COBRA and Its Provision for Post-Job Health Insurance

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1986, is much in the news lately because of the millions thrust into unemployment in the past year who now face not only loss of income but also loss of health insurance. Title X of COBRA provides that individuals laid off from their jobs can extend their health coverage for 18 months provided they pay the full health care premium plus a two-percent administrative fee. Even in the best of economic times, however, only 10 percent of those eligible ever opted for COBRA coverage, and in today’s dire economic situation, paying the COBRA tariff has become ever more challenging. In response, Congress and Barack Obama have stepped in to offer a 65-percent federal subsidy of COBRA payments. Under the program, those terminated on or after Sept. 1, 2008, now qualify for the federal subsidy, but the subsidy runs for just nine months, not 18. The subsidy also applies to all who face layoff through the end of 2009.

COBRA has become synonymous in everyday life with post-employment health insurance, but the original bill was truly a hodge-podge of spending initiatives and legislative patches. COBRA aimed to fix Medicare, Amtrak, Social Security, pensions, disability insurance, unemployment insurance, trade and customs, the postal service, the civil service, oil drilling, maritime trade, the nation’s highways, the armed forces, the Coast Guard, tobacco price supports, agriculture price supports, public broadcasting, and of course, health insurance. The list is actually much longer than the one supplied here, definitely earning COBRA its sobriquets of “omnibus” and “reconciliation,” though it’s not clear how much was truly reconciled through this legislative act.

Leaving aside the other measures covered by COBRA, what exactly does Title X do?

Employers with 20 or more employees are subject to the health care continuation provisions of Title X of the Consolidated Omnibus Budget Reconciliation Act. Using a system of fines and a potential excise tax, COBRA mandates that affected employers make their health plans available to employees, their spouses and dependents when the latter encounter certain “qualifying events” that otherwise would terminate their insurance coverage.

For employees, a qualifying event can be either voluntary and involuntary termination for reasons other than gross misconduct or a reduction in hours. For spouses, the same qualifying events make them eligible for continued coverage, but in addition, the covered spouse’s death or eligibility for Medicare becomes a qualifying event, as does divorce or legal separation. For dependents, all of the above apply, as does their loss of status as dependent children. In certain cases, different qualifying events can occur over time, affecting the length of coverage that can be offered, as explained next.

Once eligible for COBRA, an individual (called an AEI, or assistance eligible individual, in COBRAese) has 60 days in which to elect the continuation option, after which the coverage offer expires. In normal circumstances, continued coverage is available for 18 months, but if the person becomes disabled, the coverage can be extended 11 months for a total of 29 months. In cases of divorce, COBRA can run up to 36 months. However, coverage beyond the initial 18 months may be charged at 150 percent of the prevailing premium.

The employer is obligated to inform the eligible individual and dependents of the availability of coverage within 14 days of the qualifying event, but if the employer is also the health plan administrator, the notification period is extended to 44 days. Newly hired employees, or newly eligible employees, also must be informed of their COBRA rights and qualifying factors within 90 days of becoming covered under the company’s health plan. Other notification and record-keeping requirements were announced and clarified by the Employee Benefits Security Administration (EBSA) in 2004 and took effect on Jan. 1, 2005.

COBRA coverage terminates when the maximum duration is reached (either 18, 29 or 36 months), when the premiums are not paid on time, when the employer goes out of business and ceases to sponsor health benefits, when the beneficiary becomes eligible for Medicare (even if he or she doesn’t enroll), or when the beneficiary obtains health insurance from a new employer. It should also be noted that COBRA is not available to those who are laid off and their company files for bankruptcy liquidation, goes out of business, or withdraws health care benefits to save costs.

Employers who do not comply with Title X health care continuation requirements face a fine of $100 a day, not to exceed $200 a day, for each day they are in noncompliance for any beneficiary. An excise tax may also be imposed equaling 10 percent of all health insurance premiums paid by the employer in the preceding tax year, or $500,000, whichever is less. Courts can order other relief as deemed necessary.

As mentioned earlier, the American Recovery and Reinvestment Act (ARRA) of 2009—the federal stimulus package—includes a provision to subsidize 65 percent of COBRA payments for nine months for all those who are involuntarily separated from work beginning Sept. 1, 2008, and continuing through Dec. 31, 2009. Those laid off prior to Sept. 1, 2008, are not eligible. The program also provides that those who previously declined COBRA coverage and who otherwise qualify for the subsidy can opt back in. However, subsidies are not retroactive and will be paid on COBRA policies only after the signing of the ARRA on Feb. 17, 2009 (thus effectively beginning March 1, 2009).

High-income individuals (over $125,000 for single filers, $250,000 for joint filers) will receive the subsidy, but the government will recoup all or part of it on the individuals' tax returns by increasing their tax by the amount of the disallowed subsidy. These individuals may waive the subsidy and avoid having to pay the increased tax.

The way the program works involves some heavy lifting on the employer’s part. Employers must re-inform all eligible former employees of their new subsidy and opt-back-in rights and then bill them for the 35-percent portion each month. Once employers receive the 35-percent payment, they chip in the other 65 percent and remit the full payment to the plan administrator. They then take a tax credit for the 65-percent portion when they submit their payroll taxes. Information, FAQs and links for both employers and affected employees are available at the Web site, http://www.dol.gov/ebsa/COBRA.html .

Another provision in ARRA now allows COBRA-eligible policyholders to switch to lower-priced health policies if their employer offers any. COBRA previously allowed this only during the open enrollment period.

It’s unclear how COBRA will change or whether it might disappear altogether as the Obama administration and Congress work on health care reform. More and more people may become eligible for either Medicare or Medicaid, and dependents may be covered under the expanded Children’s Health Insurance Program (CHIP, previously SCHIP). (Another recent Personnel Concepts white paper looked more deeply into health care issues under the title “Joined at the Hip: Health Care Reform and HIPAA.”)

Whatever happens, Personnel Concepts will continue to monitor developments in COBRA, health care and HIPAA and keep everyone inform on our Web site here at PersonnelConcepts.com. For those involved with COBRA at work, you can make your job easier with Personnel Concepts’ COBRA Notice Rules Compliance Kit and our COBRA Information Sheet package for new hires.

About the author:
Gary McCarty is a researcher and Web Content Manager for Personnel Concepts.

Note: The details in this white paper are provided for informational purposes solely. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.