Economic Stimulus Summary
Premium Assistance for COBRA Benefits & Increase in Transit Benefits
(Update)

On Tuesday February 17, 2009, President Obama signed the $787 billion American Recovery and Reinvestment Act of 2009 (ARRA) into law. The broad legislation included almost $25 billion targeted at minimizing the number of Americans who lose their employer sponsored health insurance as result of involuntary job loss. 

ARRA intends to accomplish the coverage objective by providing a nine month government subsidy of up to 65% of the COBRA premium that an eligible person would otherwise be required to pay. 

In addition to administrative responsibilities related to the new law, plan sponsors are required to advance the COBRA premium subsidy to eligible terminated employees and then seek reimbursement from the federal government via credits on federal payroll taxes. 

Following are highlights, logistical items and questions related to the legislation. Additional guidance is expected from the Department of Labor with respect to a number of questions related to the Act. ArlenGroup will provide clients with additional information and model forms as they are developed by the DOL.

Legislation Highlights

1. ARRA becomes effective with the first coverage period after February 17th, which will be March 1, 2009 for virtually all employers. 
   
   
2. To qualify for the premium subsidy a worker must lose their coverage because of an involuntary termination between September 1, 2008 and December 31, 2009. A worker who meets these criteria is an Assistance Eligible Individual (AEI). 
   
   
3. Workers that are eligible for COBRA due to a reduction in work hours or other qualifying events are not AEIs, and are not eligible for the subsidy. 
   
   
4. AEIs will only be required to pay 35% of their COBRA premium, with the federal government reimbursing the employer for the remaining 65% by allowing the employer to take a credit against the employer’s payroll tax liability. 
   
   
5. The 65% premium subsidy is effective for premium months commencing March 1, 2009 and in no event is the subsidy available for coverage periods prior to that date. 
   
   
6. The premium subsidy will terminate upon the earliest of a) nine months of subsidized coverage; b) eligibility for other employer-sponsored health care coverage; c) Medicare eligibility; or d) COBRA benefits being exhausted.
   
   
7. The premium subsidy begins after an individual has been involuntarily terminated and becomes eligible for COBRA. Any employer-funded COBRA is deducted from the employee’s nine-month eligibility, not added to it. For example, if an an employee is involuntarily terminated on March 1, 2009 and the employer agrees to pay for two months of COBRA continuation coverage as part of the severance agreement, the employee is eligible to receive the federal COBRA subsidy for seven months after the employer-funded COBRA ends (for a total of nine months of COBRA coverage under ARRA).
   
   
8. Involuntary termination is one that is initiated by the employer, including terminations that were due to a material change in working conditions. Employees that are asked to resign are considered to be involuntarily terminated under ARRA.
   
   
9. State continuation – such as CalCOBRA – is included in the legislation. This would apply to small employers that are below the 20 employee federal COBRA guideline. State continuation plans are not required to offer the second chance election.

Logistical and Administrative Items

1. Employers have until April 17, 2009 to notify AEIs of their rights and responsibilities. 
   
   
2. ARRA requires employers to offer a special 60 day enrollment window to allow AEIs who either a) never elected COBRA; or b) elected and subsequently dropped COBRA, to newly elect COBRA effective March 1, 2009. These AEIs cannot be assessed special pre-existing condition limitations for coverage gaps between their termination date and the March 1 effective date. Coverage, if timely elected, is retroactive to March 1, 2009. The maximum duration of COBRA coverage (i.e., 18 months) would still be based on date of the AEI’s original qualifying event, not March 1st. 
   
   
3. The subsidy applies to any coverage tier that an individual may elect (employee only, employee plus spouse, employee plus family, etc.). Also, at the employer’s discretion the individual may be allowed to change their health plan if they elect a lower premium cost plan.
   
   
4. COBRA election notices should be revised as soon as possible to refer to the subsidy’s availability. Updated model notices are available at the Department of Labor website.
   
   
5. If the employer credit against employment taxes is not sufficient to recover the full premium subsidy, the employer will qualify for a direct payment from the federal government.
   
   
6. While the employer will still be required to facilitate the COBRA subsidy, it is worth noting that individuals with modified adjusted gross annual income exceeding $125,000, or families filing jointly with adjusted gross income exceeding $250,000 will be subject to a partial or full reversal of the premium subsidy through their federal income tax filing process. 
   
   
7. In the event that a plan sponsor is not able to notify all eligible individuals in a timely manner, the AEI may be required to pay full COBRA premiums for up to two months. If an AEI pays the full COBRA premium, the plan sponsor must either credit the subsidized portion of the premium against future COBRA premiums or refund the subsidized portion within 60 days. 
   
   
8. Individuals that are no longer eligible for the subsidy, generally due to being eligible for other group coverage or Medicare, must notify the employer or COBRA administrator or they can be liable for a penalty of 110% of the ineligible subsidy received.
   
   
9. Health flexible spending accounts offered through a Section 125 cafeteria plan are not eligible for the COBRA subsidy.
   
   
10. The IRS has updated Form 941 to include lines for the amount of credit claimed and the number of individuals that have been provided the subsidy. Adequate supporting documentation must be maintained by the employer.
    

Click Here for link to the text of the Act

Click here for a link to Notice 2009-27 which provides updated guidance and clarification on ARRA

Economic Stimulus Summary – Transit 

Current law allows employers to provide certain tax-free fringe benefits for transit and parking. A provision of the Stimulus Bill equalizes the tax-free benefit employers can provide for both transit and parking at $230 per month for 2009; indexes them equally for 2010 and clarifies that certain transit benefits apply to federal employees. Before the Act, the monthly limits were a combined $120 for transit passes and vanpooling and $230 for parking.

Employer Action Items

Employers should take the following actions and/or confirm that their third party administrator will handle them: Determine whether participants will be allowed to switch to a lower-cost plan when electing coverage. By April 17, 2009 provide eligible current COBRA participants with notice of their entitlement to the subsidy.  By April 17, 2009 distribute special COBRA election notices to employees who were terminated after September 1, 2008 but not COBRA enrolled. These individuals will have 60 days from receipt of that notice to elect the coverage retroactive to March 1, 2009. Modify COBRA notices for Qualifying Events that occur between February 17, 2009 and December 31, 2009 to include updated COBRA notice language.  Provide COBRA participants with updated payment coupons or other mechanisms for submitting their share of premiums.  Set up accounting processes to track reimbursable premium subsidies by COBRA continuee, by month.  Set up processes to ensure that employer subsidies are recouped on the Form 941 payroll tax reporting and payment process.