bill provides individuals eligible for continued medical coverage under COBRA with a federal subsidy of 65% of the individual’s insurance premium for up to nine months, which subsidy is advanced by the employer.  Every employer that sponsors a group health plan and every employee that was terminated or laid off on or after September 1, 2008 is affected. Below is a brief summary and outline of some of the subsidy requirements.

1.    What is the COBRA Subsidy:  Qualified individuals will receive a 65% subsidy for up to nine months toward the COBRA premium that they are responsible to pay.  Employers that administer the health plan will initially pay the 65% subsidy and subsequently receive a credit against payroll taxes for the subsidy amount.

2.    When Does the Subsidy Become Effective:  The subsidy applies to premiums paid commencing February 17, 2009; therefore, for most plans using calendar months as the coverage period the subsidy will begin on March 1, 2009.

3.    Who is Eligible for the Subsidy:  Individuals who have been involuntarily terminated from employment between September 1, 2008 and December 31, 2009.  Qualified individuals include the terminated employee and his or her spouse and dependents that were covered under the plan.  There are limitations for individuals who are considered high income earners with the threshold generally being a modified adjusted gross income that exceeds $125,000, or $250,000 in the case of joint returns, for the tax year that they receive the subsidy.

4.    What if the Individual Declined COBRA Before the Effective Date:  Such individuals are entitled to an extended election period that  begins on February 17, 2009 and continues for 60 days after an extended election notice is delivered to the individual.

5.    What if the Individual Already Paid the COBRA Premium:  The employer may either reimburse the excess amount that the individual paid or credit such excess amount against future premiums, provided that the excess will be used within 180 days.

6.    Who Administers the Subsidy:  (a) if the sponsor of the plan is a multiemployer plan, the responsible party is the plan, (b) if the sponsor of the plan is an employer with more than 20 employees, the responsible party is usually the employer, and (c) in other cases the responsible party is the insurer.

7.    How Will the Government Reimburse the Employer:  The party advancing the subsidy is reimbursed through a credit against its payroll taxes.  If the subsidy exceeds the employer’s liability for payroll taxes, the IRS will reimburse the employer for such amount.  The Act defines payroll taxes to include amounts withheld for federal income tax and the employer and employee portions of FICA, Social Security and Medicare taxes.  Reimbursement, however, may not be claimed until the 35% payment due from the individual is actually received.  If you would like a copy of the IRS form containing the line item for the tax credit, please email me at jcohen@homefurnishingslaw.com.

Certain information and documentation must be maintained to support the tax credit, including the level and some details of the coverage, dates and amounts of premiums received from the covered individual, proof that the required payment was made to the insurer, and an attestation of the involuntary termination of employment of the covered employee.

8.    What Notice Must the Employer Provide:  COBRA notices need to be revised to include information on the availability of the subsidy, including (a) the forms necessary to establish eligibility, (b) contact information of the plan administrator, (c) an explanation of the extended election opportunity for individuals who declined COBRA coverage, (d) that the individual must notify the plan when he or she becomes eligible for coverage that would cause the subsidy to cease and the penalty for the failure to do so, and (e) a description of the option to enroll in a different coverage und the health plan if applicable. Such notices must be provided for all individuals who were terminated during the applicable time period on or before April 18, 2009.  If you would like to see a form notice, please email to me at jcohen@homefurnishingslaw.com.

9.    Are Small Health Plans Subject to the Subsidy:  Generally, COBRA does not apply to health plans if the employer has fewer than 20 employees.

10.    How Long Does the Subsidy Last:  The subsidy is paid for up to nine months, provided that the individual is eligible to receive coverage under COBRA or other state law.  If the individual becomes eligible for another health group plan or Medicare/Medicaid, that individual is no longer eligible for the subsidy even if the individual does not accept the other coverage. Individuals may be subject to a penalty if they fail to notify the employer that he or she is no longer eligible for the subsidy.

The government is providing additional information and clarification on many of the matters discussed here.  In the meantime, if you have any questions or comments, please feel free to call or email at jcohen@homefurnishingslaw.com.