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New COBRA Subsidy and Related Requirements

“Did I Hear Something About Cobra Changes?”

Yes, you certainly did! As to whether or not your company will be impacted by the changes depends upon whether and how your company provides health care benefits to its employees. 

Included among the array of changes imposed under the American Recovery and Reinvestment Act of 2009 (the “Act”) are important revisions to COBRA. “COBRA” refers to the collective requirements under various provisions of federal labor law (ERISA) and tax law (Internal Revenue Code) which generally require employers maintaining group health plans to offer continued plan coverage for a limited period at the ex-employee’s expense, following a loss of plan coverage. Thus, the COBRA requirements afford a measure of transitional protection to individuals (and their families) who would otherwise lose their health care coverage on account of a so-called “qualifying event,” such as his or her involuntary termination of employment with the employer maintaining the plan. The maximum mandated coverage continuation period in connection with a typical involuntary termination of employment is 18 months. Again, the key is that the individual can be (and typically is) required to pay the entire (presumably, monthly) premium (i.e., the aggregate of the employee portion he or she had been paying while employed by the employer maintaining the plan and the portion the employer had paid on his or her behalf). In fact, the employer can increase the individual’s premium amount by up to an additional 2% (i.e., total monthly payment equal to 102% of the actual monthly premium) to cover its administrative costs. Under the Act, the U.S. government will provide a subsidy, limited as to time and amount, to certain qualifying (income-based test) individuals making COBRA payments, intended to assist severed employees and their families to afford continued health care coverage (hopefully for only a limited time until they obtain new employment with health care coverage). The COBRA requirements do not apply to certain small group health plans (the “COBRA Small Plan Exception”). Under the COBRA Small Plan Exception, for any calendar year, a group health plan will not be subject to COBRA if for the immediately preceding calendar year, all employers maintaining the plan employed fewer than 20 (full and part-time) employees on at least 50% of the working days during that calendar year. In addition, the COBRA continuation requirements cease for an individual who obtains coverage under another group health care plan or Medicare.

Depending upon one’s political stance, the new COBRA subsidy under the Act may or may not appear to be good news for our nation. However, included under the Act are additional notice requirements (and potential penalties for compliance failures). Unless your company does not maintain a group health plan or if it does, unless it qualifies for the COBRA Small Plan Exception (in which case you need read no further), these new requirements/penalties will apply to your company and its plan, and the compliance deadlines are approaching rapidly!

The Act provides generally for a government-provided subsidy of as much as 65% of the COBRA payments (including state and federal COBRA requirements) to be made by individuals who (i) lose group health care plan coverage on account of being involuntarily terminated by the employer maintaining the plan during the period which commenced on September 1, 2008, and which will end on December 31, 2009, and (ii) have an annual modified adjusted gross income not exceeding $145,000 ($290,000 for joint filers). (The subsidy is phased-out for modified adjusted gross incomes of $125,000-$145,000/$250,000-$290.000.) The maximum subsidy payment period is 9 months of continuation coverage (subject to termination upon the earlier to occur of coverage under another group health care plan or Medicare), beginning on March 1, 2009. The subsidy is to be provided by means of a payroll tax credit to the employer - the Secretary of the Treasury will issue guidance as how the credit is to be obtained.

On or before April 18, 2009, notice of the availability of the COBRA subsidy (as well as other newly-required information) must be provided to all individuals who became entitled to elect COBRA continuation coverage during the period which commenced on September 1, 2008, and ended on February 16, 2009.

All individuals who experience a COBRA qualifying event between February 17, 2009, and December 31, 2009, must receive an updated or replacement version of the COBRA notice, which amongst other things, explains the new subsidy.

Any eligible individual (i.e., based on adjusted gross income) who became eligible for COBRA continuation coverage on or after September 1, 2008, but who did not elect such coverage, is eligible for the subsidy and must now be provided with the opportunity to elect subsidized COBRA continuation coverage during a special election period commencing on February 17, 2009, and ending 60 days after the date on which notice of the new COBRA subsidy is provided. Where such election is effected, the duration of the subsidized coverage period will not extend beyond the COBRA coverage period that would have gone into effect had COBRA continuation originally been elected.

The Act requires the U.S. Department of Labor to issue model notices for these purposes by March 19, 2009.

Employers with COBRA-covered group medical plans should confirm with their health insurers/administrators that the new required notices and procedures will be timely prepared/implemented, and should also discuss with their tax advisors, as more details emerge, as to how to obtain the payroll tax credits to be associated with the COBRA subsidies.

More to follow!

This alert is a publication of Loeb & Loeb LLP and is intended to provide information on recent legal developments. This alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.

Circular 230 Disclosure: To ensure compliance with Treasury Department rules governing tax practice, we inform you that any advice contained herein (including any attachments) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer; and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.