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 ex-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% of the premium, to cover administrative costs). Many employees are unable to afford this premium and therefore decline coverage.
However, under ARRA, beginning on March 1, 2009, eligible individuals will only be required to pay 35% 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% instead of 100% of the applicable premium, beginning with the March 1 premium payment. The remaining 65% will be paid by the employer or the health plan, and then the payor 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 September 1, 2008 and December 31, 2009 who are eligible for COBRA.
- Because of the way ARRA 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 lasts for a maximum of 9 months, but terminates earlier if the individual becomes eligible for coverage under another group health plan (or Medicare). In no event will the subsidy (or coverage) last longer than the original 18-month COBRA continuation period.
- Individuals making more than $125,000 (or $250,000 for joint filers) in the same year as the COBRA election (either 2009 and/or 2010) may find the premium reduction is recaptured by an increase in income tax liability for the year. Employees whose income may exceed these amounts should be advised to consult with their tax preparer.
- For individuals who declined COBRA coverage after September 1, 2008, there is a special re-enrollment period. These employees must be sent notice no later then April 18, 2009 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.