So what is new with COBRA? It seems like everything!
There have been and continue to be legislative changes that may directly impact your company's administrative and cash flow procedures. We hope that this article helps clarify issues around COBRA and related legislation passed as a part of the Economic Stimulus Package. Congress is currently considering continuing some of these programs, to continue to help the lagging job market recover as it struggles behind the economic recovery.
What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act of 1986, as Amended (COBRA) is an act that requires most employers with at least 20 employees to allow covered employees and/or their dependents ("qualified beneficiaries") to continue their employer-sponsored group medical, dental and/or vision coverage for up to 18 months after losing coverage due to a COBRA "qualifying event" (e.g., termination of employment for other than gross misconduct, divorce, no longer being a legal dependent, etc.). Coverage may be continued for up to 36 months if a covered individual experiences a "secondary event" while on COBRA health care continuation (e.g., if he or she becomes disabled).
An employer offering a group health plan to its employees becomes COBRA-liable on the first day of a calendar year when it has employed at least 20 W-2 employees for at least 6 months of the previous calendar year. Under COBRA, the covered individuals must normally pay 100-102% of the monthly premium themselves.
What is ARRA and how does it impact your company?
With the American Recovery and Reinvestment Act of 2009 (ARRA), the U.S. government extended a 65% COBRA subsidy to covered employees of COBRA-liable companies (employed at least 20 W-2 employees for at least 6 months of the previous calendar year) who are involuntarily terminated between September 1, 2008 and December 31, 2009. Employers play a large role in providing this subsidy, since they must pay the subsidy up front and then recover the funds via a tax credit when they file their quarterly Federal Income Taxes on Form 941. The COBRA subsidy provisions under the ARRA apply to all group health plans, including both fully- and self-insured health plans, maintained by essentially all types of employers that are required to offer COBRA in the first place. This is a great boon for folks who lose their coverage because of the down job market, and it is also something employers need to be prepared to continue dealing with. It is quite possible that Congress may extend this program.
So what do you need to know about COBRA/ARRA? Here are your Subsidy Essentials:
• OBRA-liable plan sponsors must notify former employees of their rights under COBRA and ARRA using the new language provided by the DOL for this purpose.
• To qualify for the subsidy, a worker must have been involuntarily separated between Sept. 1, 2008, and Dec. 31, 2009, and not for gross misconduct.
• Workers who lost their jobs between Sept. 1, 2008, and enactment of the ARRA in 2009, but failed to initially elect COBRA because it was unaffordable, got an additional 60 days to elect COBRA and receive the subsidy.
•Eligible workers must self-declare as "Assistance Eligible Individuals" (AEIs).
•AEIs have to pay 35 % of the premium to their former employers.
•The employer must pay the other 65% of the premium to the carrier, and can recapture that money from the Federal government via a tax credit on quarterly tax filings, using form 941.
•The subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.
•The 65% subsidy is payable for up to nine months from the date it begins.
•If an AEI becomes eligible for other group coverage at any time during the 9 month COBRA/ARRA subsidy period, he or she is still eligible for COBRA, but no longer eligible for the subsidy.
•Once a COBRA covered individual becomes covered under another group plan, he or she is no longer eligible for the subsidy or for COBRA health care continuation.
Is your plan subject to the COBRA/ARRA subsidy?
All group health plans, except for health flexible spending account arrangements offered through a Code § 125 cafeteria plan, are subject to the COBRA premium subsidy under the ARRA. This includes not only major medical plans (indemnity, PPO, etc.) and HMOs, it also includes dental-only plans, vision-only plans, health reimbursement arrangements ("HRAs"), employee assistance programs ("EAPs"), and on-site medical clinics that provide medical care. Note, however, health savings accounts ("HSAs") are NOT considered to be group health plans for COBRA purposes, even though a related high deductible health plan ("HDHP") may be subject to COBRA.
What is an Assistance Eligible Individuals (AEIs)?
