On February 17, 2009, Michael Best & Friedrich LLP issued a client alert on the COBRA subsidy provisions in the American Recovery and Reinvestment Act ("ARRA"). Since the release of that alert, there has been a great deal of discussion and questions among our clients and among the general benefits community. The Department of the Treasury has also engaged in clarifying discussions. Because of this, we are releasing this supplement to our earlier alert.
Does the subsidy apply to dental and vision plans?
Yes. The subsidy applies to group health plans that are subject to the continuation coverage rules. Dental and vision plans are group health plans for COBRA purposes.
Does the subsidy apply both to plans subject to federal COBRA and plans subject to state laws providing comparable continuation coverage?
Yes. The subsidy applies to plans that provide COBRA continuation coverage. COBRA continuation coverage is a defined term in ARRA, meaning plans that are subject to federal COBRA, certain types of government continuation coverage that is not technically federal COBRA, and state programs that provide comparable continuation coverage. The subsidy does not apply to flexible spending arrangements under a cafeteria plan.
A state program that provides comparable continuation coverage is not specifically defined in ARRA. However, Congress’ Committee Notes appear to define this term. The Committee Notes state that this program includes state laws that require group health plan participants be provided a right to continue coverage in the plan at a coverage level that is substantially similar to the coverage the individual had prior to termination. Additionally, the participants’ cost for the continuation coverage must be based upon the group health plan’s cost of providing such coverage.
Who receives the subsidy?
The party eligible to apply the subsidy as a credit toward its employment tax liability or, if applicable, to receive repayment from the federal government depends upon the type of plan. Assuming the plan is not a multiemployer plan, the following rules apply: (1) for self-insured plans, the employer provides the subsidy and receives the credit; (2) for insured plans subject to federal COBRA (20 or more full-time employees), the employer provides the subsidy and receives the credit; and (3) for insured plans which provide state continuation coverage but are not subject to federal COBRA (also known as small employer plans), the insurer provides the subsidy and receives the credit. In the case of a multiemployer plan, the plan provides the subsidy and receives the credit. We have revised our earlier alert to make this distinction clearer.
Plan sponsors should recognize that additional notices must be sent to all individuals regarding the additional continuation coverage rights. There is no specific date by which notices are required for individuals terminated (and their qualified beneficiaries) after February 17, 2009; however, under current COBRA law, an individual’s period for electing COBRA coverage will not start running until after a sufficient election notice is sent to the individual. As described in the next section, certain individuals terminated prior to February 18, 2009, must receive notice of their second chance to elect COBRA by April 18, 2009. This notice will be insufficient unless it describes particular rights under ARRA. Even so, ARRA only describes with particularity the notice requirements for plans subject to federal COBRA. The Departments of Labor, Health and Human Services, and Treasury have been instructed to provide rules regarding notices to plans only subject to state continuation coverage.
Do employees who were involuntarily terminated between September 1, 2008, and December 31, 2009 have a second opportunity to elect COBRA coverage?
Yes. This is true even if an ex-employee’s prior COBRA election period has passed (e.g., the employee was terminated September 1, 2008 and did not elect continuation within the required time period – usually 60 days after the notice is sent). ARRA extends the election period within which an assistance eligible individual may elect COBRA. The period begins on February 17, 2009, and ends 60 days after the terminated employees are notified of their additional rights. Some employers may want to promptly send out the second notice to start the 60-day "clock" ticking. The new notice must be sent to most individuals terminated during the applicable time period, not just individuals who were involuntarily terminated. The expanded election period does not appear to apply to individuals whose continuation coverage right arose under state continuation coverage law.
Additionally, provided the individual is otherwise eligible to receive the subsidy (discussed below), the subsidy will apply to the individual’s continuation coverage period for periods after February 17, 2009.
Does eligibility in another group health plan terminate subsidy eligibility?
Yes. The subsidy ends when the participant is eligible to participate in another group health plan, other than coverage consisting of only dental, vision, counseling, or referral services. The person’s right to the subsidy never ripens if he or she has other coverage available when, after February 17, 2009, the individual first becomes eligible for COBRA.
This standard differs from ordinary, or old, COBRA. Ordinary COBRA provides that an individual’s COBRA coverage ceases upon the individual’s enrollment in another group health plan. Thus, a participant can choose to decline to enroll in another employer’s group health plan and instead continue COBRA coverage through the employer’s plan. Although employees can still decline to enroll in another group health plan, subsidized COBRA coverage will end as soon as the employee becomes eligible to enroll in the other plan. Employers should pay attention to participants with access to spousal coverage through their spouse's employer. It seems that this coverage could often make the employer ineligible for the subsidy.
How exactly is the 65% calculated?
It is still unclear. ARRA does not address how government-subsidized COBRA coverage coordinates with an employer's obligation to provide a subsidy under, for example, a severance policy. Practitioners are debating whether the subsidy applies only to assistance eligible individuals who pay 35% of the total COBRA premium (including up to 2% of administrative fees, if applicable) or whether the subsidy applies to all individuals who have an obligation to pay COBRA premium (of any level) – even less than 35% of the total premium (employer and employee portions).
For example, assume the total premium for single health coverage at ABC Co. is $500 a month. ABC Co. has a severance policy under which the Company pays 60% of the COBRA premium for the first six months following severance. Employee A, who was covered under single coverage, elects COBRA following his termination on March 1, 2009, and is not eligible for other group health plan or Medicare coverage for the 18-month COBRA continuation coverage period. Employee A would ordinarily be required to pay $200 per month for COBRA coverage through the severance period and thereafter $500 per month. However, under ARRA, Employee A is responsible for paying only $70.00 (35% of the employee’s $200 share) per month for the first six months of the severance period and $175 (35% of the entire COBRA premium of $500) per month for the next three months (the remainder of the nine month COBRA subsidy period). Thereafter, Employee A must pay $500 per month (the entire COBRA premium) to retain COBRA continuation coverage.
Based upon comments from the Treasury, it appears the Treasury adopts the latter interpretation (illustrated in the above example), that the subsidy applies to all individuals who have an obligation to pay COBRA premium (of any level) – even less than 35% of total premium. Even so, further guidance from the IRS is necessary.
We hope this update addresses some of the questions that employers have regarding the COBRA subsidy provisions. If you do have further questions regarding the law, please contact Charles P. Stevens at 414.225.8268, or firstname.lastname@example.org, John L. Barlament at 414.225.2793, or email@example.com, or Kirk A. Pelikan at 414.223.2529, or firstname.lastname@example.org.
This client alert is one of a series designed to provide summaries of the American Recovery and Reinvestment Act of 2009 ("The Act") and information and guidance regarding opportunities and relief made available through The Act. All of The Act client alerts are available on Michael Best's Stimulus and Economic Recovery Team publications page. For additional information on this topic, please feel free to contact one of the authors of this alert or your Michael Best attorney.
If you are interested in learning about other provisions included in the Act, the Michael Best Stimulus and Economic Recovery Team is prepared to assist you in understanding the implications and in developing and implementing a strategy to secure the benefits of this unprecedented legislation. Specifically, we will assist you to identify opportunities, prepare appropriate proposals and make targeted contacts to secure funds. We will also work with you to ensure that your applications are tailored to meet your needs and that your funded projects proceed in compliance with award requirements and applicable laws.