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Introduction to COBRA and CAL-COBRA.
Currently, all employers who provide their employees with health care coverage are required to send all terminated employees a COBRA notice explaining to the former employee that they have a right to extend their health care coverage under COBRA or Cal-COBRA. In the past, relatively few employees were able to maintain their health care coverage under COBRA because the premiums were often prohibitively expensive. To help people maintain their health coverage, the 1500+ page American Recovery and Reinvestment Act of 2009 (the "Act") contains a provision that require all employers to provide "eligible" employees a continuation of heath care benefits under a 65% premium reduction for the first 9 months (15 months as of 12-2009) of coverage.
To be "eligible," the employee, or a member of his or her family must: (1) become eligible for COBRA health benefits via an involuntary termination between September 1, 2008 and December 31, 2009 (now May 31, 2010); (2) elect COBRA coverage within 60 days of termination (when COBRA starts); and (3) the individuals must have a modified adjusted gross income under $145,000 (or 290,000 if married filing joint).
It is important to note that a plan may not refuse to provide the premium reduction (subsidy) to an assistance eligible individual because of the former employee's income. If the former employee's adjusted gross income in the year in which the premium assistance is received exceeds the income threshold, then the individual will be required to repay the premium assistance. For more information, contact the IRS at www.irs.gov or at IRS Facts On COBRA Health Insurance Continuation Premium Subsidy.
It is also important to review the clauses in any severance pay package to ensure the employee does not involuntarily waive his or her right to the subsidy. The Notice required to be provided to an employee does permit an assistance eligible individual to permanently waive the premium reduction (subsidy) by providing a signed and dated notification that includes a reference to "permanent waiver" to the employer. Once the waiver is made, it cannot be reversed.
The Act provides that the COBRA premium subsidy will end on the earlier of: (a) 9 months after first day of first month of applicability; (b) the end of the maximum COBRA period under federal or state law; and (c) the date the former employee becomes eligible for Medicare, or other group health coverage.
Involuntary or Voluntary Termination.
Involuntary termination is not limited to being "fired." For the purpose of the COBRA premium reduction, an involuntary termination may occur if: (1) voluntary resignation or retirement if failure to resign or retire would have resulted in termination; (2) layoff or other suspension of employment; (3) employee quits because the employer significantly changed the terms of the employment (e.g., reduction in pay, demotion, relocation, etc.); or (4) employee's voluntary acceptance of a severance pay package (buy-out) where the employer has indicated that additional terminations are likely.
An employee will not be deemed involuntarily terminated if the employee was terminated for gross misconduct, is subject to a reduction in hours, voluntarily retires, or is subject to a work stoppage due to a strike.
When Cal-COBRA Must Be Elected.
To be eligible for the COBRA premium reduction, both the involuntary termination and the loss of health coverage must occur between September 1, 2008 and May 31, 2010. If a terminated employee accepts a severance pay package under which the employer agrees to pay for the employee's continuing health coverage for a period of months, the right to elect health coverage may not begin until that period ends. For example, assume an employee is terminated on April 1, 2009 and that the terminated employee accepts a severance pay package that provides that the employer will continue to provide health coverage to the former employee for 3 months. Eligibility for COBRA would not begin until July 1, 2009, and eligibility for the subsidized premium would extend for 9 months from July 1, 2009 through March 2010. If, on the other hand, the severance pay package provides that the employer will reimburse or pay the employee for 3 months of health coverage, then eligibility for COBRA begins on the date of termination and must be elected within 60 days.
Under the Act, the eligible employee must only pay 35% of their COBRA premium, and the employer (with reimbursement from the government) is responsible for remitting payment of the remaining 65% for the first 9 months (now 15 months) of COBRA coverage.
Notice To the Employee.
The Act requires all employers who provide health care insurance benefits to their employees to notify all affected former employees who are eligible for the COBRA premium reduction within 60-days (the Department of Labor has a model notice which may be used).
The Act provides that any employer who fails to comply with the notice requirements without reasonable cause shall be subject to a penalty of 110% of the premium reduction the terminated employee would have been entitled to.
UPDATE: January 1, 2010…COBRA Subsidy Eligibility Extended
In Mid December of 2009, President Obama signed the 2010 Defense Appropriations Bill, which included an extension of the 65% COBRA Subsidy provision originally enacted last February in the American Recovery and Reinvestment Act of 2009 ("Stimulus Bill"). The new law affects the COBRA subsidy as follows:
1. Extends the COBRA subsidy to individuals who were involuntarily terminated and who lost group health insurance coverage before December 31, 2009 to February 28, 2010. So long as the employee is terminated before 2-28-2010, the employee will be entitled to the 65% COBRA subsidy effectively reducing their COBRA health insurance premium to 35% of the cost of coverage. Employees who receive a notice of termination before February 28, 2010, need not actually be COBRA-eligible to receive the 15 month subsidy, they just have to have been involuntarily terminated by that date.
2. Extends the maximum subsidy period for an additional 6 months, from 9 months to a total of 15 months.
3. Gives individuals whose subsidized COBRA coverage expired, 60 days from the date of enactment (or 30 days after the employer provides written notice of the employee’s eligibility for the extended COBRA subsidy, whichever is later) to retroactively get back their subsidized COBRA coverage. To do so, the former employer who opted to cancel coverage must pay the 35% subsidized premium amount to reinstate the coverage. If the former employer paid the full premium for any period after October 31, 2009, the "overpayment" must be refunded or credited towards future coverage.
4. Requires administrators of group health plans to provide current and former employees entitled to COBRA benefits written notice of the new 15-month COBRA premium subsidy and the foregoing amendments.
The new legislation also permits employers to either issue refund checks for beneficiaries who "overpaid" their COBRA premiums by paying unsubsidized premiums but who are now eligible for retroactive subsidized coverage, or to offset future COBRA premiums by paying those premiums on behalf of the affected former employees.
UPDATE: April 20, 2010…COBRA Subsidy Extended Again
This new COBRA extension enacted on April 15, 2010, provides a COBRA premium subsidy up to 15 months for eligible individuals who are involuntarily terminated from employment through May 31, 2010.
It should also be noted that eligibility for COBRA need not occur on or before May 31, 2010, in order for an individual to be eligible for the COBRA subsidy; only the qualifying event that makes the individual eligible for the COBRA subsidy must occur on or before May 31, 2010. For example, an individual who is involuntarily terminated on May 31, 2010, and becomes eligible for COBRA on June 1, 2010, would be eligible for the COBRA subsidy so long as the individual meets the other eligibility requirements.
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