One of the many lifelines thrown to displaced workers in the American Recovery and Reinvestment Act of 2009 (ARRA) is that the government will now pay for a portion of former employees’ continuation health care coverage available through the COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) health-benefit law.
Employers need to act now to ensure that workers displaced over the last few months receive new COBRA notices and put systems in place to correctly account for this subsidy.
By way of brief background, terminated employees may typically remain on their former employer’s health insurance for up to 18 months through the federal COBRA law. The problem is that the ex-employee is required to pay the entire insurance premium (sometimes even 102 percent of the premium, to cover administrative costs). Many employees are unable to afford this premium and therefore decline coverage.
However, under the act, eligible individuals will now only be required to pay 35 percent of the COBRA premium. These individuals do not need to file any special election, receive the new notice, or take any other action to begin to take advantage of the subsidy. They just pay 35 percent instead of 100 percent of the applicable premium, beginning with the recent March 1 premium payment. The remaining 65 percent will be paid by the employer or the health plan, and then the payer will be reimbursed by taking a tax credit against its current year payroll taxes.
Some other highlights of this provision are as follows:
• Eligible individuals are those involuntarily terminated from their jobs between Sept. 1, 2008 and Dec. 31, 2009 who are eligible for COBRA.
• Because of the way the act defines “COBRA,” the subsidy applies not only to federal COBRA coverage, but also to state continuation coverage providing similar benefits, such as those provided under Rhode Island General Laws Chapter 27-19.1. Therefore, individuals who were employed by small employers exempt from federal COBRA (e.g. those with fewer than 20 employees) still may be eligible for the premium subsidy.
• Please note, however, that not everyone on COBRA will qualify. In addition to the look-back window restriction, individuals who receive COBRA for qualifying events other than involuntary termination – such as a spouse that loses coverage due to divorce, a dependent child that ages out of coverage or an employee that voluntarily terminates employment – are not eligible for the subsidy.
• The subsidy starts to phase out (by way of it being included as taxable income) for individuals making more than $125,000 (or $250,000 for joint filers).
• For individuals who declined COBRA coverage after Sept. 1, 2008, there is a special re-enrollment period. These employees must be sent notice no later then April 18 of their right to re-enroll for continuation coverage (even if they declined coverage initially). The individuals have a 60-day period after receiving notice to elect subsidized COBRA continuation coverage. Currently, the secretary of labor is working on issuing form notices which are expected to be available by mid-March.
Employers should immediately compile a list of employees involuntarily terminated on or after Sept. 1, 2008 and prepare to supply them, along with their eligible spouses and/or dependents, notice of the their right to subsidized COBRA continuation coverage. Employers should also work with their payroll administrators to ensure that, if applicable, they obtain the tax credit applicable to the employer’s 65 percent premium payment. •
Michael A. Gamboli and Kimberly I. McCarthy are partners at Partridge Snow & Hahn LLP. Gamboli (mag@psh.com) is chair of the employment & labor practice group. McCarthy (kim@psh.com) advises clients concerning the federal and state tax, employee benefit and health care regulatory implications of business decisions.
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