New Law Extends the Period of Eligibility for COBRA Subsidy
Wolff & Samson Employment Law Alert
On December 19, 2009, President Obama signed into law the Department of Defense Appropriations Act of 2010 (DOD Act), which extends the eligibility period for the group health continuation coverage subsidy provided by the American Recovery and Reinvestment Act of 2009 (ARRA). As a consequence of the passage of the DOD Act, certain employees (and their qualified dependents) involuntarily terminated between December 31, 2009 and February 28, 2010 are now eligible for the 65% subsidy provided by the ARRA, and the period during which such individuals are eligible for the subsidy has been extended from nine months to 15 months. Employers must be aware of these changes and the corresponding new notice requirements imposed by the DOD Act.
Historically, under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), employees (and their qualified dependents) who have experienced a qualifying event may elect to continue their group health insurance coverage at the full cost of the group premium for at least 18 months following the qualifying event. Common qualifying events are: the employee’s resignation; the employee’s involuntary termination of employment; death of the employee; a reduction in the employee's hours or a leave of absence; the employee's divorce or legal separation; and a dependent child no longer meeting eligibility requirements. COBRA continuation coverage, however, is not available to employees terminated by reason of gross misconduct, which is excluded from the definition of “a qualifying event.”
COBRA Subsidy under the ARRA and the DOD Act
The ARRA, passed in February 2009, provides individuals (and their qualified dependents) involuntarily terminated from employment during the period from September 1, 2008 to December 31, 2009 with a government subsidy for the COBRA premium. Under the ARRA, eligible individuals pay a reduced premium to continue participation in the employer group health care plan for a period of up to nine months. Thus, eligible individuals only pay 35% of the COBRA premium, and the remaining 65% is paid by the employer. The employer is then reimbursed through a tax credit equal to the amount of the subsidy, which may be applied to current payroll and income tax deposits.
Under the ARRA, the COBRA subsidy is only available to individuals with an adjusted gross income of less than $145,000, or joint filers with a combined adjusted gross income of $290,000. The subsidy is proportionally reduced for individuals earning in excess of $125,000. In addition to these income limit requirements, an employee (and his/her qualified dependents) is eligible for the subsidy if the individual: (1) was eligible for COBRA coverage at any time beginning September 1, 2008 and ending December 31, 2009; (2) elected COBRA coverage either during the original COBRA election period or the special election period provided by the ARRA; and (3) was a COBRA-qualified beneficiary because of an involuntary termination during the period beginning September 1, 2008 and ending December 31, 2009.
The newly enacted DOD Act amends the eligibility requirements of the ARRA by extending the period during which the employee and his/her dependents are eligible for the COBRA subsidy. Under the new law, an individual is eligible for the COBRA subsidy if (1) the employee was involuntarily terminated from September 1, 2008 thru February 28, 2010 and (2) the individual timely elects COBRA coverage. In addition, the law extends the maximum period an individual can receive this subsidy from nine months to 15 months. Qualified individuals, referred to as “Assistance Eligible Individuals,” are entitled to the COBRA premium reduction for any period of continuation coverage that began on or after February 17, 2009 and lasts for up to 15 months. As a result, individuals who became eligible for the reduced COBRA premium upon enactment of the ARRA in February 2009 and whose 9-month subsidy period expired in December will be entitled to receive the subsidy for an additional 6-month period.
New Notice Requirements
The DOD Act also imposes additional notice requirements on employers (or plan administrators). Under these new notice requirements, notice of the changes made to the premium reduction provisions of ARRA by the DOD Act must be provided no later than February 17, 2010 to Assistance Eligible Individuals who have already received COBRA and ARRA notices.
In addition, the DOD Act notice must be provided to any individual who experiences a termination of employment on or after October 31, 2009; this notice must be sent to such individual within the deadlines for providing COBRA and ARRA notices.
Finally, notice must be provided to any individual whose original 9-month subsidy period would have expired as of December 19, 2009 if the DOD Act had not extended the subsidy period. This notice will inform the individual of his or her right to pay retroactive premiums to reinstate coverage and/or the right to reimbursement for overpayment if the individual paid the full 100% COBRA premium when the original 9-month subsidy period expired.
These new model notices are available through the Department of Labor’s website at http://www.dol.gov/ebsa/COBRAmodelnotice.html.
An employer (or plan administrator) may be held personally liable to the aggrieved beneficiary in a civil action where the employer (or plan administrator) fails to satisfy the COBRA notice requirements. The penalties for failing to timely provide an individual notice of his or her rights under COBRA can be quite substantial: a court may order the employer (or plan administrator) to pay the individual $100 a day, from the date of the failure to provide notice, as well as attorneys’ fees and court costs. In addition, the Internal Revenue Code imposes a separate obligation on the employer (or plan administrator) to provide notice of COBRA rights. An employer (or plan administrator) may be subject to a nondeductible excise tax imposed by the IRS of $100 per day during the period of non-compliance, up to a maximum of $200 per day per family.
What Should Employers Do Now?
In order to comply with this new law and avoid penalties, employers (or plan administrators) should take immediate action to identify those employees (and their dependents) who must receive notice of their extended eligibility for the COBRA subsidy. Moreover, employers are required to provide to those individuals who paid the full amount of the COBRA premium in December 2009 and whose eligibility for the COBRA subsidy has now been extended with a credit for any overpayment against any future subsidized COBRA premium. Employers (or plan administrators) must also identify those individuals whose COBRA coverage was terminated upon the expiration of the COBRA subsidy so that these individuals may be notified of their right to reinstatement with the reduced premium. Finally, employers should also revise internal procedures to monitor when an employee’s premium subsidy ends in order to reinstate the 100% COBRA premium charge.