March 2009

March 2009

NEW COBRA RULES FOR MEDICAL INSURANCE PLANS UNDER AARA

Littler Mendelson, P.C., is a national law firm specializing in employment and labor law from offices throughout the country. Our firm relies on Littler Mendelson in connection with a number of employment law matters. Recently, it provided a short "plain-English" summary of the new COBRA provisions in the American Recovery and Reinvestment Act of 2009 (ARRA) which we have obtained permission to share with our clients and friends. The summary cannot contain all the details of the new COBRA provisions. In fact Littler Mendelson has provided its clients with a more detailed explanation of these provisions demonstrating the complexity and uncertainty that exists about them, but the summary does make it possible to see the basic themes of this subject under ARRA. The following is the brief Littler Mendelson summary which is copyrighted by Littler Mendelson and is presented to you with the permission of that firm:

Generally, the new COBRA laws take effect for employees who are involuntarily terminated on or after September 1, 2008, but on or before December 31, 2009, except for those employees terminated for gross misconduct. These new provisions are scheduled to end December 31, 2009, but Congress may extend this new law.

Employees and/or their qualified dependents who pay 35% of the applicable "COBRA Premium", which includes the health care coverage and administrative fees, are treated as having paid the entire COBRA Premium. Consequently, employers are obligated to do the following:

Cover at least 65% of the COBRA costs (the "Subsidy") for employees who (i) are involuntarily terminated, (ii) elect COBRA in a timely manner and (iii) pay for 35% of the COBRA Coverage; and

Provide the Subsidy from the first day of the first month that the employee and/or their qualified dependents are eligible for the Subsidy until the earlier of (i) nine months from the time the Subsidy is provided, (ii) the date the employee becomes eligible for coverage under another employer's plan (whether or not the employee enrolls in such plan) or (iii) the date COBRA would otherwise expire (for example, if the employee stops paying for their portion of the COBRA Premium).

The Federal government will cover the employer's cost of the Subsidy in the form of a tax credit, which will be provided through quarterly payroll reporting beginning with the first quarterly return due on April 30, 2009. Note that if the Employer chooses to subsidize more than 65% of the COBRA Premium, then the Employer is likely ineligible for the tax credit for the amount that the Employer covers. For example, if the Employer covers 85% of the COBRA Premium, it appears that the Employer will not receive a tax credit for the portion of that subsidy that represents the required 65% Subsidy.

1. Employers should review plans, policies and other arrangements that mention COBRA, and amend the related documents for the applicable period of time or send out communications regarding the Subsidy. Plan, policies and other arrangements that may be affected include:

Severance plans,
Health plans,
Communications for terminated employees and qualified dependents, e.g., a "leaving kit", or
Individual employment agreements.

2. Employers should also compile a list of employees who have been involuntarily terminated, other than for gross misconduct, between September 1, 2008 and February 17, 2009 (the date that the Stimulus Package became legislation) as the Subsidy will also apply to these former employees and qualified dependents. For former employees who timely elected COBRA coverage: these employees will be entitled to the Subsidy for the nine-month period following February 17, 2009 until that employee's COBRA eligibility expires.

For former employees who did not timely elect COBRA coverage: the employer must provide to these employees a second chance to elect COBRA. If such an employee timely elects COBRA during this period, he or she will be entitled to the Subsidy in the same manner as an employee who first becomes eligible for COBRA coverage and eligible for the Subsidy. These notices must go to the most recently-reported address for the former employee.

For these former employees, if they elect COBRA, the coverage can relate back to the effective date of the law (March 1, 2009 for monthly-coverage plans), but the maximum COBRA coverage period starts with their actual qualifying event.

Littler Mendelson, P.C. can provide form notices in either of the instances above. We can put you in touch with that firm.

3. Employers that already subsidize COBRA for their employees should calculate and determine whether it is covering at least 65% of the COBRA Premium, in order to be in compliance. If an Employer covers more than 65% of the COBRA Premium, the Employer may want to reduce the amount it covers to exactly 65%, in order to take advantage of the tax credit, as the legislation is unclear whether the tax credit is available if an Employer covers more than 65% of the COBRA Premium. For former employees already receiving larger subsidies from the employer, the employer may need to renegotiate the severance package to take advantage of the tax credit.

[Currently some of the provisions of the new COBRA rules seem to be unclear and even contradictory. Dean, Dunn & Phillips LLC will continue to monitor the development of the regulations related to the new rules. You may wish to discuss these rules with your accountants and watch information provided by various trade associations as more clarity is developed regarding the new COBRA rules.]

This Newsletter is provided for information purposes only. Accordingly, the information is general in nature and is not intended to address a specific issue or problem. The reader should seek legal counsel of his or her choice for specific problems. The receipt of this Newsletter does not create an attorney-client relationship with the author or the law firm of Dean, Dunn & Phillips LLC.