Big Changes to COBRA
A little more than 60 days ago, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Included in the bill is a little-noticed provision that may give the growing ranks of unemployed workers some relief with their medical bills. The impact on the institution side is much more significant, including provisions relating to institution-sponsored health plans, some of which require immediate action by plan administrations. Even more recently, the Department of Labor (DOL) and the Internal Revenue Service (IRS) issued guidance on how the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) subsidy should be handled, but also advised that more guidance is pending.
Under ARRA, certain individuals who are eligible for COBRA will receive a 65 percent government subsidy of the premiums paid for health-care coverage for up to nine months. Those who can take advantage of the subsidy include workers who were eligible for COBRA continuation coverage between September 1, 2008, and December 31, 2009, and those who were involuntarily terminated during this period. Workers who can be covered under another health plan, such as one provided by their spouse's institution or Medicare, are not eligible for the discounted coverage.
New Enrollment Extension
More importantly, workers who were laid off between September 1, 2008, and February 16, 2009, who did not elect COBRA coverage when it was first offered or who did elect it but are no longer enrolled have a new window to elect subsidized coverage, according to the DOL. This new window began February 17, 2009, and ends 60 days after the required notice is provided by an institution.
It is important to note that ARRA does not provide the subsidy directly to eligible individuals. Instead, if an individual is eligible and pays 35 percent of the premiums charged for COBRA coverage under the plan, the plan is not allowed to charge the individual the remaining 65 percent. Instead the institution (or the insurance company if the plan is fully insured, or the plan in the case of a multi-institution plan) is reimbursed via a credit against its payroll taxes equal to that remaining amount, or a direct payment to the extent the credit exceeds its payroll tax liabilities. The subsidy is not available for COBRA coverage that consists of contributions to a health flexible spending account.
In terms of tax preparation, an institution will be reimbursed for the COBRA subsidy by claiming a credit on Line 12a of Form 941 Employer's Quarterly Federal Tax return, which has been revised to allow for this credit. The tax filer also needs to include the number of individuals provided COBRA premium assistance on Line 12b of Form 941. No extension will be provided for filing Form 941.
Expansion of Health Coverage Tax Credit (HTHC). Under ARRA, the HTHC increases from 65 percent to 80 percent from May 1, 2009, through December 31, 2010. It also expands the trade adjustment assistance (TAA) program in several ways, which in turn makes more employees eligible for the HTHC. Several changes related to the HTHC that directly affect institutions include:
- Modifying procedures for calculating creditable health coverage. For plan years effective after February 17, 2009, group health plans that impose preexisting condition limitations must modify their procedures for calculating creditable health coverage. The group health plan will have to disregard the period between when a TAA-eligible individual has a TAA-related loss of health coverage and seven days after the individual is certified by the IRS as eligible to have the HTHC sent directly to his or her group health plan in determining whether the individual has a significant break in creditable health coverage for purposes of applying any preexisting condition limitations.
- Determining when COBRA coverage will end. Some situations will require immediate changes to group health plans' procedures. For example, for an individual who loses health coverage under a group health plan because of a termination of employment or reduction in hours and was entitled to receive retirement benefits from the Pension Benefit Guaranty Corporation at that time, it extends the period during which the plan must provide COBRA coverage to the date the individual dies (or 24 months later in the case of the individual's family). For an individual who loses health coverage in the same situation and was TAA-eligible at that time, it extends the period for as long as the individual remains TAA-eligible (or 24 months later in the case of the individual's family). Both changes apply regardless of whether the individual is actually entitled to or receiving the HTHC.
The accounting office at an institution will be faced with the difficulty of managing this new benefit and may want to meet internally with human resource and payroll staff to ensure that interpretation of the legislation is managed correctly. The Government Accounting Standards Board Statement No. 24 regarding on-behalf payments provides information on fringe benefits and is where institutions would record revenue and expense for the benefit. This statement requires employer governments to recognize revenue and expenditures or expenses for these on-behalf payments. Revenue should equal the amounts that third-party recipients have received and that are receivable at year-end for the current fiscal year.
Based on the Initial Implementation Guidance for ARRA from the Office of Management and Budget, it appears that institutions would record revenue and expense for the subsidy on the Schedule of Expenditures for Federal Awards (SEFA). The guidance also indicates that there should be new CFDA (catalog for federal domestic assistance) numbers added specifically for the ARRA programs (see section 5.4).
