Hawaii Employment Law Alert: Employers Required to Comply with American Recovery and Reinvestment Act’s Continuation of Health Care Benefits Provisions
On February 19, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (“ARRA”) into law. ARRA is intended to stimulate an overall economic recovery and is now in effect.
Among other provisions ARRA amended the continuation of health care provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). When enacted COBRA amended the Employee Retirement Income Security Act (“ERISA”), the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage for qualified beneficiaries.
Under ARRA a majority of eligible employees, and other qualified beneficiaries such as spouses and dependent children, who were/are involuntarily terminated between September 1, 2008 and December 31, 2009, are eligible for a 65 percent subsidy for the cost of health care continuation coverage under COBRA for up to 9 months following termination. For example, if the required COBRA premium for continuation of benefits is $1,000 per month, an eligible individual would only need to pay $350 per month to receive COBRA coverage.
Individuals who became eligible for COBRA continuation coverage due to an employee’s involuntary termination of employment on or after September 1, 2008, but who did not elect COBRA continuation coverage or are no longer enrolled in COBRA for reasons such as a failure to pay the required premiums, must be offered a second chance to elect COBRA continuation coverage and receive the 65% COBRA premium subsidy. Those individuals must be provided the additional notification within 60 days after the date of ARRA’s enactment.
Such individuals will have a second chance to elect COBRA continuation coverage for 60 days after they are provided the notice described above (and the applicable election forms). If such an individual elects COBRA continuation coverage, the coverage would begin effective March 1, 2009 (assuming that such individuals pay for COBRA continuation coverage under the group health plan on a calendar month basis). However, the Act does not extend the maximum COBRA continuation coverage period otherwise available to an individual.
Under ARRA eligible individuals are required to notify the employer of eligibility for other health care coverage, e.g., coverage under a spouse’s plan, or Medicare, and will be subject to a penalty of 110% of the subsidy amount for failing to do so. Otherwise, employers must pay for the subsidy, but will be reimbursed through a payroll tax credit.
As long as an individual is eligible for the premium subsidy, it will not be considered additional taxable income. In addition, the premium subsidy cannot be considered as additional income or resources in determining eligibility for any federal or state public benefit program.
ARRA gives employers the option to permit the employees to switch from a more expensive group health plan program to a less expensive alternative. Employers must notify in specified terms all employees who have a “qualifying event,” e.g., termination, of their eligibility for the subsidy, including those who previously declined COBRA coverage.
Covered employers should take ARRA’s provisions seriously and consider the following:
o ARRA does not amend the rule that COBRA applies to only employers that have 20 or more employees. Nor does it alter the rule that an employee is disqualified from receiving COBRA benefits for “gross misconduct.”
o Under COBRA, qualified beneficiaries must be provided notice of COBRA rights by the plan administrator. Further, ARRA requires the plan administrator to modify COBRA election notices or provide separate, supplemental notices to all individuals who become entitled to elect COBRA continuation coverage during the period beginning on September 1, 2008 and ending on December 31, 2009. It is critical that employers understand who the plan documents designate as “plan administrator.”
o While DOL will be publishing a recommended form notice, employers should have already revised COBRA notices to comply with ARRA’s requirement that eligible employees after September 1, 2008, who did not elect COBRA continuation coverage or are no longer enrolled in COBRA, be given additional notice.
o The failure to send a timely and incorrect COBRA election notice subjects a plan to a statutory penalty of up to $110 per day under ERISA § 502(c)(1). In addition, failure to comply with the new election notice requirements could also result in adverse tax consequences under the Internal Revenue Code.
o In addition to statutory penalties, a qualified beneficiary could argue in a lawsuit that an employer/administrator is liable for actual medical expenses to the extent that s/he would have elected to continue coverage under the employer’s health plan had s/he been given proper and timely notice. In some cases, such as a serious or fatal illness or disease, the amount of damages to which a plaintiff is entitled could be astronomical.