The Health Insurance Assistance for the Unemployed Act of 2009 and its impact on COBRA


On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act. Generally, the Act is an economic stimulus bill designed to address the current economic crisis, but it also includes several important changes to COBRA. The bulk of these changes are part of the Health Insurance Assistance for the Unemployed Act of 2009 (as contained within the American Recovery and Reinvestment Act).

It is important to keep in mind that this law is still very new and there are still many unanswered questions. We identify areas that require further clarification.

What is Cobra?

COBRA requires group health plans to offer certain individuals known as "qualified beneficiaries;" defined below, who would otherwise lose their group health plan coverage as a result of a specific qualifying event (such as employment termination or certain changes in family status), the opportunity to continue their group health plan coverage for a specified period of time at applicable group rates. In a typical COBRA continuation coverage scenario, the individual receiving COBRA coverage is responsible for paying the full amount for the coverage.

Who is eligible for assistance?

The Act provides for a federal subsidy of 65 percent of the COBRA continuation coverage premiums for "assistance eligible individuals" (AEI). Under the Act, an AEI is any qualified beneficiary that is eligible for COBRA continuation coverage by virtue of the covered employee’s involuntary termination of employment (for reasons other than gross misconduct) occurring between September 1, 2008, and December 31, 2009, and elects such continuation coverage.

The bill does not define "involuntary" for purposes of this Act. While there are still some questions regarding this term (e.g., does this apply to employees that agree to retire early?), it should be noted that this provision applies to all employees that were terminated involuntarily, not just those tied to a reduction in force.

NOTE: Employers should begin to review their records to identify "assistance eligible individuals." Although additional guidance and model notices will be forthcoming (as described below), it is important to identify these individuals as soon as possible so the necessary actions can be taken when ready.

Under COBRA, the definition of qualified beneficiary includes the covered employee, the covered employee’s spouse (as defined by federal law), and the covered employee’s dependent children (as defined by the plan). Qualified beneficiaries have separate election rights under COBRA. Therefore, even if the covered employee does not elect COBRA, a covered spouse or covered child of the involuntarily terminated covered employee will qualify as an AEI assuming they meet the criteria outlined above.

NOTE: Because an individual must be a qualified beneficiary under COBRA as a condition to being an AEI, the definition of AEI does not include domestic partners or any other individual that is not a spouse, as defined by federal law, or a dependent child under the terms of the plan. Although the subsidy applies to any coverage selected by an AEI (including coverage for a domestic partner, if permitted by the plan), any person that is not a qualified beneficiary would not have an independent right to the subsidy if the covered employee does not elect coverage.

What groups are eligible?

There are two groups of individuals eligible for the subsidy.

Group 1. This group includes qualified beneficiaries that experienced an involuntary termination of employment and subsequently elected COBRA continuation coverage on or after September 1, 2008, but prior to February 17, 2009 (the "enactment date"). These individuals are eligible to receive the subsidy on a go-forward basis, commencing "with the first period of coverage beginning on or after the date of the enactment of this Act" (see explanation below).

Group 2. Qualified beneficiaries that experienced an involuntary termination of employment between September 1, 2008, and February 16, 2009 and did not elect COBRA coverage during their initial 60-day election period must be provided another opportunity to elect COBRA coverage. This special election period also applies to those individuals who elected COBRA coverage but have subsequently lost that coverage prior to the enactment date (e.g., due to nonpayment of premiums). This special election period provides these individuals with a 60-day election period that begins on the date the notification is received.

If an AEI from Group 2 elects COBRA continuation coverage, his or her coverage commences with the first period of coverage following the enactment date. The Act defines a "period of coverage" as a "monthly or shorter period of coverage with respect to which premiums are charged." For plans that charge for COBRA coverage on a calendar month basis, this date is March 1, 2009. For plans that bill for partial month premiums, this date is February 17, 2009.

