Human Resource
Executive Online
March 23, 2009
Avoiding COBRA's Bite
Because the federal stimulus bill offers a subsidy of COBRA benefits, employers should expect
increased selection of the coverage. The changes will increase employer costs and require new
processes to be developed to comply with the enhanced benefit. The deadline is fast approaching.
By Stacy H. Barrow and April L. Boyer
HR leaders need to understand the modifications to the Consolidated Omnibus Budget and Reconciliation
Act (COBRA) contained in the Feb. 17, 2009 American Recovery and Reinvestment Act. The changes
apply to all companies that sponsor a group health plan and have terminated or laid off at least one
employee since Sept. 1, 2008.
Along with action items HR executives need to pursue, we will review answers to the most commonly
asked questions by HR: What does it all mean? What do we have to do? And what will it cost?
Economic Stimulus Bill Modifies COBRA
The stimulus bill modifies COBRA by creating a temporary federal subsidy, for up to nine months, of 65
percent of the cost of COBRA continuation coverage for employees (and their spouses and/or dependents)
who lose group health insurance coverage between Sept. 1, 2008 and Dec. 31, 2009 due to an involuntary
termination of employment.
These provisions are effective immediately and require prompt compliance, including:
* Coordinating with COBRA and payroll vendors to implement new payroll tax administration
requirements;
* Locating and providing affected individuals with an additional COBRA notice; and
* Responding to new government reporting requirements.
Prudent employers are seeking guidance from their attorneys because it is predicted that the Department of
Labor will closely scrutinize employers' compliance.
Who is Eligible?
To be eligible for the subsidy, an employee must lose group health plan coverage between Sept. 1, 2008
and Dec. 31, 2009 due to involuntary termination. Assistance-eligible individuals include employees who
previously declined COBRA coverage between Sept. 1, 2008 and Feb. 17, 2009 and who are otherwise
eligible for the subsidy.
While the subsidy applies to those who lost or will lose coverage between the set dates, the subsidy is only
available for periods of coverage starting March 1, 2009. For former employees who previously declined
coverage, the maximum COBRA duration is measured from the date of the original COBRA qualifying
event (even if that date is earlier than election of COBRA benefits).
Employees terminated for "gross misconduct" are generally ineligible for COBRA and the subsidy. The
standard for "gross misconduct" is very strict, so an employer must be careful if it denies benefits on that
basis, or it could face taxes, penalties and court costs if an employee challenges the denial and prevails.
What is the Premium Subsidy?
The premium subsidy applies to continuation coverage provided under COBRA (as well as state insurance
law for small, fully insured groups not otherwise subject to COBRA), and covers all group health plans
subject to COBRA (e.g., medical, dental and vision), other than a healthcare flexible-spending
arrangement.
The subsidy covers 65 percent of the cost of COBRA coverage elected, which includes family tier
coverage, if applicable, as well as the 2 percent COBRA administration fee. The former worker is
responsible for the remaining 35 percent of the COBRA premium. If an employer subsidizes a portion of
the COBRA premium, the subsidy applies to the premium actually charged to, and paid by, the individual.
Domestic partners, same-sex spouses and/or their dependents are not eligible unless they meet the IRS
definition of dependent.
Because of the availability of the subsidy, employers should expect increased elections of COBRA
coverage. This is likely to create additional costs for affected group health plans because claims of COBRA
participants often exceed the COBRA premium charged.
How Is The Premium Subsidy Recovered?
For employers maintaining fully insured or self-insured group health plans subject to COBRA, the
employer will bear the initial cost of the subsidy and then obtain a reimbursement through a reduction in
quarterly payroll tax reporting.
In the case of a group health plan that is a "multi-employer plan," the plan -- not the employer -- will be
entitled to reimbursement for the cost of the premium subsidy. The subsidy reimbursement will be in the
form of a credit or refund check from the government. For plans not subject to federal COBRA, the insurer
providing the coverage will be entitled to the reimbursement for the cost of the premium subsidy.
How Long Will the Premium Subsidy Last?
The stimulus bill does not extend COBRA's duration of 18, 29 or 36 months of coverage. Rather, it
provides nine months of premium subsidy.
The subsidy may terminate earlier if the worker reaches maximum COBRA duration (which includes
possible early termination of COBRA) or becomes eligible for coverage under another group health plan or
Medicare.
In determining the subsidy duration, an individual will not be considered eligible for other coverage until
any waiting period is met. Importantly, the subsidy may end prior to the expiration of COBRA because, for
example, the subsidy generally ends upon eligibility for other coverage, but COBRA coverage ends upon
actual enrollment in other coverage.
For these purposes, other group health plan coverage does not include coverage consisting only of dental,
vision, counseling or referral services such as an employee-assistance plan, or coverage under a FSA or
healthcare reimbursement arrangement.
