On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”) into law. The Act is over 400 pages long and contains a wide array of spending provisions intended to offset the impact of the economic downturn.

From an employee benefits perspective, the most significant provision of the Act provides a special temporary subsidy toward the purchase of COBRA coverage for employees (and their dependents) who are involuntarily terminated between September 1, 2008 and December 31, 2009. This provision is intended to increase access to health care coverage.

Overview of Cobra

Under the general provisions of COBRA, if an employee loses health care coverage due to termination of employment for any reason (other than “gross misconduct”), the employee can purchase health care coverage from his or her former employer for up to 18 months. COBRA applies only to employers that normally employed 20 or more employees on a “typical” day during the prior year. COBRA coverage must also be made available to the employee’s spouse and dependent children covered by the employee under the health care coverage as in effect before the termination of employment. The maximum premium for COBRA coverage is 102% of the cost of the plan for non-COBRA participants (referred to as the “applicable premium”).

Special COBRA Rules under the Act

The key features of the Act relating to the special COBRA subsidy are as follows:

If an employee is “involuntarily terminated” between September 1, 2008 and December 31, 2009 the employer will be required to reduce the COBRA premium (for the employee and his or her eligible dependents) to 35% of the applicable premium (i.e., 35% of the 102% that could otherwise be charged). These individuals are referred to as “assistance eligible individuals”.

There is no definition of “involuntary” termination under the Act; however, the Department of Labor has indicated that it will interpret the Act in a way that supports former employees’ access to the coverage. In effect, any employee who terminated at the initiation of the employer (i.e., did not voluntarily quit) is likely to qualify for this special subsidy. If there is a dispute over eligibility for the subsidy, the Department of Labor is required to review the dispute and render a decision within 15 business days.

The special subsidy terminates after 9 months (or, if earlier, the date COBRA eligibility ceases—such as upon exhaustion of the 18 month maximum coverage period under COBRA).

The Act makes one significant change to COBRA rules for assistance eligible individuals. Under general COBRA rules, eligibility for COBRA ceases when an individual becomes covered under another group health plan. However, under the Act, an individual ceases to be eligible for this additional subsidy when the individual becomes eligible for coverage under another group health plan. In conjunction with this new rule, the Act requires that an assistance eligible individual must notify the health plan if the individual ceases to be eligible for the subsidy because of eligibility for another plan. If the individual fails to notify the plan, the individual is liable to pay a penalty equal to 110 percent of any subsidy received after eligibility for the other health plan.

Individuals who become eligible for COBRA must now be given a special notice of the new COBRA subsidies. The notice must (among other things) contain the following:

• a description, displayed in a prominent manner, of the qualified beneficiary's right to a reduced premium and any conditions on entitlement to the reduced premium
• the forms necessary for establishing eligibility for premium reduction
• the name, address, and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the new COBRA subsidy
• a description of the election periods governing this special subsidy
• a description of the obligation of the qualified beneficiary to notify the plan providing COBRA coverage of eligibility for subsequent coverage under another group health plan
• a description of the option of the qualified beneficiary to enroll in different coverage if permitted by the employer under special COBRA rules established as a part of this special subsidy

Employers must start providing this notice no later than April 18, 2009 (60 days after the enactment of the Act). This notice can be provided as part of the overall COBRA notice or as an “add on” notice. The government is required to provide employers with a sample notice containing this information. The sample notice is to be issued by March 19 (30 days after enactment of the Act).

Individuals involuntarily terminated after September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled must now be provided with (1) the notice of the new subsidy provisions, and (2) a new COBRA election opportunity. This special notice must be provided by April 16, 2009 (60 days after enactment of the Act). The election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice. COBRA coverage elected in this special election period begins with the first period of COBRA coverage on or after February 17, 2009 (for most plans, likely to be March 1, 2009). Thus, the subsidy may be elected as late as June 15 and the employer must offer to provide the coverage on a retroactive basis (but the retroactive coverage cannot extend to any period before February 17, 2009).

This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's termination).

Individuals who terminated after February 17, 2009, but before the new COBRA notice provisions are put in place, must also be provided notice of the new subsidy and the opportunity to select COBRA and obtain the subsidy. These individuals have 60 days after receipt of the notice to elect COBRA coverage and obtain the subsidy.

The employer is reimbursed by the federal government for this additional subsidy. This reimbursement is obtained by the employer by filing for a federal tax credit on Form 941 (the employer’s quarterly federal tax return). The employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter. The employer may receive the 65% subsidy only after it has received the 35% premium payment from the individual. This is noteworthy because an employer can still (retroactively) revoke COBRA coverage for failure to make premium payments. In effect, the employer cannot request reimbursement from the federal government if an employee has not yet paid the remaining 35% COBRA premium and is still in the COBRA “grace period”.

It should also be noted that any employer overstatement of the subsidy will be treated as an underpayment of payroll taxes. In light of the potential penalties for underpayment—and individuals’ ability to appeal denials of the subsidy to the Department of Labor—it is anticipated that employers unsure of an individual’s eligibility for the subsidy may be inclined to deny the subsidy (and allow the individual to appeal), rather than grant the subsidy (and risk penalties for underpayment of payroll taxes).

The IRS has noted that no additional information need be submitted with the Form 941 in order for the employer to receive reimbursement from the federal government. However, the Act requires that an employer must be able to provide reports with additional supporting documentation, including:

• Information on the receipt, including dates and amounts, of the eligible individuals’ 35% share of the premium.
• In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
• Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008 to December 31, 2009) for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
• Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008 to December 31, 2009 and election of COBRA coverage.
• A record of the Social Security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
• Other documents necessary to verify the correct amount of reimbursement.

The special subsidy is phased out for those with adjusted gross income over certain thresholds. The phase-out begins with adjusted gross income of $125,000 (if filing a single return) or $250,000 (if filing a joint return) and is completely eliminated for those with adjusted gross income over $145,000 (single return) or $290,000 (joint return). These individuals can choose to waive the subsidy. The waiver must occur at the time of COBRA enrollment and is permanent. Or the individual can choose to collect the subsidy and recognize it on their income taxes. To allow collection of these taxes, the employer must report the amount of the subsidy to each employee and to the IRS (presumably on the Form W-2).

The subsidy applies to each health benefit plan that the employer is required to offer under COBRA, except for health spending account. This includes medical, dental, and unfunded health reimbursement arrangements maintained by the employer. Also, this provision does not apply to health savings accounts (“HSAs”). The subsidy also applies to health plans that are not subject to federal COBRA but are subject to continuation of coverage requirements under state law, such as small group health plans. Although this Bulletin focuses on the application of the subsidy to COBRA coverage, the analysis is similar for health plans that are subject to state continuation requirements.

Other Benefits Changes Made by the Act

The Act also made two other changes that directly affect employee benefit plans:

Changes to the Monthly Limit on Transit and Vanpooling Benefits: Effective March 1, 2009, the Act amends Code Section 132 to increase the monthly statutory limit for qualified mass transit and vanpooling benefits. The increase is from $120 per month to $230 per month. This provision is scheduled to expire on December 31, 2010 unless extended in future legislation.

Expansive HIPAA Privacy and Security Changes: The Act includes a number of provisions that modify (and expand) the privacy rules established under the Health Insurance Portability and accountability Act of 1996 (“HIPAA”). Most of these HIPAA changes are effective 12 months after the enactment of the Act. Due to the complexity of these changes, we plan to make these HIPAA changes the subject of a future Special Bulletin.

The information contained in this Special Bulletin to Clients is not intended as legal advice or as a legal opinion on specific facts.