Just When You Thought it Couldn't Get Any More Confusing: COBRA Subsidy as Amended by the Defense Act

Diane Pfadenhauer
Posted: 01/18/2010

The American Recovery and Reinvestment Act of 2009 (ARRA) permits "assistance eligible individuals" to pay reduced premiums and provides additional election opportunities for health benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA). These individuals will pay only 35 percent of the COBRA premium; 65 percent is paid by the employer (or Plan) and then reimbursed through a payroll tax credit. The reduction in premiums under ARRA applied to periods of health coverage beginning on or after February 17, 2009 and lasted for up to nine months. Both the Internal Revenue Service (IRS) and The United States Department of Labor (USDOL) provided information available on their websites.

The ARRA COBRA provisions are rather confusing. To make matters worse, at the end of 2009, ARRA’s COBRA provisions were extended by the Department of Defense Appropriations Act for 2010 ("Defense Act"). Essentially the Defense Act does two things: It extends the period of eligibility and the length of the subsidy.


What is COBRA?

COBRA is a federal law which provides that workers whose employment loss will result in a loss of groups health benefits have the right to continue their coverage under the group health plan for up to 18 months. While COBRA applies to employers with 20 or more employees, many states such as New York have Mini-COBRA laws that apply to employers with fewer employees. This new subsidy applies to both plans covered under COBRA and those covered by state Mini-COBRA laws.

What is the COBRA Subsidy?

The original COBRA subsidy under ARRA provided a nine month subsidy for COBRA continuation coverage for those who were involuntarily terminated and lost coverage as a result of a termination within the period September 1, 2008 and December 1, 2009.

Under the Defense Act, the expiration period of the subsidy is extended now for 15 months through February 28, 2010. Thus, individuals are eligible for the extended subsidy if they are involuntarily terminated from employment beginning September 1, 2008 through February 28, 2010 and would be otherwise eligible for COBRA.

It is important to note that under the Defense Act, only the termination from employment, not the loss of coverage, must occur before February 28, 2010. Thus, if an individual’s employment is terminated prior to February 28th, but coverage does not terminate until after February 28th, s/he is eligible for the subsidy even though the loss of coverage occurred after the eligibility period.

Generally under the original ARRA legislation individuals who are eligible for other group health coverage (such as a spouse's plan) or Medicare are not eligible for the premium reduction and the subsidy is only available for premiums paid for periods of coverage after February 17, 2009.

An individual who pays the 35 percent COBRA premium is deemed to have paid the full COBRA premium. The remaining premium is taken as a credit by the employer/ plan against employment taxes. Credits that exceed the employment taxes owed are reimbursed. The IRS has revised Form 941 (Employer’s Quarterly Federal Tax Return) accordingly.

Wage earners, with an adjusted gross income of over $145,000 (and joint filers with an adjusted gross income of over $290,000) for 2009 are not eligible for the subsidy. Those earning between $125,000 and $145,000 individually (and between $250,000 and $290,000 for joint filers) are subject to a "phase out" of the subsidy.

Eligibility

An "assistance eligible individual" is one who, 1) has a COBRA qualifying event (or under a State COBRA law that provides comparable coverage) that relates to the employee’s involuntary termination during the period between September 1, 2008 and February 28, 2010, and, 2) makes a timely COBRA election. Individuals who are eligible for other group health coverage (such as a spouse's plan) or Medicare are not eligible for the premium reduction.

An individual who pays the 35 percent COBRA premium is deemed to have paid the full COBRA premium. The remaining premium is taken as a credit by the employer/plan against employment taxes. Credits which exceed the employment taxes owed are reimbursed. The IRS has revised Form 941 (Employer’s Quarterly Federal Tax Return) accordingly.

Wage earners, with an adjusted gross income of over $145,000 (and joint filers with an adjusted gross income of over $290,000) for 2009 are not eligible for the subsidy. Those earning between $125,000 and $145,000 individually (and between $250,000 and $290,000 for joint filers) are subject to a "phase out" of the subsidy.

The Defense Act’s COBRA Subsidy Extension is Retroactive

Under the Defense Act, any individual who previously had the federal COBRA subsidy but exhausted it after nine months will now have the opportunity to opt back into COBRA at the reduced subsidy rate for an additional six months (subject, of course, to the maximum COBRA continuation coverage period), retroactive to when s/he stopped paying for COBRA coverage.

If the individual remained on COBRA, exhausted the subsidy rate, and continued on COBRA by paying the higher, full-premium rate, s/he is entitled to a refund or credit of the excess premium paid retroactively.

In both of the above instances, the individuals must pay their retroactive premiums by February 17, 2010 or 30 days after the notice of the extension is provided to them by the plan administrator.

The Defense Act’s New Notice Requirements

The Defense Act requires that plan administrators provide a new notice to any individual who, 1) was eligible for the ARRA COBRA subsidy on or after October 31, 2009, or 2) was voluntarily terminated on or after October 31, 2009. The notice must be provided by February 17, 2010. Notice requirements for individuals who become eligible for COBRA after December 19, 2009 follow COBRA’s traditional notice rules.

Additionally, notice must be given to those individuals who were eligible for the ARRA subsidy but either lost coverage for failure to pay premiums or who paid the full COBRA premiums after exhausting the subsidy.

Thus, if you have not done so, you should immediately send notice to any affected individuals by sending out a new COBRA notice and sample materials found on the USDOL’s website.

What New Notices Are Available?

The revised COBRA notices, available on the Department of Labor’s website, are:

1. General Notice (Full version): Send this notice to ALL qualified beneficiaries going forward. This combines a general COBRA notice with the premium reduction provisions of ARRA and the Defense Act.

2. Premium Assistance Extension Notics: Plan administrators must provide notice to certain individuals who have already been provided a COBRA General Notice that did not include information regarding the Defense Act.

The following are the affected individuals that should receive this notice and the associated timing requirements:

  • Individuals who were "assistance eligible individuals" as of October 31, 2009 (unless they are in a transition period), and individuals who experienced a termination of employment on or after October 31, 2009 and lost health coverage (unless they were already provided a timely, updated General Notice). This notice must be provided by February 17, 2010.
  • Individuals who are in a "transition period" must be provided this notice within 60 days of the first day of the transition period. An individual's "transition period" is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment. An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.

Remember: You will still have to edit these forms for your own use. Follow the instructions or seek professional help!

Diane Pfadenhauer
Posted: 01/18/2010

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