As reported in last week’s The KZR Alert, under the American Recovery and Reinvestment Act of 2009 (also known as the Economic Stimulus Bill) effective February 17, 2009 certain individuals eligible for continued medical coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act) or similar state laws may be eligible for a temporary federal subsidy of 65% of the premium otherwise due. While there are still a number of outstanding questions and we are awaiting further information and guidance from the government, following is a summary of Frequently Asked Questions regarding the subsidy requirements.
These changes are effective immediately, and therefore, employers must take prompt action to ensure compliance.
Q: What plans are covered? A:Group health insurance plans, including dental and vision plans (but not health flexible spending accounts), that are subject to federal or state continuation of coverage laws.Q: Who is eligible? A:Qualified beneficiaries who a) lose coverage as a result of a covered employee’s involuntary termination from employment (other than for gross misconduct) occurring between September 1, 2008 and December 31, 2009, and b) who are eligible to elect continued coverage under COBRA or a similar state law during that period. Qualified beneficiaries include the covered employee and his/her spouse and dependents covered under the plan at the time of the employee’s termination.Q: How much is the government subsidy? A:The government subsidy is 65% of the applicable COBRA premium. Sometimes, in a severance package for example, an employer may agree to pay for an employee’s COBRA expense. If the employer subsidizes the cost of COBRA, the government subsidy only applies to the amount of the premium actually payable by the employee.Q: When is the subsidy effective? A:The subsidy applies to premiums paid for periods of coverage on or after February 17, 2009, the date of enactment of the statute. For most plans this means March 1, 2009.Q: What if the eligible individual pays the full amount of the premium? A:If an eligible individual pays the full premium amount during the first or second coverage periods after the subsidy first applies, the responsible entity may either reimburse the excess to the individual or credit it against future premiums, provided the excess will be used within 180 days. If it is not reasonable to believe the credit will be used within 180 days, the excess premium must be reimbursed within 60 days of the payment, or within 60 days of a subsequent determination that it is no longer reasonable to believe the credit will be used within the 180-day period.Q: How long is the subsidy effective? A:The subsidy is payable for a maximum of 9 months, provided the individual’s coverage would not otherwise have terminated under the provisions of COBRA or state law, such as due to termination of the coverage period or failure to pay premiums. However, if an individual subsequently becomes eligible for other group health insurance or Medicare, the individual is no longer eligible for the subsidy, even if the individual does not elect the other coverage. Assistance eligible individuals are required to notify the plan administrator if they cease to be eligible for the subsidy and may be subject to an excise penalty tax if they fail to do so without reasonable cause in an amount equal to 110% of the premium reduction received after their eligibility terminated.Q:
What if an employee was terminated between September 1, 2008 and the A:Assistance eligible individuals who were terminated on or after September 1, 2008 and have not elected continued coverage as of February 17, 2009, including those whose election period has not yet ended, or who elected coverage but allowed it to lapse, must be given a second special opportunity to elect continued coverage. Employees and their qualified beneficiaries will have 60 days from the date that notice of this special election period is provided to make an election.Q:
If continued coverage is elected during the special election period is it A:No. If the assistance eligible individual elects continued coverage, it will become effective as of the first period of coverage on or after February 17, 2009 (generally March 1). The maximum coverage period allowed under COBRA (18, 29 or 36 months) or the applicable state law, however, will run from the date of the original loss of coverage. In addition, an individual who elects coverage under the special provision will not have the intervening period from the time they originally lost coverage counted as a break under the Health Insurance Portability and Accountability Act (“HIPAA”) rules relating to pre-existing condition exclusions.Q: What other special COBRA provisions are there? A:Plans have the option of allowing assistance eligible individuals to elect a different type of coverage than what they were receiving at the time of the qualifying event, provided it is a type of coverage available to active employees and is not limited coverage, such as dental or vision, and the premium is no greater than the cost of the coverage that was in place. Plans are not required to do this, but if they