By JERRY GEISEL
COBRA provisions in the massive economic stimulus law are by far the biggest expansion in the history of the COBRA health care statute. While the enactment of COBRA in 1986 caught many employers by surprise, most employers are aware of the COBRA subsidy provisions in the American Recovery and Reinvestment Act of 2009, which President Barack Obama signed in February and which Congress expanded in December. Under the law's core provisions, the federal government will pay 65% of the COBRA premium for employees laid off from Sept. 1, 2008, through Feb. 28, 2010. The subsidy is available for up to 15 months or until a beneficiary becomes eligible for new group coverage or Medicare. But many other details and requirements are less widely known. To aid employers in complying, here are some frequently asked questions and their answers. This feature is periodically updated.
Q: Is anyone laid off from Sept. 1, 2008, through Feb. 28, 2010, eligible for the full premium subsidy?
Yes, with two exceptions. Under the first exception, employees terminated for gross misconduct would be ineligible for COBRA and the subsidy. Also ineligible are laid-off workers with annual adjusted gross incomes exceeding $125,000 for individuals and $250,000 for couples in the year or years the subsidy was available.
Q: The subsidy generally begins March 1, 2009. Would individuals laid off since Sept. 1, 2008, and who opted for COBRA then be entitled to a subsidy for the months in which they paid the full premium?
No. The subsidy is prospective. It would be provided only for coverage starting on or after March 1.
Q: Would an employee who declined COBRA coverage prior to the March 1 effective date be eligible for the subsidy?
Yes. Employees laid off since Sept. 1, 2008, would have a new right to enroll, with the federal government paying 65% of the premium. Eligible beneficiaries would have 60 days once they are notified to enroll.
Q: When does the 65% federal premium subsidy end?
The subsidy ends if any of a number of events occur, including the beneficiary becoming eligible for health care coverage from another employer or becoming eligible for Medicare. Beneficiaries would be required to inform their former employers of their new eligibility. That is different from unsubsidized COBRA coverage in which eligibility ends only when a beneficiary enrolls in new group coverage or Medicare. In addition, beneficiaries who received the subsidy to which they no longer were entitled would be required to repay 110% of the subsidy to the government.
Q: How does the employer receive the 65% share of the COBRA premium paid by the federal government?
The employer would be paid through reducing payroll taxes it remits to the government. If that does not recoup costs, the employer then would file with the Internal Revenue Service to receive the necessary payments.
Q: Must subsidy-eligible beneficiaries enroll in the same health plan they were in before they were laid off?
Beneficiaries eligible for the subsidy can elect coverage in a plan in which they last were enrolled. The new law also permits employers to offer beneficiaries plans that have the same or lower costs than the one in which they were enrolled before being laid off.
Q: Many employers will not be able to get their administrative systems changed prior to March 1 to charge eligible COBRA beneficiaries 35% of the premium. So, beneficiaries may pay too much. How do employers refund the difference?
Under the law, during the first two months in which the subsidy is available, employers have two options. They can repay the excess within 60 days or provide the beneficiary with a credit to be applied to future premium payments.
Q: What happens in a situation where a beneficiary who is receiving the subsidy dies? Would the individual's spouse and children have a right to the subsidy?
Yes, the subsidy applies to each qualified beneficiary. So, if the spouse decides to continue COBRA for himself or herself and children after the primary beneficiary dies, the subsidy would continue.
Q: Let's say an employee who was laid off was eligible for COBRA coverage on Oct. 1, 2008. The employee, though, declined coverage. Now, the individual decides, in light of the 65% premium subsidy, to enroll in COBRA, effective March 1, 2009. Would the individual be entitled to 18 months of COBRA coverage, starting from March 1?
No, the 18-month eligibility clock would begin to run from the time of the individual's original COBRA entitlement. So, in this example, notes Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago, the individual would be entitled to 13 months of COBRA coverage. The individual could receive the 65% premium subsidy for nine of those 13 months.
Q: Are the premium subsidies tax free for beneficiaries?
The law clearly states that the amount of the subsidy is not included as taxable income.
Q: Some employers pay part of the COBRA premium for several months for terminated employees. How is the 65% federal premium subsidy calculated in such situations?
