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COBRA changes

Kevin Sampson

Recently, Congress passed the American Recovery and Reinvestment Act, and on Feb. 17, President Obama signed this legislation into law. This new act has a direct impact on all employers here in Northern Nevada that have a group health insurance plan in force, regardless of size.

One section of the act requires employers to temporarily subsidize 65 percent of a qualified terminated employees’ COBRA health insurance premium for up to nine months. Employers will be able to recover this same 65 percent cost with a reimbursement by the government through payroll tax credits.

COBRA is a federal law that requires employer groups with over 20 employees to offer certain employees and their eligible covered dependents the ability to continue their group health insurance coverage after their termination of employment. COBRA also restricts the monthly health insurance premiums that are offered to terminated employees. If you have a business that has less than 20 employees, these same guidelines in the American Recovery and Reinvestment Act apply. This new act gives you (with some restrictions) the flexibility to offer assistance-eligible individuals the ability to choose less-expensive coverage, if it is available, provided the lower-premium plan is available to non-COBRA active employees.

The new plan option must be made within 90 days of receipt of the COBRA election notice.

Effective Feb. 17, the American Recovery and Reinvestment Act provides a federal subsidy of 65 percent of the COBRA continuation premium for “assistance eligible individuals” or “AEIs”, and certain groups of AEIs can benefit from the 65 percent subsidy for up to nine months. AEIs include employees and their dependents who were involuntarily terminated from the health plan between Sept. 1 and Dec. 31, 2009. In addition, AEIs include employees that did not elect COBRA coverage and those that did elect COBRA yet failed to pay their COBRA premiums, from Sept. 1, 2008, to Feb. 17, 2009. The 65 percent subsidy is further restricted by the income of the assistant-eligible individual. AEIs with a modified adjusted gross income exceeding $125,000, (or $250,000 in the case of a joint return), are not eligible for the full subsidy, and for those AEIs that have modified adjusted gross incomes exceeding $145,000 (or $290,000 in the case of a joint return), the subsidy is completely phased out.

The monthly cost for COBRA health insurance has traditionally been paid by the terminated employee. If for some reason you entered into an agreement with a terminated employee to pay part of their COBRA premiums, or if you currently subsidize their COBRA premium in any way, they may not be eligible for the subsidy, or they may be eligible for only a reduced amount of the subsidy.

The effective date for this subsidy started on March 1, for health plans that are billed on a calendar month. The subsidy period expires after nine months unless the individual becomes eligible for major medical group coverage, Medicare or if they would have reached the end of their COBRA benefit.

One important note employees must notify you in writing if they become eligible for coverage under any other major medical group health plan or Medicare (even though they may not enroll). A penalty of up to 110 percent of the subsidy amount is possible for their failure to notify you of their new eligibility.

Terminated employees that did not elect COBRA between Sept. 1, 2008, and Feb. 17 have a second-chance enrollment period. Employers are required to provide notice to these individuals, and these notice rules will be forthcoming. In addition, a group health plan must refund the AEI-qualified individuals any COBRA premiums that they may have paid on or after Feb. 17 that was in excess of their 35 percent portion of the

COBRA premium. Because the assistance-eligible individual may not have received the American Recovery and Reinvestment Act notice, some of your qualified participants may already have paid their March and/or

April COBRA premiums. These individuals will be eligible for a refund from you. This may be in the form of a reimbursement payment or credit against future premium payments within 60 days. There is no provision for reimbursement of AEI pre-paid COBRA premiums for May 2009 coverage, since this coverage period is beyond the 60-day notice date.

The first step that many employers are taking is to identify their Assistance-Eligible Individuals. The American Recovery and Reinvestment Act does not define what it means to be “involuntarily terminated” so great care should be devoted to making this determination. If an employer denies an individual the rights of an assistance-eligible individual (because the person was not involuntarily terminated) the termed employee may apply to the Secretary of Labor for an expedited review of the denial, and the employer could be subject to penalties.

The second step is to modify your COBRA election notices, or provide separate supplemental notices, to all AEI qualified participants. The deadline for these notices is April 18, but many employers are sending out their COBRA disclosure notices now in order to close the second-chance enrollment period. The second-chance enrollment period runs for 60 days from the date that you provide the AEI of their second-chance enrollment rights. The Department of Labor is required to issue a model of the notice by March 18. Failure to provide these notices to your eligible AEIs would be a COBRA violation, and subject to the standard COBRA penalties of up to $110 a day under ERISA.

The third step involves the normal process of collecting the COBRA premium. For qualified AEI’s, you will be looking for their 35 percent portion of the COBRA premium, and thereafter remitting 100 percent of their premium to the carrier.

The fourth and last step is to apply for the credit on your payroll taxes. Further regulations will be forthcoming regarding the mechanics of this credit. The published rule today states that if payroll taxes are not sufficient to cover the subsidy, the additional amount will be provided as a credit to the taxpayer as if it were an overpayment of payroll taxes.

Kevin Sampson is president of Health Benefits Associates in Reno. Contact him at 828-1216 or kevin@healthbenefits.net.