At first glance, the new Cobra provisions in the American Recovery and Reinvestment Act (ARRA) seem to be a fairly straightforward strengthening of the federal government’s safety net, but some small employers may be in for a surprise.
The federal COBRA law, which allows workers who lose their jobs to continue to have access to their former employer’s health insurance coverage, only applies to businesses with 20 or more employees. However, since Wisconsin is one of several states with a continuation law that extends COBRA benefits to smaller companies with group health plans, even employers with a handful of workers will have to cover 65% of COBRA premiums for former workers.
Due to Wisconsin’s COBRA continuation law, employers with as few as two employees could be subject to this requirement, according to Christopher Rendall, an attorney with the Murphy Desmond law firm in Madison. Those who ignore their obligations run the risk of having costly penalties imposed on them. “The scary thing is that there are employers out there with group health plans that have fewer than 20 employees,” Rendall noted. “The federal rules say COBRA applies to employers with 20 or more employees, and I would be more scared for the [smaller] employers who therefore think COBRA doesn’t apply to them, and this subsidy does not apply to them, when they actually do.”
Worthless Benefit
COBRA stands for Consolidated Omnibus Budget Reconciliation Act, which refers to a 1986 law that amended several statutes to provide the continuation of group health coverage that otherwise would be terminated. Under that previous law, if an employee lost group health coverage due to the termination of employment, the employer had the obligation of offering continued coverage, and the former employee would have the opportunity to elect continued coverage for a period of up to 18 months.
Jon Anderson, an attorney with Godfrey & Kahn in Madison, said discharged workers normally got the same coverage they had before. “If I was covered under a Blue Cross Blue Shield Plan and I was laid off from my job, under the old law my employer would say, ‘Hey, do you want to continue this Blue Cross Blue Shield coverage under our group rates?’ Then you [the employee] have to pay 100 percent of the cost. You’d have to pay 102% of the cost if the plan charges an administration fee.”
That fact that the full cost burden fell on jobless workers was the practical flaw in the previous COBRA law, according to critics, so the new 35% employee share makes the benefit much more affordable. “If I was discharged from employment and I was single, I’d have to pay, under Wisconsin’s continuation law, 100 percent of my premium for health insurance,’ noted Rendall. “I’d also have no money to pay for it because I had no job to pay for it with.”
The new COBRA provision not only covers people who lose their jobs from the time the law was enacted (Feb. 17, 2009) through Dec. 31, 2009, but also those who were terminated from Sept. 1, 2008 and the law’s enactment. Under the ARRA, employers had until April 18 of this year (60 days from enactment) to send the notice to individuals who had lost their jobs after Sept. 1, 2008. The notice was to include information about new COBRA subsidy provisions.
If they haven’t already done so, this may require employers to track down former workers. “You really don’t want to be out of compliance with federal law, so I would suggest that if you haven’t done it, do it,” Anderson said. “A late notice is better than no notice.”
An estimated seven million unemployed workers will qualify. Qualified beneficiaries are defined as people covered by a group health plan on the day before a “qualifying event,” meaning involuntary termination. (Coverage generally is not available to employees terminated for gross misconduct.)
Soft Landing
Even though employers now pay a 65 percent premium subsidy for former employees’ COBRA coverage, there is a strong mitigating factor for employers. The government will reimburse employers for that 65% share as part of a reduction in payroll taxes, and the reimbursement can be filed quarterly. Employers claiming the 65% reimbursement should report their COBRA premium assistance payments by using the updated IRS Form 941 (www.irs.gov/formspubs).
The 35% COBRA payment must be received by the former employee before the employer is eligible for the payroll tax credit.
In addition, if terminated employees are eligible for coverage under another health plan, they are not eligible for the COBRA subsidy.
High-income individuals are eligible for the subsidy, but might need to repay it on their federal income tax return. There is an eligibility phase-out if certain income thresholds are met — if the modified adjusted gross income is between $125,000 and $145,000 for individuals, and $250,000 and $290,000 for joint filers.
Rendall noted that the entity that is entitled to be reimbursed for the COBRA coverage depends on the type of health insurance being offered: in a multi-employer plan, it’s the plan itself; in a self-insured plan, it’s the employer; and in an insured plan, it’s the insurer.
Another issue is the definition of involuntary termination, which has been clarified since passage of the ARRA. According to Anderson, employees have to be dealing with a situation where they involuntarily lose coverage; it does not apply in situations where a worker resigns or requests a temporary layoff to save his or her job in the long run while helping an employer through a rough patch. Involuntary termination, he said, is defined as severance from employment that’s due to unilateral action by the employer.
“An employee could say, ‘Why don’t you lay me off? I’ll take a month’s layoff or a six-month layoff.” Under those circumstances, that wouldn’t be an involuntary situation.”
Some employers are trying to spread the risk, he added, by implementing a system where everyone is cut from 40 hours to 30 hours. “The mere reduction in hours does not make you eligible for COBRA, unless you lose your health coverage,” Anderson stated.
Four model notices have been posted by the U.S. Department of Labor (www.dol. gov/ebsa/cobramodelnotice.html) and can be used to provide information about the new COBRA benefit to beneficiaries.
Not every laid off worker qualifies for the benefit, including those whose former employer has gone out of business and those who worked for companies that have terminated group health coverage.
In order to avoid penalties for noncompliance, the continuation of benefits for COBRA participants must be managed according to Federal guidelines, Anderson indicated. He noted that penalties include the imposition of a non-deductible excise tax of $100 per day per beneficiary, ERISA (Employee Retirement Income Security Act) penalties of $110 per day per violation, and the potential for a private lawsuit for payment of health claims and fines.
For most businesses, Anderson said the avoidance of COBRA-related penalties and fines can be achieved by taking the following steps:
- Maintaining a written COBRA procedures manual (outlining the steps the employer takes to provide notices, address inquiries, et cetera).
- Maintaining copies of all COBRA notices.
- Appointing a properly trained individual to handle COBRA duties.
- Keeping copies of all notices sent, including stamped and addressed envelopes.
- Keeping notes of conversations with COBRA beneficiaries.
In this economy, Rendall said employers are stuck between a rock and a hard place when it comes to layoffs, but the reimbursement softens the blow. He said the most important thing employers must do regarding COBRA is investigate how the law now applies to them, especially if they have entered into severance agreements since the all-important date of Sept. 1, 2008.
“I would say an ounce of prevention is worth a pound of cure,” Rendall advised. “Employees need to dot their Is and cross their Ts so as not to subject themselves to unexpected liabilities moving forward.”
Permanent 65-35% Split
If the economy continues to falter into late 2009 and early 2010, there also is a realistic chance that the enhanced COBRA benefit will be extended beyond this year. Well beyond.
Barbara Zabawa, an attorney with Whyte Hirschboeck Dudek, said her contacts tell her that the nine-month requirement might well be extended, and that it’s the Obama Administration’s belief that there always should have been a larger subsidy for COBRA because it had always been considered an unaffordable option. That could make the recent changes a precursor for establishing a permanent 65% subsidy for employers.
In Zabawa’s view, the new provisions create a little bit more paperwork in terms of providing the required notices, but they are not an overwhelming burden on employers. “I think it softens the blow for both employers and employees when it comes to layoffs,” she said. “One of the concerns of any person is health coverage for his or her family if there is a job loss, and I’m sure it’s a concern for both employers and employees. By providing this subsidy, that kind of allays some of the fears that go along with a layoff.”