Individuals are obligated to notify their former employer, in writing, upon becoming eligible for another
group health plan or Medicare. Failure to do so could result in the former worker being fined in an amount
of 110 percent of any improperly paid subsidy amount.
Is Anyone Excluded from Eligibility for the Premium Subsidy?
The subsidy amount is reduced for an individual with a modified adjusted gross income in excess of
$125,000 ($250,000 for joint returns) for the taxable year in which the employee receives the subsidy, and
phases out entirely for an individual whose adjusted gross include exceeds $145,000 ($290,000 for joint
returns) in that taxable year.
If an individual is ultimately ineligible for the subsidy due to the income limitation, federal income tax
liability will be increased by the amount of ineligible COBRA subsidy payments made during that taxable
year.
Consequently, employers will not be responsible for determining whether an individual's income will cause
the employee to be ineligible for the subsidy. Former high-earning employees may avoid this potential tax
liability altogether by making an election to permanently waive subsidy eligibility.
What Are The New Notice and Reporting Requirements?
By April 18, 2009, group health plan administrators must provide additional information to all individuals
who lost or lose coverage between Sept. 1, 2008 and Dec. 31, 2009 via the plan's COBRA election notice
process. Administrators may choose to revise their current notices or include the new information as a
separate notice.
Information from the DOL about the approved form for the new notice includes the following:
* A description of premium assistance available and any conditions on eligibility including the extended
election opportunity;
* Forms for establishing eligibility;
* The special 60-day election period (as described below);
* Contact information for the plan administrator and other key contacts; and
* Disclosure of the former employee's duty to notify the plan upon becoming eligible for other coverage.
Employers also may be required to file certain reports with the IRS relating to the subsidy, including the
employer's attestation that each employee receiving the subsidy was involuntarily terminated; whether the
subsidy relates to one, or more, individuals; and an accounting of payroll-tax credits taken (including an
estimate of credits to be taken in the following reporting period).
What is the Special 60-Day Election Period?
The stimulus bill provides a special 60-day election period for those individuals whose loss of coverage
occurred between Sept. 1, 2008 and Feb. 17, 2009 and who are otherwise eligible for a subsidy. This
special election period must be offered to former employees who originally declined COBRA continuation
coverage as well as those who elected and subsequently terminated COBRA coverage.
The 60-day period to elect COBRA coverage commences on the date the individual receives the notice
described in the section above. COBRA continuation coverage elected during this period will be effective
as of March 1, 2009, so employers should not delay in sending the notice.
However, the maximum COBRA duration for individuals electing COBRA coverage during this special
election period will still be measured from the date of the original loss of coverage due to involuntary
termination of employment.
The bill also provides that, in the event an individual elects COBRA coverage during the special 60-day
election period, the period of time beginning with the loss of coverage due to involuntary termination of
employment and ending on March 1, 2009 will not be counted as a break in coverage for purposes of the
63-day creditable coverage rule under the Health Insurance Portability and Accountability Act of 1996.
Under HIPAA, group health plans may not impose a pre-existing condition limitation unless the individual
has had more than a 63-day gap in creditable coverage.
Action Items For Employers:
* Identify individuals who have had a COBRA qualifying event on or after Sept. 1, 2008, the
circumstances surrounding such event and whether any are currently enrolled in COBRA;
* Consider permitting high-earning employees to permanently waive the subsidy;
* Review severance policies and individual severance agreements providing for COBRA coverage to
determine if any special provisions apply (such as a subsidy not generally provided to other group
health plan participants);
* Develop processes to implement the premium subsidy by May 1, 2009 as required by the ARRA
and determine how to apply any excess COBRA premiums paid since March 1, 2009;
* Closely track the maximum COBRA duration as well as the maximum premium subsidy period, as
the two will likely not match;
* Coordinate with payroll and/or COBRA vendors to determine their level of preparedness and the
extent to which they can assist with tracking and notice requirements;
* Review any stop-loss policy associated with a self-insured group health plan to confirm that eligible
individuals will be covered; and
* Develop and send required notices as soon as possible to avoid delaying elections.
Stacy H. Barrow is counsel with K&L Gates LLP in its Employee Benefits Practice Group, where he
advises corporate, not-for-profit, governmental and individual clients on matters related to executive
compensation and employee benefits. Barrow audits plan documentation and plan operation and
identifies gaps that could lead to legal or regulatory issues as well as helps find alternative strategies.
April L. Boyer is a partner with K&L Gates LLP in its Labor & Employment Practice Group, where she
represents employers in all areas of employment law. She trains and counsels employers on making dayto-day employment decisions, conducting internal investigations of discrimination, harassment and/or
retaliation complaints, and complying with state and federal employment laws and regulations as well as
has extensive experience in drafting and enforcing restrictive covenant agreements, and counsels and
trains employers on compliance with the Foreign Corrupt Practices Act.