April 20, 2009

The new American Recovery and Reinvestment Act of 2009 (“ARRA”) provides reductions in premiums and additional opportunities to elect continued group health coverage under COBRA for employees who became eligible for COBRA coverage as a result of an involuntary termination of employment between September 1, 2008, and December 31, 2009.  The premium reduction and additional election opportunity also apply to members of the employee’s family who were covered under the group health plan at the time of the employee’s involuntary termination.  Employees and family members who are eligible for the COBRA premium reduction are “assistance eligible individuals” under the ARRA.  For more information about the details of the COBRA premium subsidy, see our article, COBRA Premiums Subsidized Under The American Recovery and Reinvestment Act of 2009.

Notice Requirement

Plan administrators are required to provide notice about the reduction in premiums to individuals who have a COBRA-qualifying event during the period from September 1, 2008, through December 31, 2009.

• The notice must be provided to all employees (and family members) who have any COBRA-qualifying event during this period, regardless of the reason for the qualifying event.  The individual must apply for the reduction. The decision as to whether the individual is eligible for the reduction is made by the plan administrator.
  
• The notice must be provided even if the individual currently does not have COBRA coverage – either because he or she previously declined COBRA coverage or because the individual had elected COBRA coverage and subsequently discontinued the coverage (typically by ceasing to pay the premiums).

Plan administrators may provide notices separately or along with notices they provide following a COBRA-qualifying event.

The United States Department of Labor (“DOL”) has posted model notice packages on its website that can be used to meet the notice requirement.  The notice packages include:  (1) a general explanation of COBRA coverage rights as modified by the COBRA premium reduction provisions; (2) a summary of the COBRA premium reduction requirements; and (3) an application to be filed by the individual requesting the premium reduction.

The model notice packages have been designed to cover three different situations:

1. Full COBRA General Notice, including information required in a regular COBRA election notice and information about the premium reduction.
   
• This package can be used by group health plans for qualified beneficiaries who have not yet received an election notice and with qualifying events occurring during the period beginning with September 1, 2008, and ending with December 31, 2009.
  
2. Abbreviated COBRA General Notice, including the same information as the full version regarding the availability of the premium reduction and other rights under ARRA, but not the COBRA coverage election information.
   
• This package can be used by group health plans for qualified beneficiaries who currently are enrolled in COBRA coverage and had a qualifying event occurring on or after September 1, 2008.
  
3. Notice of Extended COBRA Election Period.
   
• This package should be provided to any individual who: (1) had a qualifying event at any time from September 1, 2008, through February 16, 2009; and (2) either did not elect COBRA continuation coverage, or who elected it but subsequently discontinued COBRA.
  
• This notice must be provided by April 18, 2009.

Action Plan

The following table offers guidance on how to use the DOL notices and forms.

Action Item

1. If the employer uses a third-party COBRA administrator, determine whether the administrator will take all necessary steps to comply with the ARRA requirements and how this impacts the administrative services contract, if at all.
   
   Description: The employer, as the group health plan sponsor, ultimately is responsible for compliance, even if COBRA administration is outsourced.
   
2. Identify all individuals who became COBRA-qualified beneficiaries after August 31, 2008.
   
   Description: Not all of these individuals will be entitled to the ARRA premium assistance, but all of them are entitled to one of the notices.
   
3. Decide if qualified beneficiaries will be permitted to select a different coverage option than that which they had at the time of the qualifying event.
   
   Description: Employers are not required to permit individuals to switch coverage options, but the DOL models include a form for this purpose.
   
4. By April 18, 2009, send the Notice of Extended COBRA Election Period (including forms) to each individual whose qualifying event occurred after August 31, 2008, and before February 17, 2009, and who already was provided your plan’s general COBRA notice, but is not covered under the plan.
   
   Description: This notice/form packet goes to individuals with qualifying events before February 17, 2009, who already received your plan’s general COBRA notice and either never elected COBRA coverage or let their COBRA coverage lapse (e.g., by failing to pay).  These individuals will have 60 days from the date the extended notice is provided to elect coverage and apply for premium assistance.
   
5. Send the Full COBRA General Notice (including forms) to each individual whose qualifying event occurred after August 31, 2008, who has not already been provided your plan’s general COBRA notice.  Send it by April 18, 2009, to those who had qualifying events before February 17, 2009.  Send it within the normal 44-day period to those who had or have qualifying events after February 16, 2009.
   
   Description: This notice/form packet goes to individuals who had or have any qualifying event after August 31, 2008, and before January 1, 2010, and who have not been provided your plan’s regular general notice.  Individuals will have 60 days to elect coverage and apply for premium assistance.
   
6. By April 18, 2009, send the Abbreviated COBRA General Notice (and form) to each qualified beneficiary currently on your plan’s COBRA coverage whose qualifying event occurred after August 31, 2008.
   
   Description: If an individual who applies for, and is entitled to, premium assistance already paid the full COBRA premium charged by the plan for March and April, the employer can reimburse the individual and claim the subsidy.
   
7. As soon as possible after receiving an individual’s completed election and subsidy forms, determine whether the individual is an “assistance eligible individual.”
   
   Description: An “assistance eligible individual” is an individual who is eligible for COBRA continuation coverage under your plan because he or she lost coverage under the plan due to the employee’s involuntary termination after August 31, 2008, and before January 1, 2010.  If the employer determines that a subsidy applicant is not eligible, the individual may request the DOL’s expedited review of the employer’s denial.
   
8. Upon determining that an individual is entitled to premium assistance, coordinate with the appropriate department or vendor to ensure proper processing of the subsidy.
   
   Description: The subsidy is claimed on the employer’s quarterly payroll return – Form 941. 
    

Important Considerations

The model notices must be modified for use with your group health plan by inserting specific information and deleting inapplicable provisions.  When customizing the notices and forms, consider the following:

• If the employer already subsidizes COBRA coverage, the ARRA subsidy is based on the employer-subsidized amount, not 102% of the “applicable premium” (the maximum COBRA premium).  For example, if a severance agreement provides that the individual may continue coverage for some period by paying only the employee portion for the coverage, an assistance eligible individual actually will pay only 35% of the employee portion for up to 9 months.
  
• If the employer will not permit qualified beneficiaries to switch to a coverage option that the qualified beneficiary did not have at the time he or she became eligible for COBRA, do not distribute the form for switching options and delete all references to the opportunity to switch.
  
• If the group health plan covers and extends COBRA-like continuation coverage rights to domestic partners or other non-federal tax code dependents, the notices and forms should note that such individuals are not “assistance eligible individuals.”  The ARRA subsidy is not available with respect to coverage for such individuals.

Existing DOL regulations require that the summary plan description for a group health plan include a full description of COBRA rights.  Accordingly, changes to COBRA, as with the special extended election right under ARRA, may require changes to the description of COBRA rights in the summary plan description for each affected plan. This can be done by amending the summary plan description or by distributing a summary of material modification.  It is important that your plan document/summary plan description is consistent with your COBRA notices. This is particularly the case for self-funded plans.

COBRA’s continuation coverage requirements also apply to health care flexible spending arrangements (HFSAs).  However, the ARRA subsidy is not applicable to premiums for continuing coverage under an HFSA.

This change in the law presents a good opportunity to review all aspects of COBRA administration, including the methods and timing for providing notices and how COBRA is provided in connection with leaves of absence.  

IRS Circular 230 Disclosure:  Any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties, under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed therein.  (The foregoing disclaimer has been affixed under U.S. Treasury regulations governing tax practitioners.)