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On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”).  The Act includes changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).

Among other things, the Act provides for a temporary subsidy to eligible former employees who have been, or will be, involuntarily terminated (except for gross misconduct) between September 1, 2008 and December 31, 2009.  A potential area of concern is that the Act does not fully define the term “involuntarily terminated” (i.e.: laid off? terminated for cause? mutual agreement?).  Eligible former employees that were enrolled in their employer’s health plan at the time they were involuntarily terminated during the relevant time period are eligible for the subsidy and will only be responsible for paying thirty-five percent (35%) of his or her COBRA insurance premiums with the employer paying the remaining sixty-five percent (65%) of the premium.

The Act’s subsidy applies to group health plans that are subject to COBRA continuation coverage requirements or to similar requirements under state law.  COBRA health insurance continuation coverage requirements apply to health plans maintained by private-sector employers with twenty (20) or more full and part-time employees.  Massachusetts health insurance continuation coverage requirements apply to health plans maintained by private-sector employers with between two (2) and nineteen (19) full and part-time employees.  This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns.  Individuals with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns do not qualify for the Act’s subsidy.

Any eligible former employee or dependent that lost health care coverage under a group plan due to involuntary termination or a reduction in hours during the above referenced time period is eligible for the subsidy.  Persons who voluntarily resigned from their jobs are not eligible for the Act’s COBRA subsidy.

Employees involuntarily terminated during the relevant time period can only utilize the subsidy for a maximum of nine (9) months after election or until they become eligible for coverage under another employer’s health plan, whichever is sooner.  Former employees that fail to notify their former employer that they have become eligible for health care coverage under a new employer’s plan will be subject to one hundred and ten percent (110%) of the paid subsidy amount.

Employers that pay their former employee’s sixty-five percent (65%) share of COBRA insurance premiums are eligible to claim a credit against its next payment of federal income and FICA taxes.  Employers can only claim a credit against income and FICA taxes after its former employee pays his or her thirty-five percent (35%) share of the COBRA insurance premium.  The federal government will directly pay employers in situations where an employer’s federal income and FICA tax obligations are less than the claimed subsidy credit.  Employers must use a revised version of the quarterly payroll tax return.  These revised forms can be obtained from the Internal Revenue Service at www.irs.gov.

The Act’s COBRA subsidy provision is effective beginning on March 1, 2009, however, the Act provides employers with a grace period until May 1, 2009.  Therefore, employers may require eligible former employees to pay the full COBRA insurance premiums for the months of March and April 2009.  However, employers will be obligated to reimburse these former employees sixty-five percent (65%) of the COBRA premium that they paid for the months of March and April 2009.

Nonetheless, before April 20, 2009, employers must notify all eligible former employees that were involuntarily terminated on and after September 1, 2008 about their new rights under the Act as well as provide these employees with new COBRA election notices, presuming the former employee did not so elect COBRA rights when originally terminated.  In essence, eligible former employees are given a second chance to make a COBRA election.  The retroactive election period does not mean that employers are also responsible for paying the sixty-five percent (65%) COBRA premium retroactively to September 1, 2008.  Employers are only responsible for paying sixty-five percent (65%) of COBRA premiums from March 1, 2009 forward, subject to the grace period discussed above.

Employers will be responsible for maintaining the following supporting documentation for the claimed credit:

1. Information on the receipt of the eligible former employees’ thirty-five percent (35%) share of the COBRA premium, including dates and amounts.
2. In the case of an insured plan, copies of invoices or other supporting statements from the insurance carrier and proof of timely payment of the full COBRA premium to the insurance carrier required under COBRA.
3. In the case of a self-insured plan, proof of the COBRA premium amount and proof of the coverage provided to the eligible former employee.
4. Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each eligible former employee whose involuntary termination is the basis for eligibility for the subsidy.
5. Proof of each former employee’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage.
6. A record of the social security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one or more individuals.
7. Other documents necessary to verify the correct amount of reimbursement.

Employers should begin to take the following steps immediately:

1. Generate a list of employees (and their eligible spouses and dependents) that were involuntarily terminated on or after September 1, 2008;
2. Send notices to eligible former employees before April 20, 2009 outlining the former employee’s rights under the Act;
3. Review and update existing COBRA communications and notice forms; and
4. Create payroll systems that will collect the relevant information required to make a claim to the U.S. Department of Treasury for reimbursement of paid subsidies.

Various federal agencies intend to release additional guidance in the coming weeks further explaining the implications and compliance components of the Act’s COBRA subsidy.

Feel free to contact any attorney at Rackemann, Sawyer & Brewster to learn more about the Act and how your organization can ensure compliance with the Act.