New Health Plan Continuation Rules Require Employers' Immediate AttentionFebruary 23, 2009
In response to the economic downturn and skyrocketing unemployment rates, President Obama signed the American Recovery and Reinvestment Act (the "Act") on February 17, 2009. The Act provides federal subsidies to help certain individuals who lose their jobs afford to continue employer-sponsored group health insurance coverage. Employers should act now to prepare for the Act's March 1, 2009 effective date.
To What Plans Does the Act Apply?
Under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"), an individual who loses coverage under his or her employer's health plan due to a termination of employment may elect to continue that coverage for a period by paying the applicable premiums. (These rights generally extend to the individual's covered family members as well.) The Act applies to all plans that are subject to COBRA, including major medical plans, dental and vision plans, and health reimbursement arrangements. However, the Act does not apply to health care flexible spending accounts.
Many states impose similar continuation coverage requirements on insured health plans. The Act applies to these plans as well. Consequently, the Act will apply to an employer's insured plan, even if the plan is exempt from COBRA because the employer has fewer than 20 employees. The Act also applies to plans sponsored by governmental entities.
To What Individuals Does the Act Apply?
The Act provides subsidies toward continuation premiums for an individual (and his or her covered family members) who loses coverage because the individual's employment is involuntarily terminated (except due to gross misconduct) between September 1, 2008 and December 31, 2009. The Act does not apply, however, to any individual who loses coverage due to a voluntary termination of employment, divorce, reduction in hours, or loss of dependent status.
The full subsidy generally will be available to any individual with income of $125,000 or less ($250,000 for joint filers), but will be fully phased out for an individual with income of $145,000 ($290,000 for joint filers). The subsidies will not be considered taxable income for any eligible individual. However, an individual may make a permanent election to waive the premium subsidy for all periods of coverage.
Any individual who experienced an involuntary termination of employment between September 1, 2008 and February 17, 2009, but who did not previously elect continuation coverage, or let the continuation coverage lapse, will be eligible for a
new 60-day election period. If that person decides to elect continuation coverage, that election will be effective as of the first day of the first coverage period beginning on/or after February 17, 2009, and the individual's maximum statutory continuation period will be measured from the earliest date he or she was eligible to elect continuation coverage.
For example, if Steve experienced an involuntary termination of employment on October 1, 2008, but did not elect continuation coverage, he must be given a new 60-day election period. If Steve elects continuation coverage on February 24, 2009 and the applicable continuation period is a calendar month, then his continuation coverage will commence March 1, 2009. However, Steve's 18-month maximum coverage period is measured not from March 1, 2009, but from October 1, 2008. Accordingly, Steve's continuation period will expire on March 31, 2010.
What is the Subsidy?
An eligible individual who elects continuation coverage will be entitled to a 65% subsidy (which, as described below, is initially advanced by the employer) for up to nine months of premiums, effective for continuation periods that start on orafter February 17, 2009. Consequently, an eligible individual generally must pay only 35% of the applicable premium tocontinue his or her coverage. Eligibility for the subsidies will end if the individual becomes eligible for Medicare or otheremployer-sponsored major medical coverage. The individual will trigger a penalty of 110% of the premium subsidyamount if he or she is eligible for other coverage but does not notify the employer.
How Does an Employer Receive Credits for the Subsidies?
As reimbursement for the subsidies it pays, an employer will receive a payroll tax credit on its quarterly employment tax returns. (The payroll tax credit for a given individual will "arise" on the day in which his or her share of the continuationpremium is received.) In essence, the employer may offset any payroll tax liabilities by the amount of the applicable continuation subsidies.
It is expected that the IRS will provide further guidance to help employers understand what information they need to file. However, the Act does specify that employers must file reports that include (1) an attestation of the involuntary termination of employment of each applicable former employee, (2) a report of the amount of payroll taxes offset for a reporting period and the estimate of offsets of taxes for the next reporting period, and (3) a report that includes the amount of each subsidy and the taxpayer identification number of each recipient. Presumably, the employer will also need to report the subsidy amounts to the IRS, probably on Form W-2.
What New Notice Obligations Apply?
Employers must provide certain information about the Act to individuals who become entitled to continuation coverage from September 1, 2008 to December 31, 2009. The Departments of Labor, Treasury, and Health and Human Services must develop a model notice for this purpose no later than March 19, 2009. Additionally, an employer must provide notice to each individual who became entitled to elect continuation coverage prior to the Act's enactment. This notice must be provided no later than April 18, 2009, and must describe the individual's new rights to elect continuation coverage. An employer's failure to provide any required notice can trigger penalties of up to $110 per day and excise taxes of up to $100 per day.
What Steps Should an Employer Take?
The Act is likely to increase an employer's administrative burdens. Employers should act now to accomplish the following:
1. Identify all individuals (and their last known addresses) who must receive any notice regarding the subsidy or new special enrollment rights, and be prepared to send notices to all applicable individuals once the model notice has been issued (but no later than April 18, 2009).
2. Check with the plan's insurer (or, in the case of a selfinsured plan, the stop-loss carrier) to confirm that the insurer (or stop-loss carrier) will extend coverage to reflect the Act's mandated changes.
3. Determine whether any plan amendments are necessary.
4. Coordinate internal personnel to develop procedures to obtain reimbursement from the federal government,including procedures to document and report necessary information. Please contact any member of Godfrey & Kahn's Employee Benefits team if you have any questions, or if you need any assistance with respect to the Act.