NOTE: Under the Act, coverage elected under the special election period is not retroactive (i.e., coverage does not extend back to the date of the qualifying event or the date when previous coverage was lost). This means there will be a gap in coverage for these individuals. However, this gap in coverage is not considered a break in coverage for purposes of HIPAA’s creditable coverage rules.

Keep in mind that regardless of when the coverage begins, the maximum COBRA eligibility period is measured from the original qualifying event date, the date of the involuntary termination of employment, not the date that coverage begins.

Income Limitations

Individuals with modified adjusted gross income that exceeds $250,000 (for joint return filers) or $125,000 (for all other filers) are not eligible for the full premium subsidy. However, they may be eligible for a portion of the subsidy. Individuals earning between $125,000 and $145,000 (between $250,000 and $290,000 for joint return filers) will have their income tax increased by a percentage of their total COBRA subsidy received in that year. Individuals earning more than $145,000 ($290,000 for joint return filers) will have their income tax increased by the total amount of COBRA subsidy they receive.

NOTE: The Act does not specify an earnings period for purposes of determining an individual’s income.

Because any portion of the subsidy an individual receives but is not eligible for must be reported on the individual’s income tax return, employers and insurers may treat all AEIs as eligible for the subsidy regardless of their income level. However, individuals have the right to waive the subsidy and pay the full COBRA premium required. The manner in which an individual waives the subsidy has yet to be determined. The Act specifies notification must be made "at such time and in such form as the Secretary of the Treasury may prescribe".

How does the subsidy work?

The federally provided COBRA subsidy is 65 percent of the amount owed by AEI. A payment made by the AEI equal to 35 percent of the applicable premium is considered payment in full. The remainder must be paid by the employer, plan, or insurer and will be subsequently reimbursed by the government through payroll tax credits. The IRS and Treasury are expected to issue additional details regarding exactly how the credit process will work, including tax filing and reporting requirements, in the near future.

Assistance Eligible Individuals are entitled to receive the subsidy for up to nine months. However, if an AEI becomes eligible for other group health coverage or Medicare, or reaches the end of his or her maximum COBRA coverage period, his or her entitlement to the subsidy ends.

NOTE: Other group health coverage does not include coverage consisting of only dental, vision, counseling, or referral services (or a combination thereof), coverage under a flexible spending arrangement (as defined in section 106(c)(2) of the Internal Revenue Code of 1986), or coverage of treatment that is furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care. Under the Act, an individual is eligible for coverage on the first date on which that individual can be covered under the plan.

Any AEI who becomes eligible for other group health coverage or Medicare must provide timely written notice that he/she no longer qualifies for the COBRA subsidy. The timing and manner of such notice remains to be specified by the Secretary of Labor. Failure to do so is punishable by a penalty equal to 110 percent of the subsidy received after becoming eligible for other coverage.

NOTE: It is easy to be confused by this provision, as it appears to be a substantial deviation from "regular" COBRA rules. Generally, COBRA coverage can be terminated when a qualified beneficiary first becomes covered under another group health plan or Medicare. Under the Act, the subsidy terminates when an individual becomes eligible for coverage under another group health plan or Medicare. Although the individual is no longer eligible for the subsidy, he or she may continue his or her COBRA continuation coverage (subject to paying the full premium and all other applicable rules).

If, during the first two periods of coverage following the enactment date, an AEI submits payment for premiums in an amount greater than the 35 percent owed, the person (see explanation below) to whom such payment is payable must reimburse the AEI for the overpayment (the amount of the payment in excess of the 35 percent owed), or provide a credit to the AEI that reduces one or more subsequent premium payments owed by the individual.

A credit may be issued only if it is reasonable to assume that the credit will be used by the AEI within 180 days from the date the "overpayment" is received. If it is not reasonable to make this assumption, or if at any time during the 180-day period it is no longer reasonable to assume the credit will be used during that period, the AEI must receive payment equal to the remainder of the overpayment or outstanding credit. This payment must be issued within 60 days of this determination.

What are the method for reimbursement?

