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COBRA Implications of ARRA 2009

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On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law.  One piece of this economic recovery legislation affected health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly called COBRA.  An explanation of COBRA and the changes follow.      
 
Generally, COBRA applies to health plans maintained by private sector employers with twenty (20) or more employees, employee organizations, and state/local governments.   Group health plans of qualified employers are required to provide former employees and their families with the opportunity to temporarily continue their group health coverage when their active coverage would otherwise be lost for reasons such as termination of employment, divorce or death.  Under COBRA, the cost of these premiums is typically borne 100% by the former employee or other eligible person.  The law additionally allows a 2% increase over the full premium cost because of the administrative cost employers must pay to administer COBRA benefits.  
 
At times employers face the difficult prospect of separating an employee from his or her employment.  Where a separation is negotiated, continuing health care benefits are often an important bargaining subject of consideration.  Therefore, as a strategic matter, parties to an employment separation should consider the COBRA ramifications.  
 
ARRA defines an "Assistance Eligible Individual" as one whose general COBRA eligibility is premised on "involuntary termination of the covered employee's employment."  This limits the premium subsidy provisions in the ARRA, by the language of the statute, to those who are involuntarily terminated and their families.  Involuntary termination includes layoffs, negotiated resignations and immediate termination with or without cause.  See IRS guidance regarding involuntary termination under ARRA at http://www.irs.gov/pub/irs-drop/n-09-27.pdf.  The premium subsidy is not available where an employee is terminated for gross misconduct.        
 
Under the eligible individual definition above, a reduction in hours scenario, an otherwise typical COBRA event, where an employee is transferred from a benefits-eligible to a benefits-ineligible status (i.e. transferring form full time to part time employment) may not qualify an employee for the premium subsidy.  Similarly, a leave of absence may not qualify an employee for the premium subsidy.  In situations where an employer has used these two separation vehicles in the past to allow an employee to remain eligible for employer health benefits, an employee may now prefer to be terminated or to resign at the employer’s request.
 
Along with the health care premium costs, an employee may also need to consider federal income tax implications.  Electing the ARRA premium reduction disqualifies the individual for the previously existing Health Coverage Tax Credit.  Additionally, individuals earning more than $125,000 (or married couples filing a joint federal income tax return earning more than $250,000) are considered high-income households that may have to repay the amount of the premium reduction through an increase in their income taxes. 
 
At this time, the ARRA/COBRA amendments will remain applicable through December 31, 2009.  The attorneys of Goehring, Rutter & Boehm can assist you in the negotiation and drafting of separation agreements as well as provide employers and employees more detailed information and analysis of COBRA.
 
ARRA overlays premium reductions and additional election opportunities for qualified individuals.  Some of the specifics are: 

  • Eligible individuals can pay only 35 percent (35%) of their COBRA premiums and the remaining 65 percent (65%) is paid by the employer, but then reimbursed to the employer through a tax credit on its quarterly employment tax return. 
  • The premium reduction applies to periods of health coverage beginning on or after February 17, 2009 and lasts for up to nine (9) months for those eligible for COBRA during the period beginning September 1, 2008 and ending December 31, 2009 due to an involuntary termination of employment that occurred during that period. 
  • There is a special COBRA election opportunity for individuals involuntarily terminated from September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled (for example because they were unable to continue paying the premium). This election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice.  This special election opportunity does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's involuntary termination).
  • The Trade Adjustment Assistance Health Coverage Improvement Act of 2009, enacted as part of ARRA, also made changes with regard to Health Coverage Tax Credits (“HCTC”).  For more information see: http://www.irs.gov/individuals/article/0,,id=109960,00.html
  • The new law imposes new noticing requirements.  Model documents are available from the Department of Labor at http://www.dol.gov/ebsa/COBRAmodelnotice.html

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