At part of his response to the Great Recession, in February President Obama signed the American Recovery and Reinvestment Act of 2009 (often called the stimulus bill). Among other things, the stimulus bill includes major changes to the Consolidated Omnibus Budget Reconciliation Act (COBRA). The purpose of the changes are to help workers who lose their jobs obtain COBRA health insurance coverage.
Ordinarily, a former employee is entitled to COBRA insurance if they are prepared to pay the entire cost of the health insurance coverage plus an administrative fee. The changes to COBRA provide an employee with a subsidy from the government that covers 65 percent of the cost of the COBRA coverage. The subsidy is a nice idea. But as always, the government decided to create a bunch of new administrative red tape for employers to deal with.
BUT I DIDN'T TECHNICALLY FIRE HIMThe subsidy applies to any employee who suffers an “involuntary termination” between Sept. 1, 2008 and Dec. 31, 2009. Perhaps thinking that employers might attempt to dance around involuntary terminations, the Internal Revenue Service (IRS) has issued an expansive definition of who qualifies. The formal definition is: “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.”
To head off questions, the IRS has given further guidance. The following non-traditional layoffs are covered:
• Employees whose contract is not renewed after expiration if the employee is willing and able to renew the contract on similar terms.
• The employee terminates the relationship for “good reason” because of employer’s action to negatively change the employment relationship.
• Termination for cause unless due to “gross misconduct.”
• Layoff with right of recall if work hours are reduced to zero and health coverage is lost.
• Termination due to absence from work or disability.
• Resignation because of a change in geographic location.
• Termination from an employer lock-out.
• Termination with a severance package if employer informs the workforce that layoffs will follow the severance package period.
Be careful of these extra terms. Unsuspecting employers will find themselves on the hook for COBRA coverage they would not previously be required to provide.
THE CHECK'S IN THE MAILThe subsidy provides the 65 percent premium assistance for a period of up to nine months. Unfortunately, the government is putting a portion of the subsidy cost on employers. The employee is required to pay his or her 35 percent of the premium directly to the employer. Once that payment is made, they are considered covered under COBRA. Of course, the employer says, “Uh, so what about that other 65 percent?” Well, it comes from the government - eventually. The company is required to pay the remaining 65 percent premium up front. The government will reimburse the company by means of a tax credit that is applied to an employer’s income tax withholding and FICA taxes. If the credit amount is greater than the employer’s entire tax obligation in any given quarter, the government will issue the employer a check for the difference.
The value of the subsidy is phased out at higher income levels. Employees making between $125,000 and $145,000 or $250,000 to $290,000 if filing jointly, should expect to repay a portion of the subsidy, possibly on their 2009 federal income taxes. Those making more than $145,000 per year or $290,000 if filing jointly, do not qualify for any of the subsidy.
CAN I SEE THE MENU PLEASE?Another big change pertains to the type of coverage the former employee may select. Under the old version of COBRA, the separated employee could only elect the same health coverage he or she had been receiving from the employer at the time of separation. After the changes from the stimulus bill, an employee and their qualified dependents have 90 days to opt for a different, lower-cost health insurance plan than the one they had at the time of separation. This of course only applies to an employee’s dependents if they were also covered on the employer’s health plan at the time of separation. In addition, the coverage plan the former employee seeks to opt in to also has to be a plan that the employer offers. Therefore, if the employer only has one plan, this change is a non-issue.
The subsidy also applies to vision-only, dental-only, and health reimbursement arrangements, not just to group medical plans. However, it does not apply to flexible spending arrangements.
WHY DO IT YOURSELF WHEN YOU CAN HAVE SOMEONE ELSE DO IT FOR YOUIn typical government fashion, they also decided to put all of the administrative burdens on business. This includes both notifying the employees of their new rights under COBRA and documenting who claims it in order to obtain reimbursement.
Employers are required to post notification of the changes to COBRA. The date for notices to be issued was April 18, 2009. The U.S. Department of Labor has “model” notices available for download on its website atwww.dol.gov/COBRA. Employers that have not already posted their notices would be wise to mail copies directly to their former employees who may qualify.
Once a former employee receives their notice, they have 60 days to elect to accept the COBRA premium. Even employees who opted for COBRA coverage under the old law and therefore did not receive the subsidy are given a new opt in period starting once they receive their notice.
The government also puts the burden for keeping track of the employee’s COBRA status on the employer. In order to qualify for the tax credit, the employer must retain and submit documentation of the employee having paid their 35 percent share of premium in order to receive reimbursement. In the case of insured plans, the employer must keep a copy of the invoice or other supporting statement from the insurance carrier, along with proof of payment of the full premium to the insurance carrier. Employers must also maintain a declaration of the former employee’s involuntary termination.
THIS ISN'T EASYFor employers who haven’t already started, there is a lot to do. First, employers need to fully understand which former employees are entitled to the subsidy, they need to make sure they send out notice to all former employees so that the 60 days opt in period can begin to run, and they need to establish record keeping procedures for documenting which former employees pay the 35 percent premium. Companies also need to determine how they intend to pay the 65 percent outlay up front. They shouldn’t expect reimbursement until the end of the quarter so they need to have sufficient cash reserves on hand to pay their portion of the premium. This is particularly onerous for companies with tight cash flows or that have had to lay off large numbers of employees.
Companies should carefully review their termination policies and layoff plans in light of the new regulations, to ensure that employees are properly classified when they are let go. Remember, a lot of employees who don’t fit the standard definition of “laid off” will be entitled to the subsidy.
Layoffs are never easy for anyone. But as difficult as it is for the employer, it’s worse on the employee. The COBRA changes are a genuine effort to help employees during an incredibly difficult economic period. And in the end, the marginal cost to employers is small. But employers need to understand their obligations and make sure they comply because like all federal regulations, these come with teeth. The Department of Labor recently announced an appeals process through its Employee Benefits Security Administration. No penalties have been assessed yet, but this isn’t the political climate to be accused of denying a laid off employee health care benefits that they are legally entitled to.