COBRA Rules Materially Modified by the American Recovery and Reinvestment Act of 2009
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, a $787 billion measure designed to create and save 3.6 million jobs and stimulate the economy. Among other things, this massive legislation materially changes one aspect of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) by creating a means to fund 65 percent of the cost of COBRA coverage for up to nine months for employees involuntarily terminated between September 1, 2008, and December 31, 2009. This new law also allows such employees to opt for a different level of coverage in some cases and requires certain new notices to be issued soon. Otherwise, COBRA rules remain largely intact. This advisory briefly summarizes key parts of these changes.
The act allocates over $24 billion to COBRA provisions that are estimated to help seven million people. The provisions include a nine-month, 65 percent COBRA premium subsidy for employees terminated involuntarily between September 1, 2008, and January 1, 2010, along with their spouses and eligible dependents (assistance-eligible individuals). Here is how it is intended to work:
Assistance-eligible individuals are responsible for paying 35 percent of their COBRA premiums while eligible for the subsidy. Employers (in the case of self-insured plans and all other plans that are already covered by COBRA), insurance carriers (in the case of insured plans not already covered by COBRA) and multiemployer plans must pay the remaining 65 percent; however, those entities can be reimbursed for the COBRA premiums by treating them as a credit against their regular payroll taxes (and if the credit exceeds their payroll tax, by treating the COBRA premiums as an overpayment of payroll taxes that can be refunded or handled as a future credit).
The COBRA changes apply to assistance-eligible individuals who already elected COBRA, as well as those who opted not to elect COBRA before the act was passed; however, no subsidy is due for periods before the act was passed. Moreover, to help employers implement these new arrangements, the act provides that if an assistance eligible individual pays the full COBRA premium for the first period to which the 65 percent subsidy applies (generally March 2009) and/or the immediately following period, the employer can either (1) reimburse the assistance eligible individual for the 65 percent he or she paid, or (2) provide a comparable credit against future payments.
Additionally, plan providers can, but are not required, to permit assistance-eligible individuals to select a different level of coverage.
By April 18, 2009, employers, insurance carriers and union multiemployer plans must notify assistance-eligible individuals of their right to receive the COBRA premium subsidy, as well as their right to modify their original elections (if applicable). The secretary of labor is supposed to issue guidance and prescribe models for the notification by March 19, 2009.
In general, the 65 percent COBRA premium subsidy will not be treated as income to most assistance-eligible individuals; however, assistance-eligible individuals who earn more than $125,000 annually (more than $250,000 for joint filers) will be required to pay additional taxes equal to some or all of the COBRA premium subsidy they receive, depending on how much they earn. Such individuals also have the right to opt out of receiving the subsidy.
In sum, the act materially changes the COBRA rules and employers, insurance carriers and union multiemployer plans need to quickly modify their practices and forms to comply with these new obligations and the act's retroactive effects.