A Brief Update on COBRA Guidance

By: Richard T. Kennedy, Esquire rtk@muslaw.com

Background

Under COBRA, most group health plans are required to provide a qualified beneficiary (employee, spouse or dependent) with an opportunity to continue health coverage when a qualifying event would result in the loss of coverage. Qualified beneficiaries have been required to pay the full cost of COBRA coverage.

Beginning generally March 1, 2009, a temporary subsidy is available for COBRA coverage provided because of an involuntary termination of employment from September 1, 2008 through December 31, 2009, but excluding high income individuals. Under the subsidy, an eligible individual pays 35% of the COBRA premium. The employer (in most cases) pays the remaining 65% and is reimbursed by the government for this cost by a payroll tax credit.

The Internal Revenue Service (IRS) has issued guidance in Notice 2009-27, available at www.irs.gov. The Department of Labor (DOL) has issued model notices and guidance, available at www.dol.gov/ebsa/COBRA.html. This update highlights certain key guidance.

Eligibility

The COBRA premium subsidy is available only if the loss of health coverage is due to an involuntary termination of employment. This is generally defined as a severance of employment by the employer, other than at the request of the employee, where the employee is willing and capable of performing services. This seemingly simple definition is subject to much additional guidance in the IRS Notice.

Both the involuntary termination of employment and the loss of coverage must occur during the September 1, 2008 through December 31, 2009 period. Extended health coverage provided by an employer after a termination of employment and continuing after December 31, 2009 may disqualify an individual for the subsidy, depending upon how the coverage is characterized for COBRA purposes.

A spouse or dependent not covered by a group health plan at an employee's termination of employment is not a qualified beneficiary, and if added later to the COBRA coverage, will not be eligible for the subsidy (except for a child born to or placed for adoption with the employee during COBRA coverage).

Amount of Reduced COBRA Premium and Credit

The reduced 35% COBRA premium and the 65% payroll tax credit are based on the COBRA premium otherwise payable. If an employer pays part or all of the COBRA premium, the employer cannot take full advantage of the available payroll tax credit. The employer may increase the COBRA premium in such case and receive a payroll tax credit based on the increased premium. The employer may reimburse the employee for the increased cost by a separate taxable payment.

End of Subsidy

The COBRA premium subsidy is available for 9 months. It will end earlier if the individual becomes eligible for other group health plan coverage or Medicare coverage, even if the individual does not enroll. The individual is not considered to be eligible for other coverage during any waiting period.

The death of an involuntarily terminated employee does not terminate the eligibility of a spouse or dependent child for the subsidy.

Second COBRA Election

A second COBRA election must be given if health coverage is lost due to an involuntary termination of employment from September 1, 2008 through February 17, 2009 and no election of COBRA coverage is in effect on February 17, 2009. A 60-day election period must be provided. If elected, the coverage is generally effective March 1, 2009, but will not extend the otherwise applicable 18-month period.

DOL Model Notices

Notices explaining the premium subsidy and (if applicable) the second COBRA election must be provided to qualified beneficiaries who lost or lose health coverage from September 1, 2008 through December 31, 2009. The DOL has issued model election notices with election and notification forms.

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This update is intended to provide information of general interest to the public and is not intended to offer legal advice. It may be reproduced with the prior permission of Meyer, Unkovic & Scott and acknowledgement of its source and copyright.