COBRA Premiums Subsidized

Included in this Act are amendments to COBRA that will affect every employer that sponsors a group health plan for employees and has terminated or laid-off an employee on or after September 1, 2008.

What is the federal subsidy?

• COBRA coverage periods beginning on or after the date the Act is signed into law, “assistance eligible individuals” will be required to pay 35% of the applicable COBRA premium.
• Employers that provide group health insurance coverage will need to cover the remaining 65% of the premiums until reimbursement can be requested from the federal government.

Does the subsidy apply to small health plans (those with fewer than 20 employees)?

• Yes - the subsidy would be available to plans where the state continuation coverage requirements are comparable to the continuation coverage requirements under COBRA.

How long does the subsidy last?

• Generally, the subsidy is available for up to 9 months, but can end sooner, such as when the maximum continuation coverage period under COBRA expires. The subsidy will cease to be available for COBRA coverage following the date an assistance eligible individual becomes eligible for:
  • coverage under any other group health plan (other than one consisting only of dental, vision, counseling or referral services) or
  • Medicare or Medicaid.
• Further, the individual must notify the employer in writing if they become eligible for coverage under a major medical group health plan or Medicare and is subject to significant penalties (110% of the subsidy amount) for failing to do so.

Who are “assistance eligible individuals”?

• Individuals who are or were otherwise eligible for COBRA continuation coverage, who lost coverage under their employer-sponsored group health plan due to an involuntary termination of employment between September 1, 2008 and December 31, 2009, AND who elect COBRA continuation coverage.  

What about persons who recently declined COBRA coverage prior to passage of the Act?

• There is a special election opportunity for assistance eligible individuals who were eligible to elect COBRA coverage when they were terminated from employment, but did not so elect. These individuals are entitled to an extended election period that begins on the date of the Act’s enactment, and ends no sooner than 60 days after an extended election notice is provided to the individuals.
• The Act requires employers to locate former employees who previously declined COBRA and provide notice of the right to COBRA coverage with the government subsidy. If an eligible individual elects COBRA continuation coverage during the special extended election period, COBRA coverage will commence with the first period of coverage beginning on or after the enactment of the Act. However, for purposes of determining the maximum COBRA coverage period, the date of the individual’s involuntary termination of employment (or the date of the loss of coverage resulting from such termination, if applicable) will continue to be treated as the “qualifying event.”
• This means that the COBRA continuation coverage period available to an individual who makes an election during the extended election period will be determined based on the date of the qualifying event as described above.
  • For example, an assistance eligible individual terminated on September 30, 2008, who makes a timely election during the extended election period, generally will be entitled to COBRA continuation coverage prospectively beginning March 1, 2009, though the 18-month maximum coverage period is measured from October 1, 2008.

What about persons who already paid the full COBRA premium?

• A group health plan or insurer must refund the individuals any COBRA premiums that subsidy-eligible persons paid on or after the date of enactment in excess of 35% of the premium. This may be in the form of a reimbursement payment or credit against future premium payments due. Under the Act, there will be no refund of COBRA premiums for previous periods as the subsidy applies only for the period March 1-December 31, 2009.

What options are there with respect to plan enrollment?

• Assuming different coverage options are available, an assistance eligible individual may enroll in coverage under a plan that is different than the coverage in which he or she was enrolled at the time the qualifying event occurred. To make this change, the assistance eligible individual must make his or her election change within 90 days after receiving notice. Such election must be permitted by the employer.
• The premium for such coverage must not exceed the premium for the coverage in which the individual was enrolled prior to termination of employment. In addition, the different coverage also must be offered to active employees at the time the election is made and the different coverage may not be coverage providing only dental, vision, counseling, referral services (or a combination of these). 

Are there income limitations on who may receive the subsidy?

• Assistance eligible individuals who receive a subsidy under the Act and who are considered high-income individuals will see their income tax liability increased by the amount of the subsidy for the tax year in which they receive the subsidy. High-income individuals are those individuals with modified adjusted gross income (AGI) that exceeds $125,000 ($250,000 in the case of joint return filers) for the tax year in which they receive the subsidy.

What are the notice requirements for employers?

• Employers will need to amend their current COBRA election notices temporarily to include general information about the availability of the premium subsidy and, if applicable, the option to enroll in different coverage.

How do employers apply for the reimbursement?

• Because the federal COBRA premium subsidy is reimbursed to employers through the federal quarterly payroll tax reporting system, the Act requires employers to advance the premium subsidies until the employer’s payments can be recouped through reduced federal payroll tax payments. Employers will have to determine the total amount of the subsidy with respect to premiums received during the federal payroll tax reporting period from assistance eligible individuals that have elected COBRA continuation coverage. The employer may use this amount as an offset to its federal payroll tax liability. For purposes of the Act, “payroll taxes” includes amounts to be withheld for federal income taxes and the employer and employee portions of FICA, Social Security and Medicare taxes.