United States: COBRA Provisions Of The American Recovery And Reinvestment Act Of 2009

The recently enacted American Recovery and Reinvestment Act of 2009 (the "Act") includes several new requirements that will impact the COBRA responsibilities of employers maintaining group health plans. In broad terms, the Act's COBRA-related provisions do two things, both related to individuals involuntarily terminated between September 1, 2008 and December 31, 2009: (1) provide for a subsidy of COBRA premiums for a nine-month period and (2) require certain additional notifications relating to the COBRA subsidy.

Background: Summary of Basic COBRA Requirements.

"COBRA" is an acronym that refers to the Consolidated Budget Reconciliation Act of 1985 and more specifically to the health care continuation requirements included in the act. COBRA requires group health plans maintained by employers with 20 or more employees to provide elective continuation coverage to employees and their beneficiaries upon the occurrence of certain "qualifying events" such as termination or employment, reduced working hours, death, or divorce (among others). Continuation coverage is available on a self-pay basis for up to a specified period of time (i.e., 18, 29, or 36 months) depending on the circumstances. Beyond the substantive rights COBRA creates, it also obligates the administrators of group health plans to provide to plan participants and their beneficiaries notices detailing the substantive continuation rights and the administrative procedures applicable to the exercise of those rights.

Both ERISA and the tax code impose penalties for failures to timely provide the required notices or to make COBRA coverage available. Penalties may be assessed of up to $110 per day under ERISA, and an excise tax penalty of up to $100 per day (up to $200 per day if more than one qualified beneficiary is affected) under the tax code. Also, participants (or the Department of Labor) may sue to secure COBRA coverage (or the benefits it would have offered) and recover the related attorneys' fees, and ERISA also permits the recovery of "other relief" that may entail substantial damages depending on the circumstances.

Premium Subsidy.

An employee, his or her spouse, and any dependent children are generally entitled to continuation coverage under COBRA if the employee is terminated and otherwise would lose coverage under the employer's group health plan. Because the cost to terminated employees of COBRA coverage1 is often significantly more than the cost to active employees, many eligible individuals do not take advantage of their rights or cannot afford to maintain their coverage for their full period of entitlement. The Act helps to mitigate this cost issue by providing a subsidy for COBRA premiums for any "assistance eligible individuals" whose employment involuntarily terminates between September 1, 2008, and December 31, 2009. Assistance eligible individuals are individuals who are eligible for COBRA due to an involuntary termination occurring during the subsidy period, including any such individuals who might have previously waived COBRA coverage or let their coverage lapse.

The subsidy is available for up to the earlier of (i) the date that is nine months after the first day of the first month that the subsidy becomes available to the individual or (ii) the end of the assistance eligible individual's maximum period of COBRA entitlement (which could be 18, 29, or 36 months depending on the circumstances).

The subsidy covers 65% of the COBRA premium costs. Assistance eligible individuals are obligated to cover the remaining 35%. From the employer's perspective, the subsidy means that only 35% of the costs of COBRA coverage can be passed through for assistance eligible individuals during the subsidy period.

The Act also applies to state COBRA-like continuation coverage and other government-sponsored continuation programs. The Act does not apply to flexible spending accounts under cafeteria plans.

Election Rights.

Recognizing that the original COBRA election period for assistance eligible individuals terminated in 2008 has already ended, the Act creates an extended election process to give all assistance eligible individuals who are not already receiving COBRA benefits on February 17, 2009, a second opportunity to elect to receive them. The extended election period begins on February 17, 2009, and ends on the 60thday following the day on which the employer provides notice of the extended election right. This means that delaying distribution of election notices to assistance eligible individuals will extend the window they have for making a COBRA election.

The Act supplements the existing COBRA notice requirements by obligating employers to supply a notice of the extended election and subsidy rights no later than April 18, 2009. The notice can be distributed on a stand-alone basis or a discussion of the new COBRA rights for assistance eligible individuals can be incorporated into existing COBRA notices and election forms and redistributed. The Department of Labor is required to issue model notices by March 19, 2009, but employers are free to develop their own form of notice. The notices can be distributed in the same manner as other disclosures required by ERISA, although electronic distribution may be problematic under the Department of Labor's guidance on electronic communications with benefit plan participants and beneficiaries. Mailing paper notices to the last known address of potential assistance eligible individuals via first-class mail should be an acceptable alternative. As with the "standard" COBRA notice requirements, an employer's failure to comply with the foregoing notice obligations can trigger substantial penalties under ERISA and the tax code.

Reimbursement.

