Government to Subsidize 65% of Medical Continuation Coverage for Involuntarily Terminated Employees

The recently enacted American Recovery and Reinvestment Act of 2009 (the “Act”) contains a provision where the federal government will partially subsidize the continuation of medical insurance coverage for involuntarily terminated employees for up to nine months if they are eligible for continued medical coverage under COBRA or similar state law. (Ohio has a mini-COBRA statute that applies to employers which are not otherwise covered by COBRA at Ohio Revised Code 3923.38). The continued medical coverage is available to any employee who participates in an employer-sponsored health plan and who is involuntarily terminated after September 1, 2008 but before December 31, 2009 – even if the employee did not initially elect to continue medical coverage after his or her termination.

The government is partially subsidizing the insurance coverage by requiring employers to pay for 65% of the monthly premium and then recoup that amount from the quarterly payroll and FICA taxes the employer would otherwise be required to pay. Of course, the employee has to elect to continue medical coverage under the new Act and pay his or her 35% share of the monthly premium before the employer can reimburse itself through payroll tax withholdings. If the employee already paid the 102% share of the premium (for months after February 17, 2009), the employer can either reimburse the employee for the 65% or credit the overpayment towards premium payments for the next two months. (The subsidy cannot be used for months prior to February 17, 2009). Employers will also need to file a report with the IRS concerning the involuntary termination of an employee covered by the new Act, the amount of the payroll taxes used to reimburse the employer for the 65% of medical insurance continuation and the Tax Identification Numbers of all covered employees. The IRS will issue regulations and other guidance concerning the form and content of such reports.

The employee may elect to continue the same insurance coverage which the employee utilized during active employment, or if the employer permits it, the employee may elect a less expensive medical plan if such plan is also offered to the employer’s active employees and such plan offers more than merely dental, vision, flexible spending or an on-site clinic at the employer’s facility.

The subsidy will not constitute taxable income to the employee, unless the employee’s adjusted gross income exceeds $125,000 (for single filers) or $250,000 (for joint filers). These high income employees may elect to waive the subsidy in order to avoid having the amount of their taxes increased by the full amount of the subsidized premium (or a significant fraction of that amount).

As mentioned, the government subsidy is available for up to nine months, but may terminate earlier when the employee becomes eligible (i) for COBRA coverage eighteen months earlier (i.e., the nine month subsidy does not extend COBRA’s regular 18-month eligibility period); (ii) under another employer’s medical plan, social security income or Medicare; (iii) for coverage under a flexible spending arrangement or (iv) for coverage for treatment that is furnished in an on-site medical facility maintained by an employer which consists primarily of first-aid services, prevention and wellness or similar care. Employees are required to notify employers if they obtain other medical coverage or risk a 110% penalty.

Employees who did not earlier elect continued medical coverage have 60 days to elect subsidized coverage once they receive the employer’s revised notice of eligibility. The revised notice of eligibility must be sent to any employees terminated between September 1, 2008 and December 31, 2009 and must notify recipients of:
• The availability of subsidized premiums for continued coverage;
• The option to enroll in different coverage (if the employer permits this option);
• The forms necessary for establishing eligibility for subsidized premiums;
• The name, address and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the subsidized premiums;
• The extended election period (for employees who failed to timely elect COBRA coverage prior to February 17, 2009); and
• The employee’s obligation to notify the plan if the employee becomes eligible for other medical coverage or social security income and the penalty for failing to comply with this obligation;

The Department of Labor is required to publicize acceptable model notices by mid-March 2009 and employers are required to send by mid-April 2009 the revised notice to all employees involuntarily terminated since September 1, 2008.

Insomniacs can read these provisions of the Act in full at http://www.dol.gov/ebsa/pdf/COBRAPremiumReductionProvision.pdf. The Department of Labor expects to publish the new model COBRA notice on its website at http://www.dol.gov/ebsa/cobra.html.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.