Each person entitled to reimbursement under the plan, who also files a claim for reimbursement in the manner yet to be prescribed by the Secretary, shall be treated as having paid to the Secretary, payroll taxes "in an amount equal to the portion of such reimbursement which relates to such premiums." This payment is considered made on the date that the AEI’s premium payment is received. In other words, any reimbursements owed by the government will be "paid" to the eligible person via a reduction in the payroll taxes owed to the federal government by the eligible person. If this "payment" is greater than the person’s liability for such taxes, the Secretary shall credit or refund the excess in the same manner as if it were an overpayment of such taxes.

What are the reporting requirements?

Each person entitled to reimbursement under the Act must submit reports to the Secretary that include information regarding the applicable AEIs and an attestation of involuntary termination of employment for each. These reports must also include the amount of payroll taxes offset for the reporting period and an estimate of the taxes that will be offset for the subsequent reporting period, as well as the taxpayer identification numbers (TIN) of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and qualified beneficiaries, and a designation with respect to each covered employee as to whether the subsidy reimbursement is for one individual or two or more individuals. The Secretary must issue guidance regarding these reporting requirements or other methods for verifying the correct amount of reimbursements.

What options are available at the time of enrollment?

The Act allows employers to offer AEIs the option to change their health insurance coverage when making a COBRA election under the employer’s plan (i.e., elect coverage that is different from the coverage that was in place prior to the qualifying event). This new coverage option must have the same or lower premiums than the premiums for coverage the individual was enrolled in at the time of the qualifying event, and must be available to active employees.

NOTE: The other coverage made available to AEIs under this optional provision cannot consist of coverage that provides only dental, vision, counseling, or referral services (or a combination thereof); coverage under a flexible spending arrangement (as defined in section 106(c)(2) of the Internal Revenue Code of 1986); or coverage of treatment that is furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof).

If the employer chooses to offer this option, an AEI must elect to change his or her coverage within 90 days of receipt of the COBRA election notice. It is not clear if this provision increases the election period from 60 to 90 days. If the election period is increased to 90 days, the increased election period would apply only to major medical coverage (see note above regarding other coverage types). This dual election period would cause significant confusion and many employers will choose to avoid this confusion by not offering this option.

What notice requirement are required by the employer?

The Act requires employers to modify their COBRA election notices or provide separate, supplemental notices to all individuals who become entitled to elect COBRA continuation coverage during the period beginning on September 1, 2008, and ending on December 31, 2009. These notices must include all of the following:

The forms necessary for establishing eligibility for the subsidy

- The name, address, and phone number of the plan administrator and any other person maintaining relevant information in connection with the subsidy

- A description of the extended election period (the second 60-day election period)

- A description of the qualified beneficiary’s obligation to notify the plan if he or she becomes eligible for coverage under another group health plan or Medicare and the penalty for failure to notify the plan

- A description, displayed in a "prominent manner," of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the reduced premium

- A description of the election of different coverage option described above (if the employer chooses to offer this option to AEIs)

Those COBRA qualified beneficiaries who were involuntarily terminated between September 1, 2008, and February 16, 2009, must be issued a revised notice including the information outlined above within 60 days of the enactment date. These notices must also describe the second 60-day COBRA election period and explicitly state that the maximum COBRA coverage period is still measured from the date of the original qualifying event. Failure to provide this notice is treated as a failure to meet the notice requirements under the applicable COBRA continuation provision and could result in significant fines and penalties.

The Act requires the Department of Labor (DOL), Treasury, and the Department of Health and Human Services (HHS) to work together to provide a model notice within 30 days of the enactment date. Because employers have a 60-day period in which to provide the revised notices, some employers may choose to wait until the model notices have been issued before revising their own notices.

Where can I find more information?

The entire American Recovery and Reinvestment Act is available at www.recovery.gov.

This information is information only. Health Insurance Quotes America does not give legal, accounting or other professional advice. If you need legal advice, you must seek the opinion of a qualified attorney.