NEW COBRA SUBSIDY FOR INVOLUNTARY TERMINATIONS
Chamber Hosts Special Seminar to Review Changes

COBRA SUBSIDY PLAN (PDF)

President Obama signed The American Recovery and Reinvestment Act of 2009 (the "Stimulus Act") last month - a landmark piece of legislation designed to aid the ailing U.S. economy. A portion of this legislation expanded the ability involuntarily terminated employees, and their covered spouse and dependent(s), to obtain continuation coverage (such as COBRA continuation coverage) from their former employer’s healthcare plan.

The Northern Kentucky Chamber of Commerce and the Northern Kentucky Society for Human Resource Management is hosting a seminar to discuss the expansion of healthcare continuation coverage, Thurs. March 26, 2009 from 8 a.m. to 9:30 a.m. at the Mazak Training Center in Florence, Kentucky.

David A. Whaley, an attorney in Dinsmore & Shohl LLP’s Executive Benefits and Compensation Practice Group and Jerry Deatherage of Diversified Asset Management, Inc. will discuss the steps employers will need to take to ensure compliance with this portion of the Stimulus Act. 

Register today to attend this seminar.

A brief summary of these administrative requirements are contained below.

The Stimulus Act provides:

1) a subsidy from the U.S. Federal Government to enable involuntarily terminated employees, and their covered spouse and dependent(s), to continue receiving healthcare coverage under their former employer’s healthcare plan; and

2) a special election period for those former employees who were terminated after September 1, 2009 and before February 17, 2009, and their covered spouse and dependent(s), to elect continuation healthcare coverage.

Individuals entitled to this subsidy and the special election period is being referred to as Assistance Eligible Individuals or AEIs.  An AEI is generally any former employee, or that former employee’s spouse or dependent(s), whose coverage under a group health plan ceased because of involuntary termination of employment of the former employee at any time during the period that begins September 1, 2008 and ends December 31, 2009.  Such an individual ceases to be an AEI, and thus is not eligible for the subsidy, if they if they become eligible for coverage under another group health plan or Medicare.

The subsidy provided to AEIs is equal to 65% of the amount that individual would have had to pay to receive continuation coverage under the former employer’s healthcare plan and can continue for up to 9-months.  The subsidy does not apply until the first day of the first period of coverage beginning on or after February 17, 2009.  For most plans that require premiums to be paid monthly, the subsidy will be effective for coverage beginning on March 1, 2009.

Under COBRA continuation coverage, if an employer had not agreed to provide any portion of the premium (such as through a severance agreement), this amount would be 65% of the total premium required to be provided to elect coverage.  Alternatively, if the employer had previously agreed to subsidize a former employee’s COBRA premium, this subsidy will only be 65% of the reduced amount that the employee was required to pay to continue COBRA coverage.  Thus, the subsidy cannot reimburse employers for a portion of the COBRA premium which they had previously agreed to provide to their former employee.

This subsidy is being implemented as follows:

• Assistance Eligible Individuals will be required to pay only 35% of the otherwise applicable premium for continuation coverage under the former employer’s plan;

• The former employer initially provides the other 65% of the applicable premium for the AEI’s continuation coverage;

• The former employer is then reimbursed by a refundable payroll tax credit on the employer's quarterly employment tax return (Form 941) in an amount equal to the premium provided.

As noted above, AEIs are also required to be provided a second chance to elect continuation coverage under the former employer’s plan.  This second chance election will need to be extended to any AEI who did not previously elect coverage or who allowed previously elected coverage to lapse.  Any coverage elected pursuant to this second chance election will not be retroactive to periods before the Stimulus Act was adopted.  For example, an AEI whose employment terminated on September 1, 2008 and who did not elect continuation coverage will not be allowed to utilize this opportunity to retroactively elect coverage as of September 1, 2008.  Instead, that AEI will only be permitted to elect coverage effective as of the first day of the first period of coverage beginning on or after February 17, 2009.  For most plans that require premiums to be paid monthly, coverage under this special election period will be effective as of March 1, 2009.

Of course, as should be expected with any large piece of legislation, this short summary does properly detail each new continuation coverage requirement under the Stimulus Act.  Thus, if you have further questions, both the Department of Labor and the Internal Revenue Service have established a specific website devoted to answering employers questions pertaining to this expansion of healthcare continuation coverage.  The links to both are as follows:

Department of Labor: COBRA Continuation Coverage Assistance Under the American Recovery and Reinvestment Act of 2009: http://www.dol.gov/ebsa/COBRA.html

Internal Revenue Service: COBRA: Answers for Employers: http://www.irs.gov/newsroom/article/0,,id=204708,00.html

Fortunately, immediately complying with these requirements is not required.  Instead, the Department of Labor is required to issue guidance advising employers how to notify terminated employees of the existence of the subsidy by March 19, 2009. Then, employer will have until April 18, 2009 to issue the proper notifications to terminated employees and to begin providing the subsidy.

Thus, employers do not need to take immediate action to be in compliance with these new mandates.  Despite this fact, employers would be wise to begin preparing for compliance with the terms of the Stimulus Act and the new continuation coverage subsidy.  We suggest that employers begin to take the following steps now so that compliance with the Stimulus Act will be easier once the Department of Labor issues the guidance advising employers how to notify terminated employees of the existence of the subsidy:

• Make a record of all individuals (employees and dependents) who have ceased to be covered under your health plan as a result of a termination of employment from September 1, 2008 through the current date.

This report should note:
o when the continuation coverage notice was provided;
o when the individual’s right to elect continuation coverage ceases; and
o whether continuation coverage was elected;

• Determine the amount of the subsidy for each AEI and the portion of the premium which must be provided by each AEI to elect continuation coverage;

• Contact your payroll provider or COBRA administrator so that systems are updated to reflect who is an AEI and the subsidized premium amount; and

• Review severance agreements and any employer subsidized continuation coverage premiums to determine applicability of the subsidy and reimbursement to the employer.