Human Resource Preparation
Designing a termination program. Institutions should take the following two features into account when designing termination to either maximize federal COBRA assistance or determine ineligibility.
1. Simply speaking, the 35 percent and 65 percent amounts are based on the premiums that the plan would otherwise charge for COBRA coverage under the plan without the new subsidy. So, for example, if the plan charges the full 102 percent of the COBRA premium that it is allowed to charge in most cases, the individual must pay 35 percent of the 102 percent of premiums charged by the plan to qualify for the subsidy. The institution will be entitled to reimbursement for the remaining 65 percent of the 102 percent of premiums charged.
On the other hand, if the plan charges only 50 percent of that cost, the individual will be responsible to pay only 35 percent of the 50 percent charged by the plan, and the institution will be entitled to reimbursement for only 65 percent of the 50 percent charged. Similarly, if the plan charges nothing for COBRA coverage, then no subsidy or reimbursement is available. Institutions that are already subsidizing COBRA coverage for terminated employees might wish to consider whether the arrangement can be modified for the same purpose.
2. Although the ARRA does not define "involuntary termination," this is an essential requirement for the subsidy. Clarity on this definition is critical, and more language will most likely follow. For example, clarification is necessary in the case of employees who leave under institution-initiated separation window programs in downsizing situations or for good reason. Despite this uncertainty, an institution that is reimbursed for providing the subsidy must give the IRS an "attestation of involuntary termination of employment" for each employee for whom the reimbursement is claimed. Institutions should take this limitation into account as a potential benefit if employees are deemed to be involuntarily terminated.
Managing changes to your plan. Plan administrators will need to follow several key changes to effectively manage the new COBRA provisions. Changes include retroactive coverage, new language, temporary adjustments, new notices, and more.
1. Retroactive coverage. As explained above, an eligible individual who became entitled to COBRA coverage on or after September 1, 2008, and before February 17, 2009, but did not elect COBRA coverage at that time must be given a second chance to elect COBRA coverage. If the individual elects COBRA coverage, the coverage is retroactive to the first period of coverage that begins after the February 17, 2009, date.
2. Temporary adjustment. In addition, the plan must forget about the period between the original loss of coverage and the date the COBRA coverage begins in determining whether the individual has a break in creditable health coverage for purposes of applying any preexisting condition limitations. The institution may allow an eligible individual who has already elected COBRA coverage to change to a less-expensive enrollment option under the plan. These changes will require group health plans to make temporary changes to their COBRA election procedures and, if they impose preexisting condition limitations, to their procedures for calculating creditable health coverage.
3. New language. In a surprising turn of the legislation, the ARRA includes a model notice, "Request for Treatment as an Assistance Eligible Individual." The form provides a means for the institution to make a determination to approve or deny the request of eligibility. For instance, if an institution denies an individual the subsidy and it is unclear whether a former employee falls into the involuntary or voluntary termination category, the institution can either approve the subsidy and risk losing the money if the DOL decides the individual is not eligible, or deny the subsidy and let the individual appeal the decision to the DOL. The ARRA requires the DOL to make this decision within 15 days, and this form will be used as a part of the review process. More guidance is expected from the DOL with respect to this issue.
4. Notices from the IRS and DOL. It is important to note that the subsidy is not included in the individual's income. It is, in fact, similar to an institution-provided COBRA subsidy, which can often be provided on a pre-tax basis. However, unlike an institution-provided subsidy, it is eliminated via a special additional tax for individuals with modified adjusted gross income above $125,000 ($250,000 in the case of a joint return) in the year the subsidy is received. Two model notices and regulations from the IRS and the DOL will be provided to plan administrators.
5. Refunds and credits. The subsidy is available beginning with the first period of coverage under the plan that begins after February 17, 2009. It is available for up to nine months, but it ends if the individual becomes eligible for Medicare or another group health plan. Note: The plan administrator may continue charging the eligible individual the full premium amount through the end of the second period of coverage beginning after February 17, 2009, but must make arrangements to refund or credit the individual with the 65 percent that he or she should not have been required to pay.
The changes listed in the ARRA to the COBRA are the most significant changes made since the inception of COBRA. Therefore, many new considerations have yet to be examined. Expect the regulations, notices, and expanded definitions to be clarified over the course of the next year. Meanwhile, higher education employers must act immediately and begin setting the stage for some retroactive changes that may need to be made quickly.
Tadu Yimam is a policy analyst at NACUBO. E-mail: email@example.com.