For example, if the monthly cost of COBRA coverage is $1,000, and employees are responsible for the full premium, under the subsidy, the employee will only be required to pay $350 each month for COBRA coverage, with a federal subsidy of $650.
How it works
The mechanics of the subsidy are interesting. Employers will receive a credit on their payroll tax returns for the federal subsidy. For example, if the federal subsidy is $650, and employee pays $350 for COBRA coverage, the employer will receive a credit of $650 on its federal withholding tax returns (i.e., Form 941).
For employers with more than 20 employees, these procedures will apply whether a plan is fully insured or self-insured. However, workers at small firms, who are not normally eligible for COBRA coverage, still will be entitled to the federal subsidy if state-mandated coverage is comparable to COBRA. However, in these circumstances, the insurance carrier, and not the employer, will be the entity responsible for providing the subsidy and taking the payroll tax credit.
The COBRA subsidy only lasts for a maximum of nine months. When COBRA rights are cut off, the subsidy ends. For example, if an employee receives new employment with a one-month waiting period, when the employee becomes eligible for new coverage, the COBRA subsidy ends. It is the responsibility of employees to notify employers when new coverage exists.
If an employer denies the employee the federal subsidy, there is an appeals procedure with the Department of Labor and the Department of Health and Human Services. It is likely that disputes will exist with regard to employees who fail to return to employment following a period of FMLA leave or other leave of absence and consider themselves to be terminated. In many of these situations, the employer will consider the employee to have voluntarily abandoned their position when they fail to return to work following the expiration of an approved leave of absence. Clarification regarding the definition of involuntary termination is expected.
Although the subsidy is available to employees who involuntarily lost their jobs - for performance issues or as a result of a larger layoff - individuals who are terminated for gross misconduct and denied COBRA benefits are ineligible. Likewise, people who voluntarily retire or quit a job also are ineligible.
Further, the subsidy applies to joint tax filers with adjusted gross income between $250,000 and $290,000. For all other tax filers, the credit is phased out between $125,000 and $145,000.
What employers need to do
Employers must evaluate the reasons why employees were terminated after Sept. 1, 2008 and will need to do the same for terminations that occur between now and Dec. 31, 2009. All such employees must receive notification of their new COBRA rights.
Many employers that conduct layoffs agree to subsidize COBRA benefits, primarily because subsidizing COBRA benefits is tax-free to employees, unlike cash severance benefits. However, employers should review severance plans and policies to determine whether they wish to continue an employer subsidy.
In my view, most employers would be better served to require employees to pay 100% of COBRA premiums and take full advantage of the federal subsidy. However, employers are permitted to provide additional cash compensation in lieu of COBRA subsidies.
Therefore, employers may simply amend their severance plan to confirm that any future employer COBRA subsidies will be suspended between March 1, 2009 and Dec. 31, 2009. Thereafter, when the federal subsidy lapses, prior severance plan provisions automatically will be reinstated.
For example, assume an employer continued the health benefits for former employees during the period in which severance benefits are paid. If the cost of COBRA is $1,000 a month, and the employer does not change its practices, the employer would pay $800, and the employee would pay $70 (or 35% of $200). The federal subsidy would be only $130 per month, rather than a potential $650 per month.
Employers must send notifications about the federal subsidy to individuals who elected COBRA coverage and are still paying for it; individuals who elected and dropped COBRA coverage; and individuals who never originally elected COBRA coverage. Employees who dropped coverage are eligible to re-enroll in COBRA.
Both large and small employers should coordinate with their insurance carriers, third-party administrators, COBRA vendors and other parties to ensure proper communication to employees and receipt of the credit. Failure to provide this notice results in penalties to the employee.
Look for a Department of Labor model notice (At presstime, DOL had not issued such a notice). Some employers have already begun to prepare individual notices for use with or without the sample DOL notice.
Areas for clarification
Important issues to monitor include:
- Domestic partner coverage. Even if it is similar to COBRA, it is not COBRA coverage. The federal subsidy will not exist for domestic partner and civil union marriages.
- Switching plans. Employers may, but are not required to, allow employees to switch to a lower-cost plan under COBRA. Employers will allow such changes, or not, depending on the amount of administrative work associated with such decisions. The ability to change coverage will not allow an individual to start a medical flexible spending account or switch to coverage that provides only dental, vision, counseling or other referral services.
- Reporting. Employers will be required to provide detailed information regarding employees receiving the federal subsidy. These disclosures are intended to avoid abuse of the federal subsidy.
- Mergers and acquisitions. COBRA individuals are assigned to buyers and sellers in most corporate transactions. Given the fact that transactions may have occurred between September 2008 and December 2009, buyers and sellers must cooperate with identifying participants to whom notices must be issued and clarifying the medical plans for which the COBRA subsidy will be available.
The rules seem complex at first blush. However, after many of the administrative issues are ironed out and additional clarification provided, we are confident that HR professionals will rise to the occasion of administering the new rules.
Contributing Editor Frank Palmieri is an employee benefits attorney with Palmieri & Eisenberg in Princeton, N.J. and Alexandria, Va., and a fellow of the American College of Employee Benefits Counsel. He has more than 25 years of experience addressing employee benefit and employment-related matters for employers.
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