New COBRA Legislation Effects Employers with Less Than Twenty Employees

COBRA, also known as the Consolidated Omnibus Budget Reconciliation Act, is the law that allows former employees to purchase their company's health insurance plan for 18 months if they pay the premiums. If you thought you were exempt from this requirement because the original law only applied to companies with more than 20 employees, listen up. The new legislation that became part of the American Recovery and Reinvestment Act (ARRA) effective February 17, 2008, makes a provision that applies to state continuation plans such as the one we have in New Jersey. In layman’s terms, all businesses with more than 2 employees will be required to offer terminated employees the right to continue their coverage and if they qualify will have to pay 65% of their premiums beginning March 1, 2008. The subsidy lasts for a period of 9 months.

New Subsidy for COBRA Beneficiaries
ARRA provides for premium reductions and additional election opportunities for health benefits under COBRA. Eligible individuals pay only 35% of their COBRA premiums and the remaining 65% is reimbursed to the coverage provider (the employer or insurer) through a tax credit. If the credit amount is larger than the taxes due, the employer will be reimbursed by the Secretary of the Treasury. For insured plans, not subject to Federal COBRA, where the insurer is collecting the premium, the insurance company will be entitles to the reimbursement through a corresponding credit to its own payroll taxes. There are also filings that payers receiving the subsidy must make with the Secretary of the Treasury.

The New Jersey Dept. of Banking and Insurance is working on a provision that will allow the insurance companies to handle this subsidy. We will keep you posted on their progress. Meanwhile, the employer will be responsible for paying the carrier.
Beneficiaries must notify the employer in writing if they become eligible for other coverage under a group major medical health plan or Medicare. There are substantial penalties if they do not.

Eligibility for the Subsidy
Not everyone is eligible for this premium reduction. They must meet the following requirements:

• Involuntarily terminated from employment on and after September 1, 2008 for reasons other than gross misconduct
• Not be eligible for other group health coverage (such as through a spouse's plan or a new employer’s plan) or for Medicare.
• Individuals earning more than $145,000 (or $290,000 for joint filers) must return the subsidy when they file their taxes
• For those earning between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers) a proportional amount of the premium reduction must be repaid


Electing a Different COBRA Option
While the old COBRA rules would not allow a terminated employee to move to a less costly plan, if the employer offered more than one plan option, this new legislation permits but does not require the employer to allow assistance eligible individuals to switch the coverage options. To retain eligibility for the ARRA premium reduction, the different coverage must have the same or lower premiums as the individual’s original coverage. The different coverage cannot be coverage that provides only dental, vision, health flexible spending account, or coverage for treatment that is furnished in a on-site-facility maintained by the employer.

Notifying Terminated Employees
Any employee terminated between September 1, 2008 and February 16, 2009 will have to be offered the right to accept these benefits (again) with the subsidy. They must be notified of the subsidy and opportunity to elect coverage within 60. The election period for those beneficiaries will begin on the date of enactment and end 60 days after. The Dept of Labor will be issuing sample notices employers can use within the next 30 days.

Failure to provide notices would be subject to penalties of up to $110/day. Additionally, there could be adverse tax consequences under the IRS code which can impose excise taxes of $100/day per notice on the plan administrator.

Logistics
ARRA requires the employer to collect only the 35% of the COBRA or continuation premium from the terminated employee. They will pay the remaining 65% and obtain a reimbursement from the Federal Government when they file Form 941, Employer’s Quarterly Federal Ta Return to report their COBRA premium assistance payments. If the credit amount is larger than the taxes due, the employer will be reimbursed by the Secretary of the Treasury.

Employers must maintain supporting documentation in order to receive the credit:

• Documentation of receipt of the employee’s 35% share of the premium
• A copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the carrier
• Declaration of the former employee’s involuntary termination

Please email your questions to: pgoldfarb@ebagroup.net