NEW COBRA RULES EFFECTIVE FEBRUARY 17,
2009
The American
Recovery and Reinvestment Act of 2009 (the "Recovery Act"), signed into law
by President Obama on February 17, 2009, provides a COBRA subsidy for all
employees who are "involuntarily" terminated from employment at any time
during the period from September 1, 2008 through December 31, 2009. This
subsidy applies to group health plans, including self-insured plans, that are
subject to COBRA continuation coverage requirements, and to health care
continuation coverage required by states for smaller employers.
Illinois
employers having fewer than twenty employees will be subject to the new subsidy
rules.
Under the
Recovery Act, an employee eligible for the subsidy will be required to pay only
35% of the monthly premium for continuation coverage. This subsidy will be
available for a maximum period of nine months. The remaining 65% of the
premium is paid by the employer or the insurance company and is reimbursed to
the employer through a credit on the employer’s quarterly employment tax
return (Form 941). The employer can either offset its payroll tax deposits or
claim the subsidy as an overpayment at the end of the quarter. An updated
Form 941 has been issued by the IRS and must be used by the employer to receive
the reimbursement.
The full subsidy
is available to individuals having modified adjusted gross income of up to
$125,000 ($250,000 for joint return filers). A reduced subsidy will be
calculated for individuals having modified adjusted gross income between
$125,000 and $145,000 ($250,000 and $290,000 for joint return filers). The
full amount of the subsidy will be paid as additional tax if the taxpayer’s
modified adjusted gross income exceeds $145,000 ($290,000 for joint filers).
Although the
Recovery Act became effective on February 17, 2009, a transition rule
anticipates that employees electing COBRA may continue to pay the full amount of
the premium for up to two months following the effective date (i.e., March and
April). However, the employees will be entitled to receive a retroactive
payment of the subsidy portion.
Employers are
required to provide a notice of the new COBRA rules to all employees whose
employment was involuntarily terminated during the period from September
1, 2008, through December 31, 2009. The deadline for providing this notice
is April 18, 2009. The text of a model notice is due from the Department
of Labor on March 19, 2009. Employers are advised to review the model
notice before submitting a notice to eligible employees. It is anticipated
that the government’s instructions accompanying this model notice will clarify
whether the notice is required to be given to a broader field of separated
employees.
Employees who
were involuntarily terminated during the period from September 1, 2008 through
February 17, 2009, but failed to initially elect COBRA in response to a COBRA
notice, will be given a second opportunity to elect COBRA at any time during the
60-day period following their receipt of the COBRA notice reflecting the subsidy
rights under the Recovery Act.
Employers
should start now to compile a list of individuals whose employment was
involuntarily terminated since August 31, 2008, or experienced any other
qualifying event under COBRA or applicable state law since that date. The
employer must then begin the task of locating any missing former employees, and
identifying former employees whose employment was "involuntarily" terminated
(there is no definition of that term included in the new law). Employers
will also have to set up procedures to pay the 65% premium subsidy, to obtain
reimbursement from the U.S. Treasury, and to credit overpayments to those
individuals who are entitled to the subsidy but pay full premiums in March and
April. All compliance mechanics should be in place so that notices and
election forms are available for delivery to former employees and others
entitled to notice prior to the April 18, 2009 deadline.
Andrew S. Williams
330 N. Wabash Avenue
Suite 1700
Chicago
, IL 60611
(312) 755-3145
awilliams@agdglaw.com
www.benefitslawgroupofchicago.com
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