New COBRA requirements

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Late on Friday, the Senate approved the economic stimulus legislation sending the bill to the President for his signature. It is unclear when he will sign the legislation, but his signature is expected this week.
As I indicated last week, the bill contains a number of important COBRA revisions that plan sponsors will need to immediately implement. These provisions are discussed in more detail below. In addition, beginning March 1, 2009, the bill also increases the monthly amount for transit passes to the level allowed for parking, and the bill also makes certain changes with respect to the HIPAA privacy and security rules implemented as part of the health information technology provisions. For those who would like to review the actual language, I have attached Division B of the bill to this email. The COBRA provisions begin on page 396 of the PDF.
The COBRA revisions are effective March 1, 2009. Due to this very short deadline, a conference call has been scheduled for Wednesday between Treasury and the benefits community. We expect that a number of questions will be answered during that call. Due to the importance of Treasury input in this process, we will be distributing our Legal Alert after this call so that we can incorporate the guidance which is expected to flow from that call. With that in mind, the following is a summary of the final COBRA revisions.
COBRA Subsidy
The COBRA premium subsidy applies to involuntary losses of employment between September 1, 2008 and December 31, 2009. Under the subsidy, the qualified beneficiary would pay 35% of the applicable COBRA premium and 65% of the premium would be subsidized by the employer. The employer may then claim the amount of that subsidy as a credit against its payroll taxes. The subsidy would expire after 9 months, leaving the remaining months as unsubsidized. If a second qualifying event occurred during that timeframe, it appears that the qualified beneficiary would be able to continue utilizing the subsidy (e.G., a divorce or death). The bill requires a special 60-day election period for those who are eligible for the subsidy but failed to previously elect COBRA - e.g., an individual who terminated employment in October 2008 and who did not elect COBRA would receive a second chance to enroll currently. Further, the bill allows, but does not require, employers to allow current COBRA participants to switch to any other medical option under the employer’s plan. The COBRA provisions specifically do not apply to health FSAs. Finally, the subsidy starts to phase out for individuals with incomes above $125,000 for single and $250,000 for married couples.
COBRA Expansion
The House version of the bill would have expanded COBRA for those individuals who are at least 55 years old or who have at least 10 years of service. This provision was eliminated by the conference committee, and is not in the final bill.
Preparation for Change
A number of administrative revisions will be needed to implement the new COBRA provisions. These revisions include the following:
1. Employers/COBRA administrators will need to prepare a special enrollment notice and send that notice to all employees who terminated employment since September 1, 2008. These employees could then elect COBRA currently with the premium subsidy. COBRA would continue for the remainder of its original term.
2. Employers/COBRA administrators will need to prepare a special notice to existing COBRA participants informing them of the new premium subsidy and their new premiums going forward, and possibly allowing them the opportunity to change to another medical option offered by the employer. The bill includes a 60-day grace period that allows refunds of previously paid premiums.
3. Administrative procedures will need to be developed to implement all of the changes (e.g., new premium structure, new notices, and calculating the amount of the subsidy actually utilized each month so that the proper amount can be credited against the employer’s payroll taxes). In addition, the subsidy only applies to involuntary terminations. Failure of employers to properly identify those who are eligible for the subsidy will mean that the employer’s payroll taxes are unpaid, potentially subjecting employers to underpayment penalties.
4. Additional notices will need to be developed to inform COBRA participants when they reach the maximum subsidy limit.
5. Additional procedures and notices will need to be developed to allow high income enrollees to opt out of the subsidy. An attestation process is included in the final bill.
6. The existing COBRA initial notice and election notice will need to be modified to include the new subsidy rules on a going forward basis.
Some of these issues should be become clearer after the Treasury conference call on Wednesday. We will incorporate the Treasury guidance in our Legal Alert that will be sent later this week. If you have any questions, please feel free to contact me.
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Mark L. Stember
Kilpatrick Stockton LLPSuite 900607 14th Street, NWWashington, DC 20005t 202.508.5802f 202.585.0018
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