The entity entitled to reimbursement from the government for COBRA premiums not paid by the employee depends on the type of plan. For multiemployer group health plans, it is the plan itself that has reimbursement rights. The employer is entitled to reimbursement for self-funded health plans other than multiemployer plans. However, for insured health plans (other than multiemployer plans), the insurer providing the coverage is the entity entitled to reimbursement. Reimbursement is via payroll tax credits. It is unclear how this mechanism will work with entities other than the employer.

Assistance eligible individuals who previously paid full COBRA premiums are entitled to be refunded premiums from the entity entitled to reimbursement for the amount they paid in excess of their 35% responsibility or else to receive a credit against future COBRA premiums in an equivalent amount. The Act includes specific deadlines for providing reimbursements or credits.

Other Issues.

  • Employment and Severance Agreements. For any individuals with existing COBRA subsidy rights (e.g., through an employment agreement or severance plan or package), attention must be paid to the interaction between the new statutory subsidy and the existing subsidy. At present, it is not clear whether the statutory subsidy will be available if the employer already provides free or reduced-cost COBRA coverage or if an assistance eligible individual (or another person or entity other than the employer) pays less than 35% of the COBRA premium.
  • Coverage Options. The Act allows (but does not require) employers to permit assistance eligible individuals 90 days to change their coverage options. Employers should decide now whether or not to permit these changes or to direct assistance eligible individuals into a specific coverage option.
  • Taxation. The COBRA subsidy is generally not taxable to the assistance eligible individual. However, the Act includes a phase-out for this exclusion for individuals whose modified adjusted gross income exceeds specified limits. In this situation, an assistance eligible individual whose income exceeds the threshold may recognize additional taxable income by receiving the subsidy. Individuals who would otherwise qualify for the subsidy can elect to permanently waive their right to receive it by providing written notice to the employer, plan, or insurance carrier, as applicable.
  • Other Coverage. Assistance eligible individuals only remain eligible to receive a subsidy until they secure other health coverage or exhaust their maximum COBRA entitlement. Assistance eligible individuals are required to notify the employer, plan, or insurance carrier (as applicable) if they secure other coverage disqualifying them from receiving the subsidy. A failure to provide this notice in a timely manner will trigger a penalty on the assistance eligible individual; the penalty is payable to the employer, plan, or carrier.
  • Expedited Review. The Act includes an expedited 15-day review process under which an individual may request review by the Secretary of Labor of a denial of coverage as an assistance eligible individual. The standard of review will be de novo.
  • Pre-Existing Conditions. The Act suspends the usual "significant gap in coverage" rule applicable under HIPAA with respect to limitations on plan coverage of preexisting conditions. For a qualified beneficiary who elects COBRA continuation coverage under the extended election period, above, the period that (i) begins on the date of the qualifying event, and (ii) ends with the beginning of the special notice period described above, is disregarded for purposes of determining the 63-day period under the rules that limit group health plans from imposing pre-existing condition limitations. Thus, an assistance eligible individual with what would otherwise be a significant gap in coverage (i.e., no health coverage for more than 63 days) cannot be subjected to a preexisting condition limitation on that basis alone.

Action Items.

To determine the appropriate course of action to satisfy the new COBRA requirements adopted by the Act, employers sponsoring group health plans should consider the following:

  • Identify "Assistance Eligible Individuals": The COBRA subsidy is generally available to any qualified beneficiary (i.e., employee, spouse, and/or dependent child) whose qualifying event was connected to an employee's involuntary termination of employment between September 1, 2008, and December 31, 2009. This would include individuals who might have been affected by reductions in force and other involuntary terminations in late 2008 and all of 2009.
  • Prepare Updated Notices: Existing COBRA notices will not discuss the new rights created by the Act. As a result, employers will need to either update their existing notices to include the required content or else create stand-alone supplemental notices. A model notice will be available from the Department of Labor within the next month, but employers may design their own notices.
  • Distribute Notices: Notice of the extended COBRA rights available under the Act must be communicated to the assistance eligible individuals no later than April 18, 2009. Notices can be distributed in accordance with the standard ERISA requirements applicable for COBRA-related disclosures. It is important to have a reliable process for disseminating the updated notices so that the employer can demonstrate its efforts to ensure actual receipt by the assistance eligible individuals. There may be practical complexities associated with contacting former employees and their families, so employers should be vigilant in dealing with notices returned by the postal service and use reasonable efforts to locate current address information.
  • Deferred Compensation Issues. To the extent an employee has a contractual "legally binding" right to a COBRA subsidy you should consult a legal adviser for compliance under Section 409A of the tax code.

Note: This Alert is a brief summary of some of the highlights of the new COBRA legislation. For further information, contact Paul Borden, Mike Frank, Tim Verrall or Yana Johnson.

Footnote

1. Generally, employees may be required to pay 102% of the premium for continuation coverage.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions