The ARRA's COBRA Health Insurance Subsidy

The American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law by President Barack Obama, provides the opportunity for eligible individuals to pay reduced premiums and gives additional election opportunities for health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The essence of what is being referred to as the COBRA subsidy is that eligible individuals will pay only 35 percent of the COBRA premium, and the remaining 65 percent is reimbursed to the health insurance coverage provider (typically the employer or the health insurance plan) through a tax credit. The reduction in health insurance premiums applies to periods of health insurance coverage beginning on or after February 17, 2009 and lasts for up to nine months. The provisions of ARRA relating to COBRA are somewhat confusing; and both the Internal Revenue Service and the United States Department of Labor are scurrying to provide the necessary health insurance coverage guidance for employers and plans. In the mean time, this basic overview of the health insurance plan revisions should be enough to shed a little light on a complex subject.

What Is COBRA and How Does It Relate to Health Insurance Coverage?

COBRA is a federal law that generally provides that workers whose employment loss would result in a loss of group health insurance benefits have the right to continue their health insurance coverage under the group health insurance plan for up to 18 months. Generally, the terminated employee pays the employer or the plan 102 percent of the actual premium. Since the cost of COBRA continuation coverage is typically much more than the amount the employee pays, many view the cost of COBRA as cost prohibitive. The result is that very few terminating employees have the financial wherewithal to elect COBRA and continue their health insurance coverage.

While COBRA applies to employers with 20 or more employees, many states have what is often called Mini-COBRA laws, which mirror the federal law in some way. The new subsidy under ARRA applies to both plans covered under COBRA and also those covered by state Mini-COBRA.

What Is the COBRA Health Insurance Subsidy Provided by ARRA?

"Assistance eligible individuals" are eligible for the premium reduction described above. An "assistance eligible individual" is the employee or a member of his family who: 1) is eligible for COBRA continuation health coverage at any time between September 1, 2008 and December 31, 2009; 2) elects COBRA coverage; and 3) is eligible for COBRA as a result of the employee's involuntary termination between September 1, 2008 and December 31, 2009.

Individuals who are eligible for other group health insurance coverage (such as a spouse's health insurance plan) or Medicare are not eligible for the premium reduction. The COBRA health subsidy is only available for health insurance premiums paid for periods of coverage after February 17, 2009.

An eligible individual who pays the 35 percent COBRA health insurance premium is deemed to have paid the full COBRA premium. The remaining insurance premium is taken as a credit by the employer or health insurance plan against employment taxes. Credits that exceed the employment taxes owed will be reimbursed to the employer or health insurance plan.

High wage earners with an adjusted gross income of over $145,000 (and joint filers with an adjusted gross income of over $290,000) for 2009 are not eligible for the COBRA health subsidy. Those earning between $125,000 and $145,000 individually (and between $250,000 and $290,000 for joint filers) are subject to a "phase out" of the COBRA health subsidy.

COBRA Health Subsidy Special Election

Individuals involuntarily terminated from employment between September 1, 2008 through February 16, 2009 who did not elect COBRA when initially offered or who did elect COBRA but are no longer enrolled (i.e. because they were unable to continue paying the health insurance premium) are eligible to participate in a special COBRA election. This special election period began on February 17, 2009 and ends 60 days after the plan provides the required notice. This new election period, however, does not extend the COBRA continuation health coverage period beyond the 18 months from the date of the individual’s original qualifying event. In other words, the individual’s 18 month COBRA health insurance coverage starts counting retroactively back to the day he or she would have otherwise originally been eligible. And, this special election period does not apply to state Mini-COBRA laws.

Employers/Plan administrators are required to provide notice to those individuals who had a COBRA qualifying event during the period September 1, 2008 through December 31, 2009. The employer must provide the notice of whether the individual elected COBRA or not retroactively back to September, 1, 2008. The United States Department of Labor is supposed to issue a new notice to comply with this requirement shortly. Although it has not yet done so, the requirement on the employer or health insurance plan is to provide the notice within 60 days of February 17, 2009.

The Health Insurance Coverage Transition Rule

ARRA permits the employer or health insurance plan to charge eligible employees the full COBRA health insurance premium for up to two billing cycles following February 17, 2009. This transition rule is intended to allow employers to put into place the necessary processes to comply with the new law. The employer or health insurance plan is required, however, to either reimburse or credit the individual with the overpayment in later billing periods. Although this could become logistically unwieldy, it allows the employer or health insurance plan to develop its internal systems and decide how it will comply with the new law, including adopting new notices soon to be issued by the Department of Labor.

When Does The COBRA Health Insurance Subsidy End?

The premium reduction in health insurance coverage applies to periods of coverage beginning on or after February 17, 2009. The premium reduction starts on March 1, 2009 for plans that charge for COBRA coverage on a calendar month basis. The premium reduction in health insurance coverage for an individual will stop on the earlier end of when he or she becomes eligible for other group coverage or Medicare or nine months. This is regardless of whether the individual actually enrolls in that health insurance plan. Under the new law individuals paying reduced COBRA premiums are obligated to advise their plans if they become eligible for coverage under another group health insurance coverage or Medicare and there are consequences for failing to do so.

There are many more details and nuances of the new law that are still being sorted out by the federal agencies. In the mean time, employers should start developing internal systems around the new law, identifying those individuals affected and modifying recordkeeping systems accordingly.