The recently enacted American Recovery and Reinvestment Act of 2009 (the “Act”) includes several new requirements that will impact the COBRA responsibilities of employers maintaining group health plans. In broad terms, the Act’s COBRA-related provisions do two things, both related to individuals involuntarily terminated between September 1, 2008 and December 31, 2009: (1) provide for a subsidy of COBRA premiums for a nine-month period and (2) require certain additional notifications relating to the COBRA subsidy.
Background: Summary of Basic COBRA Requirements.
“COBRA” is an acronym that refers to the Consolidated Budget Reconciliation Act of 1985 and more specifically to the health care continuation requirements included in the act. COBRA requires group health plans maintained by employers with 20 or more employees to provide elective continuation coverage to employees and their beneficiaries upon the occurrence of certain “qualifying events” such as termination or employment, reduced working hours, death, or divorce (among others). Continuation coverage is available on a self-pay basis for up to a specified period of time (i.e., 18, 29, or 36 months) depending on the circumstances. Beyond the substantive rights COBRA creates, it also obligates the administrators of group health plans to provide to plan participants and their beneficiaries notices detailing the substantive continuation rights and the administrative procedures applicable to the exercise of those rights.
Both ERISA and the tax code impose penalties for failures to timely provide the required notices or to make COBRA coverage available. Penalties may be assessed of up to $110 per day under ERISA, and an excise tax penalty of up to $100 per day (up to $200 per day if more than one qualified beneficiary is affected) under the tax code. Also, participants (or the Department of Labor) may sue to secure COBRA coverage (or the benefits it would have offered) and recover the related attorneys’ fees, and ERISA also permits the recovery of “other relief” that may entail substantial damages depending on the circumstances.
An employee, his or her spouse, and any dependent children are generally entitled to continuation coverage under COBRA if the employee is terminated and otherwise would lose coverage under the employer’s group health plan. Because the cost to terminated employees of COBRA coverage is often significantly more than the cost to active employees, many eligible individuals do not take advantage of their rights or cannot afford to maintain their coverage for their full period of entitlement. The Act helps to mitigate this cost issue by providing a subsidy for COBRA premiums for any “assistance eligible individuals” whose employment involuntarily terminates between September 1, 2008, and December 31, 2009. Assistance eligible individuals are individuals who are eligible for COBRA due to an involuntary termination occurring during the subsidy period, including any such individuals who might have previously waived COBRA coverage or let their coverage lapse.
The subsidy is available for up to the earlier of (i) the date that is nine months after the first day of the first month that the subsidy becomes available to the individual or (ii) the end of the assistance eligible individual’s maximum period of COBRA entitlement (which could be 18, 29, or 36 months depending on the circumstances).
The subsidy covers 65% of the COBRA premium costs. Assistance eligible individuals are obligated to cover the remaining 35%. From the employer’s perspective, the subsidy means that only 35% of the costs of COBRA coverage can be passed through for assistance eligible individuals during the subsidy period.
The Act also applies to state COBRA-like continuation coverage and other government-sponsored continuation programs. The Act does not apply to flexible spending accounts under cafeteria plans.
Recognizing that the original COBRA election period for assistance eligible individuals terminated in 2008 has already ended, the Act creates an extended election process to give all assistance eligible individuals who are not already receiving COBRA benefits on February 17, 2009, a second opportunity to elect to receive them. The extended election period begins on February 17, 2009, and ends on the 60thday following the day on which the employer provides notice of the extended election right. This means that delaying distribution of election notices to assistance eligible individuals will extend the window they have for making a COBRA election.
The Act supplements the existing COBRA notice requirements by obligating employers to supply a notice of the extended election and subsidy rights no later than April 18, 2009. The notice can be distributed on a stand-alone basis or a discussion of the new COBRA rights for assistance eligible individuals can be incorporated into existing COBRA notices and election forms and redistributed. The Department of Labor is required to issue model notices by March 19, 2009, but employers are free to develop their own form of notice. The notices can be distributed in the same manner as other disclosures required by ERISA, although electronic distribution may be problematic under the Department of Labor’s guidance on electronic communications with benefit plan participants and beneficiaries. Mailing paper notices to the last known address of potential assistance eligible individuals via first-class mail should be an acceptable alternative. As with the “standard” COBRA notice requirements, an employer’s failure to comply with the foregoing notice obligations can trigger substantial penalties under ERISA and the tax code.
The entity entitled to reimbursement from the government for COBRA premiums not paid by the employee depends on the type of plan. For multiemployer group health plans, it is the plan itself that has reimbursement rights. The employer is entitled to reimbursement for self-funded health plans other than multiemployer plans. However, for insured health plans (other than multiemployer plans), the insurer providing the coverage is the entity entitled to reimbursement. Reimbursement is via payroll tax credits. It is unclear how this mechanism will work with entities other than the employer.
Assistance eligible individuals who previously paid full COBRA premiums are entitled to be refunded premiums from the entity entitled to reimbursement for the amount they paid in excess of their 35% responsibility or else to receive a credit against future COBRA premiums in an equivalent amount. The Act includes specific deadlines for providing reimbursements or credits.
To determine the appropriate course of action to satisfy the new COBRA requirements adopted by the Act, employers sponsoring group health plans should consider the following:
Note: This Alert is a brief summary of some of the highlights of the new COBRA legislation. For further information, contact Paul Borden, Mike Frank, Tim Verrall or Yana Johnson.
 Generally, employees may be required to pay 102% of the premium for continuation coverage.