Employer’s Notice Requirements
The Act requires that the new COBRA notices advising of the subsidy are distributed by April 18, 2009 to all qualified beneficiaries who encountered a qualifying event, of any kind, between September 1, 2008 and December 31, 2009. The notices must include the following:
- information on the availability of the subsidy;
- information on establishing eligibility for the subsidy;
- contact information for the plan administrator;
- a description of the special enrollment period;
- an option to enroll in other coverage if the employer so allows*; and
- information regarding the individuals’ obligation to notify the plan upon becoming eligible for another group health plan or Medicare.
The Department of Labor issued four separate model notices for these purposes on March 19, 2009.
[*If the employer allows, AEIs may elect coverage different than that in effect at the time of termination; however, the premium must not exceed the premium for the coverage enrolled in at the time of termination, the different coverage must also be offered to active employers, and the different coverage must not be: (a) only dental, vision, counseling or referral services; (b) a health FSA; or (c) coverage providing treatments in an on-site medical facility of the employer providing primarily first-aid and prevention services. AEIs have 90 days to make such an election.]
As the notices are likely being distributed closer to the April 18th deadline, any AEIs already receiving COBRA coverage will not yet have notice of the subsidy. Therefore, they will likely be paying 100% of the COBRA cost for March and April. In those cases, the employer or plan administrator must credit the 65% subsidized portion of the premium against future COBRA premiums which must be used within 180 days or refund the subsidized portion within 60 days.
Employer Obtaining Government Reimbursement
As previously mentioned, the employer must first pay the 65% premium on the AEI’s behalf and is then reimbursed by the government. Employer reimbursement may be made by the employer taking a credit against its liability to deposit payroll taxes and federal income taxes withheld from all employees' compensation. This credit will be reported on the employer’s quarterly tax return, Form 941, which has already been revised by the IRS to reflect the subsidy.
However, the employee (or someone other than the employer) must pay 35% of COBRA before the employer can request reimbursement of the other 65%. Additionally, employers who do not charge the full COBRA premium will not be entitled to reimbursement of 65% of the maximum COBRA premium. Therefore, employers may want to revisit severance agreements or other arrangements in which they agreed to pay a portion of the COBRA premium.
Employer Action
The subsidy became effective for periods of coverage beginning on or after February 17, 2009 (ie, March 1, 2009 for most plans). Therefore, employers have to update COBRA election notices and other communications to reflect the subsidy as soon as possible, and no later than April 18th.
Although the notices are sent to a larger population of qualified beneficiaries, including non-AEIs, employers must keep record of those employees (and resulting AEIs) who were involuntarily terminated between the relevant dates. There have been many questions as to what exactly constitutes an involuntary termination, and we hope to receive guidance from the IRS in this regard in the coming weeks.
Additionally, employers must put procedures in place, including but not limited to:
- Proper distribution of the notices to the appropriate qualified beneficiary groups;
- Payment of the government's 65% of the subsidy;
- Reimbursement from the government;
- Crediting overpayments by AEIs who fully paid COBRA but are entitled to the subsidy within the first months of the Act;
- Offering a lesser alternative coverage to AEIs;
- Reviewing severance policies to revisit issue of any employer COBRA contributions;
- Allowing special enrollment periods;
- Adopting methods to allow permanent waiver of subsidies for those AEIs with modified adjusted gross income meeting the threshold levels;
- Monitoring the duration of COBRA and the subsidy;
- Formulating a compliance team, including COBRA administrators, payroll systems, benefits consultants, and/or legal counsel to ensure compliance.
Employers must also determine whether any covered employee has a non-forfeitable right to receive pension benefits directly from the Pension Benefit Guaranty Corporation or is a Trade Adjustment Assistance-eligible individual as the maximum COBRA period may be extended.
There is much to do in a limited period of time. An employer who utilizes a third party administrator for COBRA purposes will be working closely with them on many of these matters; however, other decisions and procedures mentioned in this article must be put in place by the employer and its payroll systems.
------------------------------------------------------------------------------------------------------
Disclaimer
This article is intended to alert clients of new developments in the law and is for general informational purposes only. It should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Please consult your attorney before taking action on any of these issues.
Because this site has a world-wide audience, this information may not apply to you. Please seek legal assistance, or assistance from State, Federal, or International governmental resources, to make certain your legal interpretation and decisions are correct. This information is for guidance, ideas, and assistance only.
------------------------------------------------------------------------------------------------------
*End Note: Determining Adjusted Gross Income: adjusted gross income is not able to be determined by a W-2. Instead, the employees/taxpayers themselves must compute this when filling out their tax returns.
Gross income includes not only wages (including commissions, fees, bonuses), but also includes income from businesses, property gains, rents, dividends, alimony, annuities, etc, etc. See Internal Revenue Code (IRC) section 61.
Adjusted gross income then is computed by taking gross income and subtracting certain items, such as trade/business deductions, losses from sale or property, and numerous other deductions. See IRC section 62.
Modified adjusted gross income, under the American Recovery and Reinvestment Tax Act of 2009, means adjusted gross income increased by any amount excluded from gross income under IRC sections 911, 931 or 933 (which all pertain to either income derived from US citizens/residents living abroad, or incomes sources for residences of Guam, American Samoa, Northern Mariana Islands or Puerto Rico).
