The American Recovery and Reinvestment Act of 2009 (ARRA) provides certain individuals with premium reductions and additional election opportunities for health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).  Under the ARRA, Assistance Eligible Individuals pay only 35% of their COBRA premiums, and the remaining 65% will be reimbursed to the coverage provider (typically, the employer) through a tax credit.  The premium reduction applies only to periods of health coverage beginning on or after February 17, 2009.  The maximum premium reduction period expires in 9 months.

As most employers with 20 or more full-time equivalent employees are aware, COBRA provides the right to purchase group health coverage to workers who lose their job or experience other qualifying events that result in a loss of their health benefits.  If the employer offers a group health plan, the employee and his or her family can retain their group health coverage for up to 18 months by paying 102% of the premium for group rates.  Each qualified beneficiary has 60 days to elect COBRA coverage; otherwise they will lose their right to obtain health insurance benefits. 
The ARRA provides premium reduction for COBRA continuation coverage for “Assistance Eligible Individuals” (AEI).
An AEI is the employee and his or her Qualified Beneficiaries (A Spouse, Dependent Children) who:

1. Is eligible for COBRA continuation coverage as a result of the employee’s involuntary termination between September 1, 2008 and December 31, 2009.

Individuals who are eligible for other group health coverage (such as a spouse’s plan) or Medicare are not eligible for the premium reduction.  The ARRA does not provide any premium reductions for premiums paid for periods of coverage before February 17, 2009.
Under the COBRA Subsidy provisions of the ARRA, an involuntary termination is not limited to a reduction in force or lay-off.  It includes individuals terminated for cause, and excludes only those terminated for gross misconduct. 

Under the ARRA, an AEI who pays 35% of the COBRA premium is considered to have paid the full amount.  The premium reduction (65% of the full premium) is credited to the employer, insurer or health plan as a credit against certain employment taxes.  Under the ARRA, if the credit amount is higher than the taxes due, the Secretary of the Treasury will directly reimburse the employer, insurer or plan for the excess.
Premium reductions begin on or after February 17, 2009.  The premium reduction starts on March 1, 2009 for plans that charge for COBRA coverage on a calendar month basis.  The premium reduction ends upon the first occurrence of any of following:

1. Eligibility for other group coverage or Medicare;
2. 9 months after the reduction;
3. Cancellation of COBRA coverage for other reasons such as non-payment; or
4. When the maximum period of COBRA coverage ends.

It is important to understand that the premium reduction does not extend the maximum COBRA continuation coverage period.  In most cases, the maximum COBRA continuation coverage period is 18 months.  Certain qualifying events may extend the coverage beyond 18 months.  However, the premium reduction does not extend the maximum COBRA continuation coverage period. 

Individuals paying reduced COBRA premiums must inform their plans if they become eligible for coverage under another group health plan or Medicare.  Individuals who fail to inform the plan may be penalized by paying back the premiums subsidies plus penalties.

Special COBRA Election Opportunity

Individuals who were involuntarily terminated between the period from 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 because they failed to pay the premiums, are given a new election opportunity under the ARRA. This election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice.  This Special Election Period does not extend the period of COBRA continuation coverage beyond the original maximum period, which, as described above, is generally 18 months from the date of involuntary termination of the employee.  COBRA coverage elected in the Special Election Period begins with the first period of coverage beginning on or after February 17, 2009, and generally ends 18 months after the involuntary termination occurred.   This Special Election Period does not apply to coverage sponsored by employers with less than 20 employees.

Special COBRA Notice

Plan Administrators are required to provide notice about the premium reduction to individuals who were involuntarily terminated between September 1, 2008 through December 31, 2009.  Plan Administrators may provide separate notices or may provide the Subsidy Notice along with the typical notice provided after a COBRA qualifying event.  This Subsidy Notice must be provided to all individuals, whether they have elected COBRA coverage or not, who were involuntarily terminated from September 1, 2008 through December 31, 2009. 
This Notice must be provided within 60 days after February 17, 2009; on or before April 18, 2009.  The Department of Labor (DOL) is required to post a sample Subsidy and Special COBRA Election Notice by March 18, 2009.  We encourage employers to wait for the DOL’s sample Special COBRA Notice before sending notice to individuals eligible for the Special COBRA Election Period.  However, all employers must comply with the provision of the Special COBRA Election on or before April 18, 2009.

A Review of Denials of Premium Reductions

Individuals who are denied premium reductions may request an expedited review of the denial by the DOL.  The DOL must make a determination with 15 business days of the receipt of a request for review.  The DOL is developing a process and an official application that will be required to be completed for such appeals.

ARRA Provides the Option to Switch Coverage Options

If an employer offers additional coverage options to active employees, the employer may, but is not required to, allow AEIs to switch the coverage options they had when they became eligible for COBRA.  An AEI has 90 days from the notice of premium subsidy to switch coverage.  In order for those individuals to be eligible for the ARRA premium reduction, the different coverage must have the same or lower premiums as the original coverage.  The different coverage cannot be coverage that provides only dental, vision, a health flexible spending account or coverage for treatment that is furnished in an on-site facility maintained by the employer for first-aid, prevention and wellness care.  Employers should carefully consider whether or not they will offer the option to switch coverage.

ARRA Income Cap

Individuals whose gross income for the tax year in which the premium assistance is received cannot exceed $125,000 for individual or $250,000 for joint filers.  If the modified adjusted gross income for the tax year exceeds that amount, a certain amount must be repaid.  Individuals may permanently waive the right to premium reduction but may not obtain a premium reduction if the adjusted gross incomes are below the limit specified in the ARRA.

HIPAA

Any break in coverage prior to March 1, 2009 is disregarded for purposes of a pre-existing condition under HIPAA.  If a participant has a break shorter than 63 days, the coverage in place before that break is creditable coverage and can be used to offset a previous condition exclusion period.

The IRS also revised Form 941 for employers to report the tax credits equivalent to the premiums subsidy paid by employers.  Employers are encouraged to speak with their tax advisors concerning any tax questions regarding the credit for such a premium.  Employers must retain adequate documentation related to the credit.  More information is available on the IRS website at www.irs.gov.  Additional Fact Sheets are available on the DOL webpage, www.dol.gov/COBRA

Recommended Actions for Employers Concerning the COBRA Subsidy

            Employers should consider the following:

1. Prepare to send the Notice of Subsidy by identifying the subset of employees who experienced an involuntary termination between September 1, 2008, to the present.
2. Identify qualified beneficiaries, including the employee’s spouse or dependent children.
3. Confirm an involuntary termination, including any termination except for voluntary resignations and terminations based on “gross misconduct”, for each former employee who is an AEI.
4. Decide whether to offer employees the opportunity to change coverage (This is not mandatory).
5. Contact the third party COBRA Administrator (if applicable) or internal administrator if self-administered, regarding the notice of premium subsidy, Special COBRA Notice and option to change coverage.
6. After the model notice is posted, send a COBRA Subsidy Notice and, if applicable, a Special Notice to each qualified beneficiary, including the spouse and dependent children.

Disclaimer: The specific matter of this letter is not intended to provide legal advice, but rather to provide thoughtful insight into recent and timely legal developments.  Actual resolution of legal issues depends upon many factors, including variations of facts and state laws.  The reader should always consult with legal counsel before taking any action.