For purposes of the new COBRA subsidy provisions, an AEI means any individual who (a) is a qualified beneficiary as the result of his or her involuntary termination of employment during the period from September 1, 2008, through December 31, 2009; (b) is eligible for COBRA at any time during that period; and (c) elects COBRA continuation coverage. In Notice 2009-27 the IRS clarified that the involuntary termination of employment and the loss of coverage must occur between September 1, 2008, and December 1, 2009, for an individual to be considered an AEI. It is important to note that the individual must not be eligible for coverage under Medicare or any other group health plan (including a successor employer plan or the spouse's group health plan) in order to receive the COBRA premium subsidy.
Does this subsidy apply to Dependents too?
The new subsidy provisions apply not only to the covered employee who is involuntarily terminated, but also to a spouse and other dependents of the employee who were covered by the employee's group health plan immediately prior to the involuntary termination of employment and loss of coverage. Since each qualified beneficiary can independently elect COBRA, they will also be independently eligible to receive the subsidy. Important (as many plans cover domestic partners): for purposes of the COBRA premium subsidy the terms "spouse" and "dependent" follow the definition of spouse and dependent under federal, not state law. Thus, a same-sex spouse, domestic partner (registered or unregistered), or the child or children of a same-sex spouse or domestic partner may qualify for COBRA, but they are not eligible for the premium subsidy if they are not qualified dependents of the employee under federal law.
What if you have High-Income individuals
- All qualified beneficiaries—even high-income individuals—who are also AEIs can receive the COBRA premium subsidy
- However, when the qualified beneficiary files Form 1040 at year-end, all or part of the COBRA premium subsidy received by the taxpayer, spouse, or dependent must be paid back (as additional income taxes) if the taxpayer is a high-income individual
- Partial recapture begins when modified adjusted gross income (AGI) is $125,000 ($250,000 for joint returns)
- Full recapture if modified AGI is $145,000 ($290,000 for joint returns)
- he taxpayer can avoid recapture by making a permanent election to waive the right to COBRA premium assistance\
What is the difference between a Voluntary and Involuntary Termination?
Under IRS Notice 2009-27, an involuntary termination means "a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." The determination of whether a termination is involuntary is based on all the facts and circumstances. This can get tricky. For example, a resignation in lieu of termination would still be considered an involuntary termination for purposes of the new COBRA subsidy rules if the facts and circumstances indicate that the employer would have otherwise terminated the employee and the employee had knowledge that the employee would be terminated. The IRS has clarified this somewhat and noted that the following specific situations resulting in loss of group insurance coverage constitute an involuntary termination of employment for purposes of the COBRA subsidy law (high-level summary only—details can be found in IRS Notice 2009-27):
- An employer's failure to renew an employment contract.
- An involuntary reduction in hours of employment down to zero, such as a lay-off, furlough, etc
- An employer's action to end an individual's employment while the individual is absent from work due to illness or disability.
- An employee's retirement, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee and the employee had knowledge that he or she would be terminated.
- An involuntary termination for cause; however, if the termination of employment is due to gross misconduct, the employee and covered dependents are not eligible for federal COBRA.
- A termination elected by the employee in exchange for a severance package (i.e., a "buy-out").
- A work stoppage due to a lockout initiated by the employer.
Note that if an individual disagrees with the employer's decision as to whether a termination was involuntary, the AEI will have the right to file an appeal with the DOL, which will render a decision within 15 business days of its receipt. The DOL's decision will be final in any disputed situations.
When does the COBRA/ARRA subsidy end?
COBRA premium assistance from the federal government ends on the earliest to occur of the following events: 1) The end of the nine-month period of COBRA premium assistance; 2) The first date the AEI becomes eligible for coverage under Medicare or any other group medical plan (with certain minor exceptions); 3) The date on which the AEI's COBRA coverage ends under federal and state law; or 4) The end of the month in which the AEI informs the employer that he or she is waiving the right to receive COBRA premium assistance. AEIs are required to notify the employer (or pay a tax penalty) if they become eligible for or covered under Medicare or any other group medical plan.
