EMPLOYERS MUST ASSSIST IN PROVIDING NEW COBRA SUBSIDIES

Employers have been given new COBRA obligations by the American Recovery and Reinvestment Act of 2009 (ARRA), enacted February 17, 2009. The new COBRA provisions are designed to reduce the cost of continuation coverage for individuals and families.

The new law primarily affects larger employers covered by federal COBRA (generally, employers with group health plans that employ 20 or more employees). Such employers must advance 65% of the cost of coverage for "assistance eligible individuals" (AEIs), such that AEIs only pay 35% of what they would have paid otherwise. The federal government will reimburse employers through a credit against their payroll taxes, reportable for most employers on Form 941, filed quarterly. Subsidies are available for a maximum of nine months.

AEIs are defined as any COBRA-qualifying employee whose qualifying event consists of an involuntary termination during the period of September 1, 2008 to December 31, 2009. This definition includes employees terminated "for cause," unless the cause amounts to "gross misconduct." Employees who have agreed to quit in exchange for severance payments are also considered AEIs, at least where the employer has signaled its intention of laying off some number of employees in that person's work group. AEIs whose modified adjusted gross incomes exceed $125,000 (or $250,000 for joint filers) may receive the subsidy, but they must pay back the federal government some or all of the amount in their taxes, with the repayment amount determined by each AEI's level of income. Employers should therefore provide the subsidy without consideration of AEI income. However, the repayment obligation may motivate some high-income AEIs to waive their entitlement to the subsidy in order to avoid future tax liability. Such waivers are allowed and should be honored by the employer so long as the waiver is permanent: individuals who have waived the subsidy cannot later seek to recover it if it turns out that their incomes would not have triggered the repayment obligation.

Employers must provide notice of the COBRA subsidy to AEIs, whether or not those individuals have already elected COBRA coverage. The Department of Labor has made forms for notice available here.

AEIs who previously declined COBRA coverage are given another opportunity to elect subsidized coverage. Such AEIs have 60 days to elect coverage, measured from the date they are provided the mandatory notice.

Generally, employers with between 2 and 19 employees are not covered by COBRA, but are subject to the California equivalent, Cal-COBRA. The new COBRA subsidy must be made available to employees of these smaller businesses, but small businesses subject to Cal-COBRA should feel little additional burden since the administration of Cal-COBRA is performed by health plan providers, not employers.

The California legislature is currently considering Assembly Bill 23 which, when final, will resolve questions about the implementation of the subsidy with respect to employees covered by Cal-COBRA, including questions about the notice that health plan providers must give to qualifying employees and the extent to which AEIs who previously declined coverage must be given a second election opportunity. In its present form, the primary new burden on employers from AB 23 will be its requirement that employers promptly respond to inquiries from health plan providers about whether individuals have been subject to an involuntarily termination (and thus whether they may qualify as AEIs).

Additional information about the federal subsidy is available here.

A copy of California's Assembly Bill 23 can be accessed here.