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COBRA Update — Coverage Under The Stimulus Plan

Published by on February 23, 2009

The new stimulus bill contains several modifications to COBRA.  More after the break. COBRA Coverage Under the New Stimulus Plan I.                   What is COBRA? a. The Consolidated Omnibus Budget Reconciliation Act (“COBRA”) was enacted in 1985 to provide health coverage for individuals, and their families, who leave their employer either voluntarily or involuntarily, or who […]

The new stimulus bill contains several modifications to COBRA.  More after the break.

COBRA Coverage Under the New Stimulus Plan

I.                   What is COBRA?

a. The Consolidated Omnibus Budget Reconciliation Act (“COBRA”) was enacted in 1985 to provide health coverage for individuals, and their families, who leave their employer either voluntarily or involuntarily, or who take a reduction in work hours.

b. COBRA only applies to private employers with 20 or more employees (in addition to employee organizations and state or local governments), and does not apply to those employers who do not provide health care plans or whose companies have been liquidated. However, in some states employers with fewer than 20 employees are subject to similar health care continuation statutes.

c. Under COBRA, employees can elect to continue under the same health care plan that their former employer provided for a period of up to 18 months, so long as they opt into the plan within 60 days after receiving notice from the employer of their eligibility.

d. Employees are responsible for paying the full premium, plus a 2% administrative fee, even if their employer had previously been funding their health care coverage.

II.                The Stimulus Plan and its Effect on COBRA

a. The American Recovery and Reinvestment Act (“Stimulus Plan”) was signed into law on February 17, 2009.

b. Among its many provisions, the Stimulus Plan provides for an estimated $24 billion subsidy to reduce what certain employees will have to pay for health coverage under COBRA.

c. For employees who have been involuntarily terminated between September 1, 2008 and December 31, 2009, and who have an adjusted gross income of $125,000 or less ($250,000 for couples filing jointly), the Stimulus Plan provides a 65% subsidy of Cobra premiums for a period of 9 months starting in March 2009. However, the 9 month period does not extend the 18 month maximum coverage period under COBRA.

i. Although not defined in the Stimulus Plan, involuntary termination would likely include termination for cause, but not for gross misconduct.

d. The subsidy is not retroactive, so it will only apply to COBRA premiums paid by employees as of February 17, 2009.

e. The subsidies will be paid directly to COBRA administrators through a refundable tax credit. Employers may be required to demonstrate that certain terminations were involuntary and provide information regarding coverage levels before they receive the credit.

f. The subsidies may be available for employees enrolled in a health plan for less than 20 employees if the applicable state continuation statute is similar to COBRA.

g. The subsidies terminate if the employee enrolls in a new health or flexible spending account plan (except for exclusive dental, vision, or counseling services plans), becomes eligible for Medicare, or is entitled to employer on-site medical treatment. Employees are responsible for notifying employers of anything that would disqualify them from receiving the subsidy, or else be subject to penalties.

h. The Stimulus Plan allows employees to choose to enroll in cheaper health plans offered by their former employers without the need to wait for an open-enrollment period. However, the employee must make the switch within 90 days of receiving notice from their employer.

i. Employees who have been laid off between September 1, 2008 and the effective date of the Stimulus Plan will receive an extra 60 days to opt for COBRA coverage.

j. Employers have till April 15, 2009 to notify eligible employees of the new COBRA provisions. However, employers should post notices as soon as possible to avoid extending the period within which employees can opt for coverage. Employers are also responsible for notifying employees who did not initially opt for COBRA coverage. The Department of Labor will issue model notices by March 19, 2009.

i. The new notices must include information regarding employee eligibility for the subsidy, what the right to the subsidy entails, any conditions on the right, employees’ responsibility for informing the employer of a disqualifying event, the additional 60 day period for employees who did not opt for coverage, the right to choose a different health plan, and contact information for plan administrators.

k. The Department of Labor will review and provide a determination within 15 days when an employee has been denied eligibility under the new provisions.

Contributed by Claudia L. Guzman

UPDATE (3.3.2009):  The IRS Press Release on COBRA assistance-related documents can be found here.

UPDATE (3.23.2009):  The new COBRA model notices can be found here.

UPDATE (4.1.2009):  IRS issues guidance on premium assistance.  See our post here.

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