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COBRA's New Look: The American Recovery and Reinvestment Act's Premium Reduction Provisions

by The Human Equation, Inc. on 5/12/2009
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How does the American Recovery and Reinvestment Act of 2009 (ARRA) change the way an organization deals with the Consolidated Omnibus Budget Reconciliation Act (COBRA)?

COBRA is the federal law that gives workers who lose their jobs, and thus their health benefits, the right to continue group health coverage under their former employer’s health plan. As originally enacted, employees electing COBRA continuation benefits are required to pay the entire premium for their health insurance. Although the cost was ordinarily higher than what the employee paid while employed (because the employer was no longer contributing to the premium), it was typically cheaper than the cost of individually obtaining private health insurance coverage.

Unfortunately, the increasing number of people losing their jobs during the current financial crisis has left larger numbers of people without employer-provided health insurance, thereby resulting in increased reliance on COBRA. However, since individuals insured under COBRA are, for the most part, unemployed, maintaining their health insurance, despite the lower price, has become cost prohibitive. Thus, more and more people are left uninsured.

In response to this trend, Congress passed the American Recovery and Reinvestment Act of 2009 to, in part, preserve and improve affordable health care. Signed by President Obama on February 17, 2009, the ARRA effectively reduces an individual’s cost of maintaining health care under COBRA.

Under the ARRA, “assistance eligible individuals” are required to pay only 35 percent of their COBRA premiums—the remaining 65 percent of the premium is subsidized by the government. The subsidy comes in the form of a credit taken against the employer’s employment taxes, and is claimed by the employer who paid the 65 percent share of the COBRA premium by filing the January 2009 revision of the IRS Form 941 (Employer’s Quarterly Federal Tax Return). If the payroll tax credit amount is greater than the taxes due, the Secretary of the Treasury will directly reimburse the employer. Under this scheme, assistance eligible individuals will not receive any payments.

The premium reduction provisions of the ARRA apply only to assistance eligible individuals, which are defined as employees or members of their families, who:

  • are eligible for COBRA continuation coverage at any time between September 1, 2008 and December 31, 2009;

  • elect COBRA coverage; and

  • are eligible for COBRA as a result of the employee’s involuntary termination between September 1, 2008 and December 31, 2009.

Those qualifying as assistance eligible individuals are entitled to the premium reduction beginning on or after February 17, 2009.

Given the timing and applicability of the ARRA (it retroactively applies to individuals involuntarily terminated as of September 1, 2008, but it was not enacted until February 17, 2009), many individuals did not elect COBRA benefits at the time of their involuntary termination because they did not become aware of the ARRA’s premium reduction provisions until after their opportunity to elect COBRA benefits had expired. Such individuals would not be considered assistance eligible individuals because they did not elect COBRA coverage. To remedy this situation, the ARRA includes a provision providing assistance eligible individuals with a new opportunity to elect COBRA benefits.

Under this provision, individuals involuntarily terminated from September 1, 2008 through February 16, 2009, who did not elect COBRA when it was first offered or who did elect COBRA but are no longer enrolled (for example because they were unable to continue paying the premium) have a new election opportunity. This new election period begins on February 17, 2009 and ends 60 days after the COBRA benefits plan provides the required notice to such employees.

The premium reduction for an individual can last up to nine months. However, it will end earlier if the individual becomes eligible for Medicare or another group health plan (such as a plan sponsored by a new employer or a spouse’s employer), or if the individual reaches the end of the maximum COBRA coverage period. Individuals receiving the premium reduction must notify their plans if they become eligible for coverage under another group health plan or Medicare.

The ARRA’s premium reduction provisions are subject to income limits. If an individual’s modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for joint filers), then the amount of the premium reduction received during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers) the amount of the premium reduction that must be repaid is reduced proportionately.

Plan administrators must provide notice about the premium reduction to individuals who have a COBRA qualifying event during the period from September 1, 2008 through December 31, 2009. The notice(s) must include the following information:

  • the forms necessary for establishing eligibility for the premium reduction;
  • contact information for the plan administrator or other person maintaining relevant information in connection with the premium reduction;
  • a description of the second election period (if applicable to the individual);
  • a description of the requirement that the assistance eligible individual notify the plan when he or she becomes eligible for coverage under another group health plan or Medicare, and the penalty for failing to do so;
  • a description of the right to receive the premium reduction and the conditions for entitlement; and
  • if offered by the employer, a description of the option to enroll in a different coverage option available under the plan.

Individuals who are denied eligibility for the premium reduction (whether by their plan, employer, or insurer) may request an expedited review of the denial by the U.S. Department of Labor. Under the ARRA, the Department of Labor must make a determination within 15 business days of receipt of a completed request for review.

As with any new law, the precise impact of the legislation may not be felt for some time. Moreover, given the lack of history to learn from, there are bound to be some issues in the manner in which the ARRA’s provisions are implemented and maintained.

Absent further legislation, COBRA will presumably return to its pre-ARRA state once individuals are no longer entitled to premium reductions (i.e., nine months after December 31, 2009). However, a considerable amount of time remains between now and then. Thus, employers must become comfortable with the ARRA’s amendments to COBRA, and must tap all the necessary resources to ensure compliance.

To learn more about COBRA, as well as the ARRA’s changes to COBRA, click here to purchase The Human Equation’s Complying with COBRA Online Training course. 

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Categories: 2009

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