Congress has passed the American Recovery and Reinvestment Act (“the Act”), and the Act has been signed by President Obama. This communication describes the provisions in the Act that affect COBRA continuation coverage and similar state continuation coverage.

Applicability and Effective Date
The COBRA changes affect both the federal COBRA provisions and the Public Health Service Act program that provides similar extension benefits for public programs. In addition, however, the subsidy provisions apply to state continuation coverage that is comparable to federal COBRA. That would include so-called “mini-COBRA” state laws that cover groups below the 20 employee threshold for COBRA. To be comparable, the state continuation law must allow the individual to continue substantially similar coverage as was provided under the group health plan at a monthly cost that is based on a specified percentage of the group health plan’s cost of providing such coverage. Reference to “COBRA” throughout this memo will also refer to the state programs that meet those requirements.

The Act is effective February 17, 2009, the day that President Obama signed the bill. All of the COBRA provisions that have a time frame will date from that day. As for calendar monthly billed programs, the effective date is March 1, 2009.

New Subsidy for COBRA Beneficiaries
The Act provides for a new subsidy for certain COBRA beneficiaries. The subsidy is 65% of the COBRA continuation coverage premiums for eligible individuals for up to 9 months. The COBRA beneficiary will pay only 35% of the overall COBRA premium for that period. The period expires on the earlier of (i) nine months, (ii) the date the individual becomes eligible for major medical group coverage or Medicare or (iii) the end of the maximum required period of continuation under COBRA. Further, the beneficiary must notify the employer in writing if they become eligible for coverage under a major medical group health plan or Medicare and is subject to significant penalties (110% of the subsidy amount) for failing to do so.

An individual who does not receive a subsidy that he/she believes appropriate may appeal the plan’s determination to the Department of Labor for private plans or to the Department of Health and Human Services for public plans covered under the Public Health Services Act. The relevant agency must rule on the appeal within 15 business days. Individuals whose appeal is denied may sue under ERISA.

Eligibility for the Subsidy – Timing
The subsidy is available to individuals (and their dependents) who were involuntarily terminated from their employment and became eligible for COBRA beginning September 1, 2008 through December 31, 2009. Persons who elected prior to the enactment of the Act (but on or after September 1, 2008) will be eligible to receive the subsidy prospectively from the date of enactment through the maximum nine-month period. Otherwise eligible persons who did not elect COBRA between September 1, 2008 and the date of enactment will have the opportunity to elect COBRA on a prospective basis with the maximum duration of the coverage dating from the date that they could have first elected COBRA. Employers or plans will have to provide notice to these groups of individuals. In addition, a group health plan or insurer must refund the individuals any COBRA premiums that subsidy-eligible persons paid on or after the date of enactment in excess of 35% of the premium. This may be in the form of a reimbursement payment or credit against future premium payments due.

Eligibility for the Subsidy – Income Test
The subsidy is adjusted based on income. Joint filers with $250,000 or more of modified adjusted gross income and all other filers with $125,000 or more of modified adjusted gross income are not eligible for the full subsidy. The subsidy is phased out completely for persons with modified adjusted gross incomes of $290,000 joint or $145,000 for other filers. The subsidy is not considered income as long as the beneficiary meets the income tests. Excess amounts of subsidy over the amount the person is entitled to by income will be added to the person’s tax on the person’s federal tax return. The employer will not have to be concerned about the taxable effect on COBRA beneficiaries although a COBRA beneficiary may request that the employer not provide any subsidy.

Mechanics of the Premium Subsidy
The Act requires that the relevant entity that is collecting the 35% premium simply not collect the remaining 65% and, instead, obtain reimbursement from the federal government. In cases of a multiemployer plan, a group health plan subject to federal COBRA and/or a self-funded employer, the plan or the employer that is collecting the premium will recoup the subsidy amounts through commensurate reductions in payroll taxes. For insured plans not subject to federal COBRA, where the insurer is collecting the premium, the insurance company will be entitled to the reimbursement through a corresponding credit to its own payroll taxes. In cases where the payroll taxes are not sufficient to cover the subsidy, the additional amount will be provided as a credit to the taxpayer as if it was an overpayment of payroll taxes. There are filings that payers receiving the subsidy must make with the Secretary of the Treasury.

Electing a Different COBRA Option
An employer may allow a COBRA-subsidy eligible individual to change his or her health insurance coverage option when making a COBRA election. The new plan option must be made within 90 days of receipt of the COBRA election notice, must have the same or lower premiums and must be available to non-COBRA active employees under the plan.

