American Recovery and Reinvestment Act of 2009 – COBRA Provisions

I recieved this message from a  COBRA provider I partner with.

This message follows up on the COBRA provisions in the economic stimulus bill, formally titled the American Recovery and Reinvestment Act of 2009 (the “Act”), which reached final Congressional approval late on Friday, February 13, 2009. The 1,073 page bill has a final price tag of $787 billion and combines tax cuts aimed at stimulating the economy right away, with longer term government spending on public works projects in the health care, energy and technology sectors. The House and Senate both voted along strongly partisan lines, with no Republicans approving the bill in the House, and only 3 Republicans voting in favor in the Senate. President Obama signed the bill into law today, Tuesday, February 17, 2009.
There were no changes to the COBRA provisions in the final bill from the “compromise” provisions that the House and Senate agreed to late on the night of February 12, 2009.
Keep in mind that further guidance will come in the form of Treasury Regulations and model notification language from the Department of Labor. There are a lot of “moving parts” to the COBRA subsidy, including model notification language which is not yet available, and a multitude of practical details that have yet to be addressed. We will let you know as soon as more information is available.

• A COBRA subsidy equal to 65% of the applicable premium will be available for up to 9 months to individuals who lost their jobs through involuntary termination between September 1, 2008 and December 31, 2009. The legal term of art for this group is “assistance eligible individuals.” Basically, this group pays reduced COBRA premiums and the plan sponsor subsidizes the remainder of the full premium amount.

• The Act does not define “involuntary termination” – presumably it would include employer-initiated termination of employment for any reason short of “gross misconduct” which can be a disqualifier for COBRA coverage under existing law.

• The premium subsidy is phased out for individuals earning above $125,000 and couples filing jointly and earning above $250,000, in the year in which the subsidy is received. The subsidy phases out completely at $145,000 for individuals and $290,000 for couples filing jointly. Because the phase out applies based on income for the same year in which the subsidy is received, it is structured as a repayment obligation – specifically, an increase in the individual’s or couple’s income taxes for the applicable year. Those who are subject to repayment obligations for part of the 9 months could still qualify for the full subsidy for the remainder of the period should their income drop below the minimum threshold for that time period; i.e., if the COBRA period bridges two calendar years. The bill also includes a waiver option for those who are certain they would be subject to a full or partial repayment obligation.

• Subsidized coverage is not retroactive, though people who lost their job in September 2008 and started COBRA in October 2008 are normally COBRA-eligible for 18 months – through January 2010 – so they should be able to enjoy a full 9 months of subsidized benefits.

• Note that the subsidy is not available for people who become eligible for COBRA for any reason other than involuntary termination, such as through divorce. The subsidy also stops if the recipient secures employment that offers alternative coverage, or becomes eligible for Medicare benefits. COBRA recipients are required to notify their employer or insurer of such events and a penalty of 110% of the premium reduction applies to those who do not timely comply.

• In most instances, the employer is eligible for reimbursement of the subsidy. Reimbursement will take the form of a credit against payroll taxes (FICA, employees’ wage withholding) the premium recipient would otherwise pay with regard to its own employees. This means that an employer’s payroll tax obligation for its own employees will be reduced to account for the reduced COBRA premiums it is collecting from the insureds’ former employees.

• If the COBRA subsidy amount exceeds applicable payroll taxes owed, the rest is reimbursed by the government in cash; Treasury Regulations will specify exactly how this will work.

• Reimbursement is only available once the subsidy has been provided. Employers and insurers may have to provide discounted COBRA coverage for some time before the government is ready to reimburse them.

• There will be an extended 60-day COBRA election period for “assistance eligible individuals” who have not elected COBRA at the time the stimulus bill passes. Late elected coverage will be retroactive to the date the stimulus bill is enacted but will not extend the total period of COBRA coverage available, measured from the date of job loss. For instance, if a covered employee lost her job on September 10, 2008 but did not elect COBRA coverage, she would have 60 days from the date of notification of the new election right to elect COBRA coverage at the subsidized rates. However, the COBRA coverage would not be required to last for 18 months, and instead would expire 18 months after September 10, 2008. The reenrollment right also extends to assistance eligible individuals who originally elected COBRA but dropped it because they were unable to afford the premiums.

• The availability of the premium subsidy must be explained in writing in new COBRA election materials provided to those who lose regular coverage before 2010 and to those who had a qualifying event on or after Sept. 1, 2008, whether or not they elected COBRA at that time. The Dept. of Labor will provide model notification language for this, and for the extended 60-day election period provided to those who already declined or dropped COBRA coverage.

• There are also provisions allowing an “assistance eligible individual” to select alternative coverage for the COBRA period, in lieu of maintaining the coverage they had at the time their employment ended. For instance, an individual who was enrolled in a PPO at the time they lost their job could select an HMO for the COBRA period to save additional costs, if the employer plan make an HMO option available. The HMO election will apply for the full COBRA period, even after the subsidy expires.

• Health flexible spending accounts offered under a Section 125 cafeteria plan are not eligible for the COBRA subsidy. (COBRA applies to Health FSAs only under limited circumstances, in any event.)


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