Updates Make COBRA Even More Challenging

 (Originally published in The Business Journal)

Historically, the Consolidated Omnibus Budget Reconciliation Act, widely known as COBRA, has been one of the most visible and challenging federal laws affecting businesses that are downsizing.

Now, with some recent revisions, COBRA poses even greater challenges – namely, higher costs and greater administrative requirements.

A clear understanding of COBRA’s new features will help assure compliance for business owners and managers who are reducing staff.

Background

COBRA is the federal law that requires U.S. employers to continue health insurance coverage for employees who are being terminated.

Employees generally can keep their coverage for up to 18 months after their termination by paying the employer the full cost of the insurance premium, plus an administrative charge.

In February, COBRA was modified as part of the legislation that delivered the economic stimulus package. As of now, the modifications are scheduled to expire at the end of 2009.

Employee Premium Discounts

The new COBRA mandates a 65 percent discount to the premiums employees must pay to keep their health insurance coverage in place after termination.

Employers can be reimbursed by the Internal Revenue Service for the cost of that discount. But to secure that reimbursement they must file for a credit on their payroll taxes.

So the new legislation not only temporarily raises the payroll expense of employers reducing staff, but also introduces some administrative requirements related to employee communication and record-keeping.

Who is Eligible?

The insurance premium discount must be made available to any employee who is or will be eligible for COBRA due to involuntary termination between September 1, 2008 and December 31, 2009.  

That includes individuals who were terminated after September 1 and declined COBRA coverage. Employers are required to notify them of their eligibility for the 65 percent premium discount introduced with the new law, effectively giving them a second chance to elect COBRA.

It also includes individuals who were terminated after September 1, signed up for COBRA coverage but are no longer covered. They also must be notified of the opportunity for discounted insurance coverage.

Not eligible for the discount are employees terminated for gross misconduct or employees who are eligible for Medicare or other group health coverage (like a spouse’s plan).

Also, the discount is reduced for individuals with federal modified adjusted gross incomes exceeding $125,000.

Employer Requirements

The new law ushers in several new administrative activities for businesses with eligible employees.

For one, employers are required to give official notice to individuals who are eligible for the discounted insurance premiums. Model notices are available on the IRS Web site, at www.irs.gov, to help employers with this communication.

Practically speaking, employers need a system for billing eligible employees the 35 percent of their insurance premium, instead of the full cost. They also need a system for recovering the 65 percent discount through the new payroll tax credit.

Specifically, employers seeking reimbursement must file the updated Form 941, which is also available on the IRS Web site.

 Also, businesses should review any severance agreements or other contracts that call for them to subsidize COBRA payments.  With these agreements, coupled with the new law, they now may need to pay more than the 65 percent discount for some employees.

Jess T. Enyeart can be reached at jenyeart@hhmlaw.com or at (330) 392-1541.