On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”). Among other provisions, the Act provides for a federal subsidy of up to 65% of insurance premiums for certain terminated employees and their beneficiaries under COBRA. The subsidy provisions also apply to State continuation coverage requirements that are comparable to COBRA (i.e., “mini-COBRA rules”).[1] The federal subsidy is effective for premiums paid beginning March 1, 2009. An employer may continue collecting full premiums from eligible individuals (referred to as “AEI” and defined below) during the 60-day period beginning on March 1, 2009 so long as the employer will either credit (to the extent allowed) or reimburse the AEI for the overpayment.

Federal Subsidy and Reimbursement

Under the Act, if an AEI pays 35% of the required premium for COBRA continuation coverage, such individual is treated as having paid the full required premium. As a result, an AEI is receiving a tax-free subsidy in the amount equal to 65% of the premium. The employer is required to make the full premium payment to the provider but the employer will be reimbursed by the IRS in the form of a credit against its liabilities for payroll taxes. If the liability for payroll taxes is lower than the reimbursement amount, the IRS will credit or refund the excess in the same manner as if it were an overpayment of payroll taxes. To be eligible for reimbursement, the employer must receive the reduced premium payment from an AEI. Additionally, the employer seeking the reimbursement must comply with certain reporting requirements.

Eligible Individuals

To be eligible for this federal subsidy, an individual must qualify as an “assistance eligible individual” (AEI). An AEI is any qualified beneficiary who: (i) at any time from September 1, 2008 through December 31, 2009, is eligible for COBRA continuation coverage, (ii) elects COBRA continuation coverage, and (iii) qualifies for COBRA due to involuntary termination of the covered employee’s employment during this period (other than for gross misconduct). Although all AEIs are eligible for these reduced premium payments, the federal subsidy is effectively eliminated for AEIs whose modified adjusted gross income (MAGI) for the year exceeds $145,000 ($290,000 for joint returns). Any subsidy received by such AEI is fully recaptured from an AEI through an increase in income tax liability for the tax year. Additionally, if MAGI is greater than $125,000 ($250,000 for joint returns) but less than $145,000 ($290,000 for joint returns), a portion of the premium is recaptured under the formula. An individual may permanently elect to waive the right to premium assistance.

Duration of Subsidy

The maximum period for the federal subsidy is nine (9) months. The period ends upon the earlier of the maximum required period of continuation coverage under COBRA, or if an AEI becomes eligible for coverage under certain other group plan or Medicare. In the latter case, an AEI is required to notify the group plan that he/she is no longer eligible for subsidized COBRA premium. Failure to do so will result in a penalty of 110% of the subsidy after termination for eligibility. If an AEI becomes eligible for coverage under such other group plan but stops paying the reduced COBRA continuation premium, the penalty will not apply. Furthermore, during any month when an AEI is receiving COBRA premium reduction, he/she will not be treated as an “eligible individual” or a “qualifying family member” for the purposes of Health Coverage Tax Credit.

Notice Requirements

The new rules require that the COBRA notice provided to an employee following the termination of employment include additional notification about the availability of the premium reduction subsidy, a description of the option to enroll in different coverage if so permitted by the employer, and certain other information. The DOL shall provide the model language for the required additional notification within 30 days of the enactment.

Special 60-Day Election Period

The Act provides a special 60-day election period for COBRA continuation coverage for an AEI who has not elected COBRA continuation coverage as of the date of enactment (e.g., an AEI who was involuntary terminated after September 1, 2008 but before February 17, 2009 and who has not elected COBRA continuation coverage, or elected the coverage but is no longer enrolled on the date of enactment because of inability to continue paying the premiums). The 60-day election period begins on the date that the notice is provided. The special election period does not extend the period of COBRA continuation coverage beyond the original maximum required period and the coverage under COBRA is not retroactive prior to the enactment date. Within 60 days of the enactment, the plan administrator (generally, the employer) must provide the additional notification to any AEI who had elected COBRA coverage as of the date of enactment, and to any individual eligible to take advantage of the extended election period.

Action Steps

You should contact your medical plan provider or your third party administrator (“TPA”) to determine who will be responsible for complying with these new rules and providing these notices.

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If you have any questions about this memo, please contact one of the attorneys listed below.