If your business has laid off or terminated employees since September 1st of last year, there are some important changes to COBRA you must know. As part of the economic stimulus legislation signed into law February 17th, eligible employees who were—or who will be—involuntarily terminated between September 1, 2008 and the end of this year (December 31, 2009) can reduce their COBRA payments to just 35% of actual cost. The federal government eventually pays the remaining 65% of the premiums by reimbursing businesses through payroll tax (wage withholding and FICA) credits. Naturally, rules and restrictions apply, but there are several things you need to do now.
Determine Eligibility. First, you should go through your records and determine which employees were involuntarily terminated, regardless of whether they were laid off, fired or simply let go. It is not necessary that the employees lost their jobs for purely economic reasons. Note though that these new benefits do not apply to employees who were not subject to involuntary termination. If any of your employees left under circumstances in which it is not completely clear whether the termination was voluntary or involuntary, you should consult counsel because many other areas of the law can be affected by that determination. Though the act is retroactive in determining which employees can reap its benefits, it is not retroactive with regard to COBRA payments already made by those employees. So employees will not get money back for COBRA premiums they have already paid prior to the enactment date of February 17th.
Second Chance to Elect. In addition, employees let go since September 1st of last year who did not elect COBRA coverage have a new chance under this law to make that election. The administrator of the plan has a duty to notify these former employees of their rights to do so by April 18, 2009. The former employees have sixty days from the date on which notice is provided to decide to take COBRA coverage at the new lower 35% cost. If coverage is chosen, the insurance plans are not retroactive and they will not last longer than they would have had the employees elected coverage within the timelines in which they were originally required to do so.
Duration. The reduced 35% COBRA payments continue for the shorter of either nine months or upon expiration of the maximum period of COBRA coverage. Those eligible lose their rights to the 35% COBRA payments if they become eligible under another group health plan or become eligible for Medicare. Former employees have an obligation to notify the group health plan of this change and failure to do so can lead to penalties.
Employer Choice—Allowing Plan Change.
The Act also gives employers a choice to make. At the employer’s election, it can allow the former employees to switch from the healthcare plans they were on at the time of termination to a less expensive plan currently being offered. For example, the employee might have been on a PPO plan prior to termination, but could (with the employer’s permission) move to a less expensive catastrophic care plan. The less expensive plan must have a medical care component (i.e. cannot be only for dental, vision, counseling or referral services) and cannot be simply a flexible spending account or treatments provided in an on-site medical facility for first aid and wellness care. Allowing former employees to make this election would have the benefit of further reducing their out-of-pocket expenses, but might also reduce employer health care costs if the less expensive plan covers fewer claims or requires higher co-pays. If your business chooses to allow this change in coverage, it must notify former employees of the right.
Notice Requirements. Your notice requirements can either be met by amending your current forms to include these new rights or by adding a separate document with these details. Note that Notices must be sent to all employees terminated on or after September 1, 2008 regardless of whether the termination was voluntary or involuntary. The Act requires the DOL, with Treasury and DHHS assistance, to prepare model notices by March 19th in order to assist employers in complying with notice requirements. Notice must include:
- The forms necessary to establish eligibility for premium reduction
- The name, address and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the premium reduction
- A description of the extended election period granted to employees let go on or after September 1st who had not elected COBRA coverage
- A description of the former employee’s obligation to notify the plan if they become eligible for Medicare or for coverage under another group health plan as well as the penalty for failing to do so
- A prominently displayed description of the right to a reduced premium
- A description of the option to enroll in a less expensive plan than the one in which the employee had been enrolled in prior to termination—if the employer chooses to allow former employees to do so
Reporting Requirements. To claim reimbursement via the payroll tax structure, employers must file detailed reports with the U.S. Treasury. The notice requirements include an attestation regarding involuntary termination for each employee to whom the reimbursement applies, the amount of payroll taxes offset for the reporting period, taxpayer identification numbers, type of coverage for which reimbursement is sought, and an estimate of offsets for the next reporting period. Overstatements of the amounts due for reimbursement will result in an underpayment of payroll taxes, with resultant penalties.
Lewis and Roca’s attorneys are well versed about these changes and remain ready to assist you with this and all of your other employment law needs.
This Client Alert has been prepared by Lewis and Roca LLP for informational purposes only and is not legal advice. Readers should seek professional legal advice on matters involving these issues.
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