Stimulus Bill Provides Subsidized COBRA Coverage

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (H.R. 1) into law. The massive stimulus package will subsidize COBRA coverage for some eligible qualified beneficiaries. The COBRA provisions will take effect soon after enactment and so require prompt attention and action from plan sponsors and administrators. Among other actions, employers must issue updated COBRA notices, provide new enrollment options and implement subsidy procedures.

COBRA subsidy
The act will provide subsidized COBRA benefits to workers (and their families) who lose health care coverage because of involuntary termination of employment. Those who retire or otherwise terminate their employment voluntarily, and those who become eligible for COBRA coverage as a result of reduced hours, divorce, loss of dependent status or another qualifying event are not eligible for subsidized coverage.

To qualify for the subsidy, the involuntary termination must be between Sept. 1, 2008, and Dec. 31, 2009, and the individual’s annual income must not be greater than $125,000 ($250,000 for married taxpayers).

The act provides a 65 percent subsidy. The subsidy is structured as a premium reduction, which means that the subsidy-eligible individual pays 35 percent of the premium to the employer or health plan. After receiving the reduced premium, the employer or health plan offsets its payroll tax liability by the other 65 percent. If the offset amount does not cover the subsidy, the U.S. Department of the Treasury makes up the difference by issuing tax credits or refunds.

The act subsidizes up to nine months of COBRA coverage. Under the act, eligibility for the subsidy will terminate in any of the following circumstances:

• After nine months of subsidized COBRA coverage
• When the individual is eligible for coverage under any other group health plan (other than a health flexible spending account, health reimbursement account, on-site clinic or certain limited-scope coverage)
• When the individual is eligible for Medicare
• When the individual’s COBRA eligibility ends

Subsidy-eligible individuals must notify the COBRA plan when they are no longer eligible for the subsidy or face financial penalties.

New enrollment opportunity
Individuals who were involuntarily terminated on or after Sept. 1, 2008, and declined COBRA coverage will have another opportunity to enroll, although the subsidy and coverage will not be retroactive. If they enroll, their COBRA coverage and the subsidy will take effect on the date the act is signed into law. But their maximum COBRA period runs from the date the individual first became eligible for COBRA (e.g., termination date).

Figure 1 shows an example of how the new COBRA enrollment and subsidy would work for three hypothetical workers.

Figure 1
COBRA subsidy eligibility and duration

Source: Watson Wyatt Worldwide.

Implications and action items for employers
The COBRA provisions have significant implications for plan sponsors. Once the stimulus package is signed into law, employers must implement the new COBRA provisions promptly. Employers should be prepared to:

• Determine how to identify former employees who must receive notice about the subsidy and new enrollment opportunity.
• Update COBRA notices to include information about the subsidy and new enrollment rights.
• Offer a new enrollment period to subsidy-eligible individuals who previously declined COBRA coverage.
• Develop procedures for complying with the subsidy mechanism and receiving an offset or reimbursement from the federal government.
• Work with COBRA administrators and other appropriate vendors to develop systems and procedures for tracking subsidy-eligible individuals and eligibility periods for those who enroll in COBRA during the new enrollment period.
• Consult health care actuaries to determine any changes to COBRA rates or Statement of Financial Accounting Standards (SFAS) 112 liabilities that may result from increased COBRA participation and claims. Note that current COBRA rules prohibit employers from increasing premiums during their current “12-month determination period.”