elect to do so, it must be included as part of the new notification requirements.Q: Who is the entity responsible for administering the subsidy? A:The statute identifies three possible responsible entities. Where the sponsor of the plan is a multiemployer plan, the responsible entity is the plan. If the sponsor is an employer with more than 20 employees and subject to the federal continuation rules (whether or not the plan is insured or self-insured), or all or a portion of the medical coverage is not provided by insurance, the responsible entity is the employer. If neither of the above applies, the responsible entity is the insurer.Q: How does the responsible entity recover the amount of the subsidy? A:Under the statute, the responsible entity is to take the amount of the subsidized premium (65%) as a credit against its payroll taxes. If the amount of the subsidy exceeds the amount of the responsible entity’s payroll taxes, the entity will need to apply for a direct payment from the government, the mechanism for which is not currently clear. Reimbursement may not be taken until payment of the 35% due from the eligible individual is actually received. The IRS has issued a revised Form 941 that includes a line for taking the tax credit once the responsible entity is entitled to do so. www.irs.gov/pub/irs-pdf/f941.pdfQ: What documentation must the responsible entity maintain? A:The responsible entity must maintain certain information in support of the tax credit claimed on Form 941, including the tax id number of all covered employees, the amount of the subsidy for each and whether it is individual or family, information on the dates and amounts of premiums received from assistance eligible individuals, proof of eligibility for COBRA, proof of payment of the full premium to insurers, if applicable, or proof of the premium amount and coverage provided by self-insured plans, and an attestation regarding the involuntary termination of employment and date (it is not clear who is to make this attestation).Q: What notice requirements are there? A:For individuals who become entitled to elect continued coverage between September 1, 2008 and December 31, 2009, the general COBRA notice provisions will now need to include notification of the availability of the premium reduction and any conditions to receiving it, a description of the extended election period, a description of the individual’s obligation to notify the plan of eligibility for coverage under another group health plan or Medicare and the penalty for failure to do so, the right to elect different coverage (if the plan so provides), contact information for the plan administrator and others with relevant information, and inclusion of any forms necessary to establish eligibility for the reduced premium.A notice containing the above information must be provided on or before April 18, 2009 to assistance eligible individuals, and, it appears, any individual who became entitled to elect continued coverage between September 1, 2008 and February 17, 2009. This includes those who did not previously elect continued coverage, or allowed the coverage to lapse, and those who elected and still have coverage.
The notification requirements may be met by amending existing COBRA forms or by including a separate document with the required information. The Department of Labor is to issue model notices by March 19, 2009. Q: Could an individual be required to repay the subsidy? A:If an individual is a “high-income individual,” he or she may be required to repay all or a part of the subsidy. While high-income individuals are eligible for the subsidy, they will be required to repay it in the form of increased taxes. If an assistance eligible individual’s modified adjusted gross income exceeds $145,000 ($290,000 for joint returns) in the tax year the subsidy is received, the full amount of the subsidy must be repaid. If the adjusted gross income is between $125,000 and $145,000 (between $250,000 and $290,000 for joint returns), a portion of the subsidy must be repaid. Such individuals may make a permanent election to waive the right to the subsidy.Q: What if I don’t comply with the new requirements? A:Failure to comply with the subsidy provisions will be treated as a violation of ERISA, which allows for suits by participants and the Department of Labor. Failure to comply with the notice provisions may subject the plan administrator to a civil penalty of $110 per day. In addition, there may be penalties for incorrectly reporting payroll taxes if the subsidy payments are overstated, as well as potential litigation.Summary of Important Dates
There remain many unanswered questions, especially for multiemployer plans. As more guidance and clarification is forthcoming from the government, we will keep you advised. This summary has been prepared by KZR’s Employee Benefits Partner, Joan Rothermel, Esq. For additional information on compliance with these new COBRA requirements, please do not hesitate to contact me or Joan Rothermel directly. Joan can be reached at 212-935-6020 x240 or jrothermel@kleinzelman.com. 3.5.09 |
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