The federal subsidy is keyed in to the amount of premium paid by the beneficiary. Take the example of a beneficiary who pays $200 of a $1,000 monthly COBRA premium for family coverage for three months after termination of employment. In that example, the individual would have to pay a premium of only $70, which is 35% of the $200 premium, while the government would pick up $130, which is 65% of the $200 premium he otherwise would have to pay.
Q: The federal COBRA premium subsidy is reduced for individuals earning at least $125,000 a year and unavailable to those earning $145,000 or more. Can former employers deny the subsidy to such individuals?
The employer cannot prevent the beneficiary from receiving the subsidy and only the beneficiary can waive that right. However, beneficiaries whose income exceeds the allowable amount would be required to return the subsidy to the government. Benefit experts say it may make sense for higher-income individuals to take the subsidy and return it if necessary. The chief reason is that such waivers are irrevocable. For example, someone who made $200,000 in 2009 and lost his job near the end of the year decided to waive the subsidy. During 2010, that individual's income might be well below $125,000, but he could not receive it because he previously waived the right to the COBRA subsidy.
Q: To be eligible for the subsidy, an employee must be involuntarily terminated. In some cases, though, an employee decides to retire after being told that he or she will be terminated. Would that person be entitled to the subsidy?
Yes. The IRS says that absent retirement, the employer would have terminated the employee and the employee knew retirement avoided termination, so the individual is entitled to the COBRA subsidy.
Q: Is there a limit on the number of times an individual can obtain the subsidy?
No. Eligibility is linked to each involuntary termination event. Take the example of an employee terminated on April 1, 2009, and who opted for COBRA with the government paying 65% of the premium. On Sept. 1, 2009, the individual begins a new job and enrolls in the new employer's health plan, losing COBRA premium subsidy eligibility. One month later, the individual is terminated. That gives the beneficiary a new right to up to nine months of COBRA premium subsidies.
Q: Is the subsidy available to employees who are called up from the reserves for active military duty?
Yes. The IRS says such employees would be considered involuntarily terminated regardless of whether the civilian employer treats the employee's absence as a termination of employment or a leave of absence.
Q: Are employees who are hired for only a limited period of time, such as a teacher hired for an academic year, eligible for the subsidy when their employment ends?
Yes. If the employee hired for a limited period of time works to the end of the period and is willing to continue but terminates employment because the employer does not offer additional work, an involuntary termination of employment has occurred, making the individual eligible for the COBRA subsidy.
Q: Would an employee who uses a balance in a health reimbursement arrangement to pay COBRA premiums after termination of employment be eligible for the subsidy?
No. The IRS says payments from an HRA are effectively from the employer. As a result, the employee really isn't making his or her own contribution and thus isn't eligible for the subsidy.
Q: What impact has the premium subsidy had on the COBRA opt-in rate?
A Hewitt Associates Inc. survey of 200 large employers released in August 2009 found that the opt-in rate of involuntarily terminated employees doubled since the subsidy program began. From March 1, 2009—when the subsidy generally became available—through June 30, 2009, monthly enrollment rates for laid-off employees averaged 38%, Hewitt found. By contrast from Sept. 1, 2008, through February 2009, an average of 19% of involuntarily terminated employees were enrolled in COBRA.
Q: What are the details of the most recent extension to the COBRA premium subsidy law?
In late December, President Obama signed into law a military spending bill that extends eligibility for the COBRA premium subsidy. Specifically, the law extends the subsidy by six months to 15 months. In addition, employees laid off through Feb. 28, 2010, now are entitled to the 15-month subsidy. Without the extension, employees laid off after Dec. 31, 2009, would not have been entitled to the subsidy. The new law also requires employers to notify COBRA beneficiaries of the extension.
Q: Are further extensions of the COBRA premium subsidy likely?
The Obama administration in its proposed federal budget for fiscal 2011 has endorsed a 12-month COBRA premium subsidy for employees involuntarily terminated from March 1, 2010, through Dec. 31, 2010. The proposal would have to be approved by Congress.
Q & A: Frequently asked COBRA questions answered
