COBRA help. Well-meaning, but another cost for the workplace.

               George L. Chimento
               February 19, 2009 (with post-publication updates)


The Federal "stimulus" law (enacted February 17) promises terminated
employees and their beneficiaries a tax-free 65% reimbursement if they elect
COBRA protection. There is already a lot of guidance circulating through e-mail
and newsletters. Unfortunately, none of that is from the government, and the
hastily prepared statute is very ambiguous.

We do know that the law is effective immediately without regulations or official
guidance. Within 30 days, the DOL will prepare a sample notice for you to give to
all persons you have terminated involuntarily since September 1, 2008, and to
persons whom you may terminate involuntarily in the balance of this year.
Beneficiaries with COBRA rights also must be notified, with the same procedures
you use for other COBRA notices.

There are reasons to act real quickly (read further) and it may make sense for
you to jump the gun and not wait for the government's sample notice.

Here is a brief summary of the new COBRA rules:

1. The law is supposed to help employees and beneficiaries who lost health
coverage due to involuntary employment termination during the period
September 1, 2008 through December 31, 2009.

2. The former employees and beneficiaries are eligible for an income-tax free
65% federal subsidy of COBRA premiums. The subsidy can extend for up to nine
months, starting with the first "coverage period" after February 17. That's
generally March 1 for plans which use group insurance. For self-insured plans,
that is arguably the first payroll period starting after February 17, but it may be
easier to say March 1 under the theory that their periods of COBRA coverage are

3. The right to the 65% subsidy terminates for a former employee or beneficiary
who becomes eligible for other health coverage, even if the person declines that
other coverage.  This is different from regular COBRA rules, which require COBRA
continuation unless alternate health coverage is actually obtained.

4. Your immediate task is to prepare a list of every employee you have
terminated involuntarily since September 1, 2008. This includes employees who
elected COBRA, employees who declined COBRA, and beneficiaries who had
COBRA election rights at the date of termination, whether exercised or not.

5. These people all need to get a notice about the subsidy -- either the
government specimen or a customized form -- no later than Saturday, April 18.
Use the same notice procedures as for regular COBRA notices. If you terminated
someone for "gross misconduct", and the circumstances were so bad they lost
rights to COBRA coverage, they do not get subsidy rights. Be careful if you
exclude anyone for "gross misconduct", because COBRA favors employees on
this issue.

6. The notice will advise that the former employee and beneficiaries can claim the
65% subsidy for the first COBRA coverage period starting after February 17,
2009. It will also advise that if COBRA was declined that it can be elected as of
the first coverage period starting after February 17.

7. After they get the notice, people have 60 days to ponder. This is where you
are at risk (especially with a self-insured plan) of adverse selection. It's a huge
reason to get the notices out ASAP to start the 60 day clock ticking.

8. You will also attach the Notice to future COBRA forms you distribute to
employees whom you terminate involuntarily, without serious "cause", during
this calendar year.

9. Although rules normally prohibit changes in coverage (except during open
enrollments or due to HIPAA family events), you may allow these persons to
"trade down" to a lower, more affordable coverage which you offer. However,
the "trade-down" cannot be just to a Section 125 reimbursement account, or
stand-alone dental, vision or counseling coverage that does not include major
medical. An employer does not have to permit "trade downs. There is no subsidy
for a "trade up" to more expensive coverage. If "trade down" is allowed, an
employee will have up to 90 days from the notice date to make that decision,
which is more than the 60 days allowed for the decision to elect a subsidy.

10. Employers are supposed to advance the 65% subsidy to the insurer. They
can then claim a credit against payroll taxes, but only after filling out forms (yet
to be designed by the government), which identify the people involved and
which confirm that the employer has already covered the 65% government share.

11. For those employees and beneficiaries who are already getting COBRA, it's
likely that your COBRA bills to them for March (and even April) may not show that
they only owe 35% and that you will cover 65%. If an employee overpays, there
is a procedure where you can credit the overpayment against future invoices or
refund it. My recommendation: for anyone on COBRA who is getting billed, get
the invoices right ASAP. It's easier than refunds.

12. "High income" people don't get the benefit of the subsidy. There will be a
procedure where they can waive the subsidy up-front by notifying you and IRS.
Alternatively, they will get an increase in their taxable income for 2009. The "high
income" test is whether the person's MAGI (modified adjusted gross income)
exceeds certain limits. MAGI is adjusted gross income on line 37 of the 2009
Form 1040, not just wages, and it is increased by exclusions for foreign income.
For single filers, the amount phases out ratable for MAGI between $125,000 and
145,000. For joint filers, the amount phases out ratable for MAGI between
$250,000 and $290,000.

