It's critical for employers to understand new COBRA rules
By Jessica M. Kramer
It is critical that employers understand the COBRA Premium Subsidy (the “Subsidy”), a provision in The American Recovery and Reinvestment Act, which was signed into law Feb. 17.
Employers sponsoring any type of group health plans, including such benefits as dental and vision, if subject to federal law, must comply with the Subsidy, which means giving eligible individuals 65 percent off the cost of regular COBRA premiums.
Normally, those on COBRA pay 102 percent of the premium (including an administrative fee). The 65 percent is paid up front by the employer and reimbursed by an offset in federal payroll taxes, resulting in no out-of-pocket costs to the employer at the end of the day.
Who must comply? Any employer who sponsors group health, dental, and/or vision coverage and had an average of 20 or more employees on the payroll last year must comply. Part-time employees are counted fractionally. Employers with fewer than 20 employees are not subject to federal COBRA but are still subject to Wisconsin continuation and to the Subsidy for health plans (not for dental or vision plans). In this case, the health insurer is most likely responsible for sending out notices related to the Subsidy, and employers should check with their insurer.
The Subsidy is available to those who are involuntarily terminated through December 31, 2009, and their qualified dependents, who were covered under the group health plan during employment. The IRS has issued guidance regarding what constitutes an “involuntary termination,” such as when an employer terminates an employee for cause, when an employee quits due to employer action that causes material negative change in the employment relationship, or when an employee is laid off with the right of recall if hours are zero and the employee loses coverage.
Individuals who believe they are eligible for the Subsidy must complete a form, included with the notices sent by the employer, and send it back to the employer within 60 days indicating the individual’s choice to elect COBRA and receive the Subsidy.
Individuals denied the Subsidy by the employer can apply to the Department of Labor for a review of the decision and the DOL will make a determination within 15 days. Individuals who are approved for the Subsidy must pay 35 percent of the COBRA premiums on time each month, or coverage can be canceled.
Employers must send out notices within 60 days to all individuals who experience a qualifying event terminating their group health coverage. Model notices that employers can modify are found at www.dol.gov/ebsa/COBRA.html. The notices going to those who were involuntarily terminated state that the individuals are eligible and must state the amount the individual must pay (35 percent of the COBRA premium). The notices going to those who were not involuntarily terminated explain the COBRA Subsidy provision and offer the individual an opportunity to apply to be considered eligible for the Subsidy.
Employers must also track who elects the Subsidy and how much the employer is paying so that the information can be reported to the IRS when the employer claims an offset in federal payroll taxes. Employers will report the details quarterly on Form 941 but can actually reduce the federal payroll tax payments more frequently whenever subsidies have been paid.
The subsidy can last for up to nine months for each recipient but will end sooner if the recipient becomes eligible for other group health coverage or Medicare. Individuals who elect the Subsidy but are eligible for other coverage and fail to so notify the employer are subject to penalties.
The law entails many more details, which can be found at the Department of Labor Web site: www.dol.gov/ebsa/COBRA.html, and the IRS Web site: www.irs.gov/newsroom/article/0,,id204505,00.html. Your insurance broker or employee benefits attorney also can assist with compliance.
