Client Bulletin #406
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EDITOR’S NOTE: the American Recovery and Reinvestment Act of 2009 (H.R. 1) passed the United States House of Representatives and the United States Senate on February 13. President Obama signed it into law this afternoon.
Responding to increasing unemployment from the dramatic downturn affecting all sectors of the economy, the United States Congress has expanded the premium and notice obligations of employers under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly known as COBRA. Provisions in the American Recovery and Reinvestment Act of 2009 (“the Act”) reduce how much certain employees must contribute to obtain COBRA continuation health coverage, provide a subsidy to employers for their portion of the cost of coverage, and add new requirements for notices which must be provided to COBRA qualified beneficiaries.
Both the federal COBRA law and state “mini-COBRA” laws (which generally cover employers with fewer than 20 employees) are affected. The changes apply to public and private employers alike. Section 3001 (Div. B) of the Act contains the changes, which are effective immediately, so employers must take quick action to comply with them.
What Qualifying Events are Affected? The new provisions apply only to employees who have experienced a qualifying event of involuntary termination of employment. The new provisions apply to all dependents of the employees as well. Employees who experience a reduction in hours or voluntarily resign employment are not affected, and individuals experiencing a second qualifying event (divorce, loss of dependent status, etc.) are not affected.
When Must the Qualifying Events Occur? Only qualifying events of involuntary termination occurring between September 1, 2008, and December 31, 2009, trigger the additional COBRA rights under the Act. Nothing under the Act, however, changes the length of available COBRA coverage (18, 29 or 36 months).
How Do Premiums Change? Under normal circumstances, an employer may charge qualified beneficiaries who have elected COBRA continuation coverage 102 percent of the total cost of coverage. For qualified beneficiaries covered by the Act, however, an employer may charge only 35 percent of the total cost of coverage and must pay the remaining 65 percent of the cost itself. The 65 percent employer contribution lasts for nine months of the COBRA period, at which point the premium may be increased to 102 percent. The employer is entitled to a refundable credit toward payroll taxes for its 65 percent share of premiums. The credit may be taken as long as the qualified beneficiary’s premium payment has been actually received by the employer or other payee.
How Should the Premium Change be Implemented? Qualified beneficiaries who experienced a qualifying event on or after September 1, 2008, but before the COBRA changes became effective (February 17, 2009), are entitled to nine months of future coverage at a 35 percent premium contribution level. (The change in premium contributions is not retroactive for months of coverage prior to February 17, 2009.) Thus, an employer should implement the new premium contribution scheme as soon as administratively feasible. While an employer implements the new scheme, it may continue to charge the full premium (for up to two months) and then credit the overpayment toward future premium payments or directly reimburse the qualified beneficiary and take the payroll tax credit for the reimbursed amount(s).
When Does the Premium Change End? The 35 percent premium contribution level for qualified beneficiaries ends nine months after an employer implements the changes in the Act. The 35 percent premium contribution level also ends when a qualified beneficiary becomes eligible for coverage under another group health plan or Medicare, even if before the end of the nine-month window.
Is Anyone Excluded From the Premium Change? Generally speaking, the premium change is phased out for qualified beneficiaries with federal modified adjusted gross income of between $125,000 and $145,000 (single) or $250,000 and $290,000 (married) in the year of COBRA coverage. Qualified beneficiaries with federal modified adjusted gross income of more than $145,000 (single) or $290,000 (married) in the year of COBRA coverage are not eligible for the 35 percent premium contribution level.
How Do Employers Notify Affected Individuals? Employers must offer an additional COBRA election period to any individual who became a qualified beneficiary due to involuntary termination on or after September 1, 2008, and who would be eligible for the reduced premiums if he or she were enrolled as of the effective date of the Act. The additional election period must be offered to individuals who previously declined COBRA coverage as well as to individuals who elected and then terminated COBRA coverage. It is important to note that individuals who previously declined COBRA coverage or elected and terminated it have another opportunity to elect it under the new premium arrangement.
What are the Notice Requirements? The additional election period begins today, and ends 60 days after the employer provides an appropriate notice. These notices must include a description of the new premium arrangement, its duration, and the option to enroll in different coverage if the employer normally permits COBRA qualified beneficiaries to enroll in different coverage. Employers must send out the additional election period notices within 60 days of the effective date of the Act, or by April 18, 2009. The Act requires the United States Department of Labor to issue model notices within the next 30 days, but it is unclear exactly when those model notices may be available.
Employers should also revise their regular COBRA notices for upcoming qualifying events to incorporate the new 35 percent premium contribution level and the nine-month duration of that level as soon as possible. Notices to individuals experiencing a qualifying event after today are still governed by the normal response period (generally a maximum of 44 days).
What You Need to Do Now? Although these changes to employer obligations under COBRA are temporary, they are significant and affect almost every employer in some way. You should begin reviewing your COBRA policies and practices immediately to comply with these new requirements.
If you need assistance in interpreting or applying the COBRA changes in the American Recovery and Reinvestment Act of 2009, please contact any member of Constangy’s Employee Benefits practice group, or the Constangy attorney of your choice.
Constangy, Brooks & Smith, LLP has counseled employers on labor and employment law matters, exclusively, since 1946. A “Go To” Law Firm in Corporate Counsel and Fortune Magazine, it represents Fortune 500 corporations and small companies across the country. Its attorneys are consistently rated as top lawyers in their practice areas by publications such as Chambers USA, Super Lawyers, and Top One Hundred Labor Attorneys in the United States. More than 100 lawyers partner with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Georgia, Florida, South Carolina, North Carolina, Tennessee, Alabama, Virginia, Missouri, Illinois, Wisconsin, Texas and California. For more information, visit www.constangy.com.