Special issues

Even carefully drawn legislation leaves room for technical corrections. For this
statute, we will be especially alert for new interpretations. Five issues jump to

Mini-COBRA.  The new law is not limited to COBRA, and provides the subsidy
for "state programs that provide comparable continuation coverage." This is
hugely important for small employers who had less than 20 employees in the
previous year, and are not covered under federal COBRA. Massachusetts and
New Hampshire, for example, have "mini-COBRA" statutes which require
COBRA-like continuation when employers are too small to be under federal
COBRA. Small employers in mini-COBRA states are subject to this new law.
However, how will they recapture the amounts they advance on the 65% share?
The law says that reimbursement goes to the carrier in non-federal COBRA
situations. In other words, it is not recouped through payroll tax credits, as is
the case with COBRA employers.  Perhaps that means the insurers advance the
premiums in mini-COBRA states? Or was it just bad drafting? We need
clarification on this.

Paid severance. The law specifically requires that the individual (or a person
other than the employer of the severed employee) pay 35% to get the 65%
credit. What if a severance arrangement includes an employer subsidy for
COBRA? It would be pretty stupid for an employer to pay money that could have
been paid by the government. Renegotiation of subsidized severance
arrangements, possibly with a taxable cash-out or a deferral of the subsidy to
2010, may make sense for arrangements in effect now.  (Be careful about 409A if
you lump sum or postpone.) For future terminations in 2009, severance
arrangements should take the subsidy into account. For "high income"
individuals, this is less important due to the recapture rules in Paragraph 12.,

No flexible account coverage. Although flexible 125 plan accounts are
subject to COBRA, the new law does not extend this special subsidy to flexible
accounts. That makes sense. Frankly, we really wonder if the subsidy was
intended to apply to stand-alone vision and dental plans, but the law seems to
read that it does and we are interpreting it that way at present.

Non-federal dependents.  The statute provides a 65% subsidy for COBRA
coverage related to "assistance eligible individuals." Using the COBRA terms
required by this statute, that includes a heterosexual spouse and a "dependent"
(undefined in COBRA) child.
Is the full 65% subsidy available to continue
coverage for a family unit that includes same-sex spouses, civil union partners,
and non-dependent children who are on extended coverage protection due to
state law?
For simplicity, I would expect that to be the answer, but a case could
be made that the subsidy applies only to the cost of individual coverage in a
situation where other beneficiaries are not explicitly COBRA beneficiaries. If the
government takes that tack -- called for by the terms of this statute -- employers
run the risk of overpaying if they reimburse 65% of the family COBRA cost.

Medicare "eligibility" or "entitlement?" Rights to the subsidy seem to end
when a person is "eligible" for Medicare, regardless of "entitlement"
(enrollment). The Medicare eligibility date is the 1st day of the month of the 65th
birthday. It makes sense that persons eligible for Medicare should not get a
subsidy. However, this is a departure from normal COBRA, which does not cut
COBRA coverage off for Medicare unless there is "entitlement," i.e. SS retirement
payments have started, or the person has applied for Medicare to start.  Also,
although Medicare
prior to a termination does not disqualify a person from
electing COBRA, that presumably won't matter for the subsidy.  So, unless the
Department advises otherwise, there is no subsidy for months of the 65th
birthday and beyond.

More costs for the workplace

The statute shifts significant health care liabilities to the workplace. Those who
have been without insurance will have 60 days from the date they get the new
notice to decide if they want to sign up, retroactive to March 1, 2009, for a
modest 35% of total cost. It's a recipe for adverse selection. More COBRA claims
means a future increase in group premiums, more administration, and more
exposure to fines and civil liability. The employer also is the one which advances
the 65%, without interest. Hopefully, the government will not linger too long in
developing the necessary forms for employers to claim the credit against payroll

More to come

I would have preferred a few weeks to get more feedback from government
before issuing this guidance. However, there is little choice with a statute that is
effective immediately. Stay tuned.

This article is provided as a courtesy and may not be relied upon as legal advice, or to avoid
taxes and penalties. Distribution to promote, market, or recommend any arrangement or
investment to avoid or evade taxes, including penalties, is expressly forbidden.
Any communication with the author as to its contents, does not, of itself, create a
lawyer-client relationship. Under the ethical rules applicable to lawyers in some
jurisdictions, this may be considered advertising.

return to]
Note: After the date of this article, IRS revised the Form 941 and issued
instructions in the form of Q&As. Read carefully.
IRS didn't linger. See the Note after Par. 10, above.
Based on some sloppy drafting, it's possible that all COBRA eligibles since
Sept. 1, 2008 will have to be notified, even if termination was not involuntary.
Hopefully, DOL will issue better guidance than presently on its web page.
Note: To keep up with the Agencies I have prepared a revised
article. Check the main page of