COBRA Complications and Employer Cost Arise from Economic Stimulus Package

February 24, 2009

As we have reported to our valued clients, on February 17, 2009, President Obama signed the economic stimulus package. A centerpiece of this law is a 65% subsidy for employees who are involuntarily terminated between September 1, 2008 and December 31, 2009 and who are eligible to continue healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

As the law doesn't define involuntary termination, qualified beneficiaries have an independent right to elect COBRA and therefore, the subsidy also will apply to qualified beneficiaries as well.

What employers don't realize is that the stimulus bill ($787 billion) is not paying for the 65% subsidy. Employers are required to pay this 65% subsidy for COBRA insurance. Instead, employers take a credit in the form of reduced payroll tax deposits. Therefore, it is imperative that you work with your payroll department or payroll service bureau to ensure that the following information flows between the terminating employer and the COBRA-payable entity:

? The names of employees who are involuntarily terminated.
? The names of employees who elect the subsidy.
? The total monthly subsidy for all employees.
? The dates employees make their subsidized COBRA payments.
? The dates employees' subsidies end.

This subsidy is required by employers who fall under the 20 employee threshold for federal coverage where individual states for small employers require COBRA coverage.

Subsidy Periods

The standard 18-month COBRA coverage period doesn't change. The subsidy will begin with coverage periods beginning on or after February 17, 2009. So, for most employees, the subsidy begins with COBRA checks that they write in March. Employees' eligibility for subsidized premiums ends with the first month beginning with the earlier of the following events.

? The date that isnine months after the first month for which the subsidy applies. Employees are still entitled to the remainder of the regular COBRA coverage period, provided they once again pick up 102% of the cost.

? The end of the maximum COBRA period.

? The date employees become eligible for Medicare or become eligible to be covered under another group health plan. However, eligibility for coverage under another group health plan won't terminate subsidized COBRA coverage if the new plan is limited to dental or vision benefits, to counseling or referral services, or is a flexible spending account or a health reimbursement arrangement.

Group health plans may permit employees eligible for subsidies to elect any health plan options that their former employers offer to current employees, which have the same or lower premiums than their previous health benefits options. Employees have 90 days to make their elections.

Employees must notify the COBRA-payable entity of their eligibility for new group health benefits. Those who don't notify that entity may be penalized 110% of the premium. Penalties won't apply if employees simply stop paying their COBRA premiums.

Special Enrollment Rights

Again, the length of the COBRA coverage period doesn't change. However, employees who originally elected not to take COBRA, and employees who originally elected COBRA but dropped it because they stopped paying their premiums, have a 60-day special enrollment period during which they may decide to take the subsidized premium. The 60-day period begins on the date they receive notice of their special enrollment rights. So, for example, if an employee could have elected COBRA in December 2008, but failed to do so at that time, and he elects COBRA in March 2009, his COBRA coverage runs out 18 months from December 2008, not 18 months from March 2009.

Overpayment Credits

Employees who are eligible for the subsidy, but who pay the normal 102% of their COBRA premiums for any month during the 60-day period beginning on the first day of the first month after February 17, 2009, may have those overpayments credited toward their future subsidized payments. Hitch: The COBRA-payable entity must be reasonably certain that the credit will be used within 180 days of the overpayment. If the COBRA-payable entity isn't reasonably certain, it must reimburse employees for the amount of their overpayments within 60 days.

Notice Requirements

Current COBRA notices must be rewritten to include comprehensive information regarding the subsidy. A new notice describing special enrollment rights must also be provided to employees. The Secretary of Labor is directed to release a model notice regarding special enrollment rights within 30 days.

Obviously, this "stimulus" subsidy has created significant obligations and expenses for employers. In fact, as of this notification, the government has yet to provide specific forms and processes to ensure compliance. However, SESCO has developed a compliant system which can be purchased by clicking on COBRA Manual. This COBRA subsidy will affect practically all SESCO clients regardless of size and therefore should you have any questions concerning this new requirement, please contact Phil Richards at 423-764-4127 or phil@sescomgt.com.