Notice Requirements and Election Period
Under the Act employers must provide modified election notices or provide separate supplemental notices to all persons who became entitled to elect COBRA continuation coverage during the period beginning on September 1, 2008 and ending on December 31, 2009.

The new forms would notify the individual about the subsidy and, if applicable, the right to change to different benefits options. The Department of Labor, Treasury and Health and Human Services are supposed to work together to provide a model notice within 30 days of enactment.

Notices are required to be sent to subsidy-eligible persons who became qualified beneficiaries before the date of enactment within 60 days of enactment. (The Act does not affect the timing of notices sent to individuals who become qualified beneficiaries on or after the date of enactment.) The election period for those beneficiaries who became eligible before the date of enactment will begin on the date of enactment and end 60 days after the date the plan administrator provides the required notice.

Failure to provide the notices would be a COBRA violation and subject to the standard COBRA penalties of up to $110 a day under ERISA. Additionally, there could be adverse tax consequences under the Internal Revenue Code, which can impose excise taxes of $100 per day per notice on the plan administrator.

Tags: COBRA American Recovery and Reinvestment Act, COBRA Provisions, COBRA stimulus, COBRA stimulus package

The U.S. House and Senate will vote on a compromise $790 billion stimulus package that includes subsidies for 65% of the COBRA health insurance premiums paid by laid-off workers, under a hard-fought conference report unveiled late Feb. 12.

The final version of the American Recovery and Reinvestment Act, which followed intense negotiations between leaders of the two chambers, is smaller than either the $819 billion stimulus passed by the House or the $838 billion package cleared by the Senate. Completion of the conference report for H.R. 1 sets up a planned Feb. 13 House vote, with the Senate to move the package either later in the day or over the President’s Day weekend. Following the vote, Congress will stand in recess until Feb. 23.

The final COBRA provisions, which were welcomed by the health insurance industry, are more generous than the 50% subsidy in the Senate version, but do not last as long as the 12-month subsidy included in both prior versions of the bill. Estimated to cost $24.7 billion, the provision would provide aid to an estimated 7 million involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009 to pay continue paying health insurance premiums through the 23-year-old Consolidated Omnibus Budget Reconciliation Act program.

COBRA allows employees who are terminated or leave their jobs voluntarily to remain in their former employer’s group health plan for up to 18 months, which can be extended to 36 months for those with extenuating life circumstances. Employers are permitted to charge COBRA enrollees up to 102% of the true cost of group health premiums, which average more than $1,000 per month.

According to the final report, the aid would be available for up to nine months, or until the terminated worker receives an offer of any new employer-sponsored health care coverage or becomes eligible for Medicare. Subsidies would not be available to those who earn more than $125,000 a year, or $250,000 per household.

The final version also strips out a provision opposed by the National Business Group on Health, which represents large employers, that would have allowed beneficiaries older than age 55 and those who have worked for the same employer for a decade to retain COBRA coverage until they become eligible for Medicare.

The measure also includes $17.2 billion in funding for health information technology infrastructure and an additional $2 billion in affiliated grants and loans. The bill sets a goal of seeing 90% of doctors and 70% of hospitals adopt electronic health records within the next decade, but it couples that with more stringent regulations on the transmission of identifiable health information. Insurers have protested that the bill’s notification requirements for security breaches were broadly worded, that it authorizing state attorneys general to enforce federal privacy standards and that new regulations could restrict health promotion, disease management and care coordination programs.

However, groups such as the Blue Cross Blue Shield Association and America’s Health Insurance Plans welcomed $1.1 billion in new funding for comparative effectiveness research. The BCBSA has proposed creation of an industry-funded institute to offer recommendations on the most effective and cost-efficient medical treatments.

“With comparative effectiveness, patients and providers will be able to assess drugs, technologies, and treatment options and make decisions that best reflect the patients’ needs and preferences,” AHIP President Karen Ignagni said in a statement. “We applaud efforts to address this important priority in the current economic recovery bills.”

The final package mostly eliminates a $54 billion provision, seen as potentially beneficial particularly to financial guaranty and mortgage guaranty insurers, that would have allowed corporations to carry back net operating losses for 2008 and 2009 against taxes paid in the prior five years. The final version offers a much more limited, $947 million carryback open only to businesses with gross receipts of less than $15 million, which could potentially be helpful to some agencies and small carriers.

Other small business tax provisions of potential benefit to agencies include $41 million to allow a one-time write-off of up to $125,000 in capital expenses; $829 million for raising the small business stock sale capital gains exclusion to 75% from 50%; and $415 million to temporarily reduce the built-in gains holding period for S corporations from 10 years to seven years.

Tags: COBRA, COBRA laws, COBRA legislation, COBRA stimulus package, COBRA subsidy