What happens if a company ceases to exist?
If an employer (including all members of the controlled group of corporations that includes that employer) ceases to sponsor any group health plan, all obligations to provide COBRA coverage cease. The COBRA premium subsidy ceases as well. If a related or successor employer is responsible for providing continuation coverage to former employees of the bankrupt employer, the former employees can enroll in the related or successor employer's group health plan. The related or successor employer must notify and make the COBRA premium subsidy available to the former employees of the bankrupt employer.
So what are some action items you should consider if you are a COBRA-liable employer?
- Provide (or have your COBRA administrator provide) the new COBRA notices created by the DOL for this subsidy program, including language regarding AEIs' right to the premium assistance.
- Include a description of the obligation of the AEI to notify the plan of eligibility of subsequent coverage under Medicare or another group health plan, and the penalty for failure to notify the plan (Failure to notify the plan may result in a penalty of 110% of the premium reduction provided).
- Identify AEIs – employees and their dependents losing group health coverage due to involuntarily terminations during the period of September 1, 2008 and December 31, 2009.
- Pay 65% of the COBRA premium for AEIs. AEIs will pay 35% of premium rate. Make sure the carrier receives the total premium each month on time (employer/COBRA administrator coordinate).
- Take payroll tax credit for subsidy using line 12 of Form 941.
- Employers may only claim the credit after the AEI has paid their portion of the reduced premiums.
- Reimbursement is made out of payroll taxes. If payroll taxes are insufficient, then IRS will issue a refund directly to the employer or carrier.
What if your plan denies coverage to a COBRA premium assistance request?
If the group health plan denies an individual's request for COBRA premium assistance, the individual may appeal the decision to the federal government
- The federal government is required to make its determination on review within 15 business days after receiving the individual's appeal
- The federal government's determination will be made "de novo" (i.e. without regard to the decision made by the plan)
Fun COBRA Facts—Did You Know?
- COBRA-liable companies are required to notify newly covered individuals of their COBRA rights when they first become covered (this is called the Initial COBRA Notice). Many companies don't realize this and only notify folks of their COBRA rights when they lose their coverage.
- If an employee has covered dependents residing at more than one address (e.g., dependent children living with an ex-spouse), COBRA notices must be sent to each address.
- Many group insurance brokers now offer COBRA administrative assistance for a small or no fee—check with your broker to see if they may be able to help. Caveat: they don't usually handle the initial COBRA notice, just the notices and premium collection when people lose coverage. A full-service COBRA administrator will handle it all for you, and will charge you fees and usually collect a 2% administrative fee from the covered individuals (this 2% should be included in the total premium when calculating the COBRA/ARRA subsidy).
- Each eligible dependent can make a separate election to continue or not continue coverage under COBRA, and can continue one coverage without the other coverages, unless coverage is "bundled". For example: a former employee whose covered spouse has a pre-existing condition might elect to cover the spouse under COBRA for medical, but cover the former employee and any other eligible dependents under individual insurance with a higher deductible and lower monthly premium.
This article is by no means a comprehensive analysis of COBRA and/or of the COBRA/ARRA subsidy—it is intended as an overview only. For more information, check out the Department of Labor's Website pages below:
An Employer's Guide to Health Continuation Coverage Under COBRA
FAQs About COBRA
COBRA Continuation Coverage Assistance Under ARRA
FAQs for Employers Re: COBRA Continuation Coverage Assistance Under ARRA
COBRA Model Notices from the DOL
Or contact Swift HR Solutions and we will be happy to help.
Caprice Pine, Senior Consultant
Swift HR Solutions
Winner "Best Service Provider to Startups" Seattle 2.0 May, 2009
This material is provided for informational purposes only, based upon our understanding of the laws and regulations as they exist on November 30, 2009, and should not be construed as being legal or tax advice. Caprice Pine and Swift HR Solutions disclaim any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it, and any responsibility to update this material for subsequent developments. Any advice contained in this material that concerns federal tax issues was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein.