Complying With The New COBRA Extension

The American Recovery and Reinvestment Act of 2009 was signed into law on Feb.17, 2009 with the announced purpose of providing a massive economic stimulus to the U.S. economy. ARRA also included temporary provisions requiring employers to provide federally subsidized premium assistance to certain former employees, referred to as “assistance eligible individuals” who timely elect health care continuation or “COBRA” coverage.

Although ARRA’s temporary premium subsidies were originally set to expire at the end of 2009, they were extended by the Department of Defense Appropriations Act (DDAA), which was signed into law on Dec. 19, 2009.

Under the ARRA’s COBRA subsidized premium assistance rules, each “assistance eligible individual” is treated as having paid the full amount of the premiums for his or her COBRA continuation coverage for a period of up to nine months if he or she pays 35% of the premium. The employer, plan, or carrier (depending on the nature and source of the health care continuation obligation) must pay the remaining 65% of the cost of the COBRA continuation coverage. The plan, employer, or carrier, as the case may be, recoups the subsidy, generally through the mechanism of a tax credit against employment taxes.

ARRA defines the term “assistance eligible individual” to mean any qualified beneficiary who elects COBRA continuation coverage and (i) whose loss of group health plan coverage is (or was) on account of an involuntary termination of employment other than by reason of gross misconduct; (ii) who is (or was) eligible for COBRA coverage during the period beginning Sept. 1, 2008 and ending Dec. 31, 2009; and (iii) who elects coverage in accordance with the requirements of COBRA and the DDAA.

The determination of whether a termination is “involuntary” is based on all the facts and circumstances. Initially, there was some confusion over what constituted an “involuntary termination.” In Notice 2009-27, the IRS helpfully defined “involuntary termination” broadly as “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.”

Availability of and access to premium assistance is based on “periods of coverage.” Eligibility for the subsidy generally begins as of the “first period of coverage” during which a qualified beneficiary first satisfies the requirements of an assistance eligible individual. An assistance eligible individual’s eligibility for COBRA premium assistance under the Act ceases 9 months after initial eligibility or, if earlier when the assistance eligible individual is eligible for coverage under another group health plan.

ARRA also provided special election periods for certain qualified beneficiaries who were eligible for a reduced premium but who had not elected COBRA continuation coverage as of Feb. 17, 2009. ARRA established certain notice requirements that were in addition to the general prior law COBRA notice requirements.

These included a “general” notice to be provided in connection with a qualifying event; an alternative notice for use by group health insurance issuers/carriers that offer group health insurance coverage under state mini-COBRA laws; and a specialized notice tailored to assistance eligible individuals. The COBRA premium subsidy under ARRA ended Dec. 31, 2009.

Not only did the involuntary termination have to occur before Dec. 31, 2009, but the assistance eligible individual also had to lose health coverage prior to that date. (Thus, an individual involuntarily terminated in December 2009 who did not lose coverage until Jan. 1, 2010 was ineligible.)

The DDAA affected ARRA’s COBRA subsidy in two key ways:

• The subsidy is now available for up to 15 months (a six-month extension from the original nine-month maximum coverage period).

• The subsidy is available for workers involuntarily terminated who lose coverage on or before Feb. 28, 2010 who elect COBRA (under ARRA, coverage had to be lost on or before Dec. 31, 2009).

Unlike prior law, under the DDAA, the loss of health coverage by the end date of the subsidy is no longer required. The DDAA determines eligibility for the subsidy based only on the date of the involuntary termination. The new law requires that individuals who reached the end of the original premium reduction period must be provided with additional time to pay extension-related reduced premiums that were due prior to notice being provided.

The DDAA amendments establish a “transition period” for assistance eligible individuals with respect to any period of coverage beginning before Dec. 19, 2009 to which the subsidy extension applies. An individual’s “transition period” begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA.

Individuals in a transition period must be provided notice of the extension within 60 days of the first day of their transition period. The notice must include information on the extension from nine to 15 months and the ability to make retroactive payments for certain unpaid reduced premiums.

An assistance eligible individual is deemed to have timely paid a COBRA premium for a transition period if he or she (i) had COBRA coverage for the period of coverage immediately prior to the transition period, and (ii) pays the premium by Feb. 17, 2010 or, if later, within 30 days of receipt of notice of the availability of the transition period.

Any assistance eligible individual who pays an unsubsidized COBRA premium during his or her transition period is entitled to either a reimbursement of the excess paid, or a credit towards future premiums.

There is a special rule for assistance eligible individuals whose eligibility for the premium reduction under ARRA expired, and who thereafter dropped coverage. These individuals are allowed to re-enroll and get the benefit of the additional six months of subsidy, provided they pay the 35% portion of the full premium.

Notice of the extension must be provided:

• By Feb. 17, 2010 to any individual who was an AEI or otherwise experiences a qualifying event relating to termination of employment on or after Oct. 31, 2009;

• As part of the standard COBRA election package, to any individual who experiences a qualifying event after Dec. 19, 2009;

• To any individual who did not timely pay his or her COBRA premium during a transition period, disclosing the ability to pay retroactive COBRA premiums and continue coverage, within the first 60 days of such transition period; and

• To any AEI who paid an unsubsidized COBRA premium during a transition period, disclosing his or her entitlement to either a reimbursement of the excess paid, or a credit towards future premiums.

The DDAA Notice requires that plans notify certain current and former participants and beneficiaries about its changes to the premium reduction rules. The U.S. Department of Labor has issued the following model notices to assist employers and plan sponsors in meeting the DDAA’s notice requirements:

Updated General Notice

Plans subject to the Federal COBRA provisions must provide the updated General Notice to all qualified beneficiaries (not just covered employees) who experience a qualifying event at any time from Dec. 19, 2009 through Feb. 28, 2010, regardless of the type of qualifying event, and who have not yet been provided an election notice.

In addition, plan administrators must provide this notice no later than Feb. 17, 2010 to all qualified beneficiaries who experienced a termination of employment and lost coverage on or after Oct. 31, 2009 but were not eligible to begin COBRA until Jan. 1, 2010 or later, have already been provided a COBRA election notice that did not include information regarding the Act, and have not elected COBRA.

In addition, these individuals are entitled to an extended election period of 60 days from the date of the updated General Notice.

Premium Assistance Extension Notice

Plan administrators must provide this notice no later than Feb. 17, 2010 to all qualified beneficiaries who experienced a termination of employment and lost coverage on or after Oct. 31, 2009 and were eligible to begin COBRA prior to Jan. 1, 2010 and who have already been provided a COBRA election notice that did not include information regarding the Act.

Individuals who were assistance eligible individuals as of Oct. 31, 2009 (but who are not in a transition period) must be provided this notice no later than Feb. 17, 2010. Individuals who are in a transition period must be provided this notice within 60 days of the first day of the transition period.