New England Biz Law Update
For the first time, employers are required to pay a subsidy for former employees’ use of COBRA, and experts caution that they could see their overall health costs rise as a result.
The changes to the Consolidated Omnibus Budget Reconciliation Act of 1985 — or COBRA — were included as part of the American Recovery and Reinvestment Act of 2009, in addition to changes to HIPAA and various tax laws.
Essentially, the changes to COBRA focus “on employees that were involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009,” explained Cher Wynkoop, a partner at Reed Smith in Pittsburgh who has an employee benefits practice.
Employers must now offer COBRA benefits to those employees, paying 65 percent of the cost up front (the money is recouped through federal payroll taxes) with employees responsible for the remainder.
There are several concerns about the changes that practitioners are already debating, Wynkoop noted.
• No definition of “involuntarily
terminated”
The group of persons eligible for COBRA benefits under the updated statute is “assistance eligible individuals” or AEIs — defined as those who were “involuntarily terminated.” But “involuntarily terminated” is a term of art that was not defined in the new law, Wynkoop said.
“Does this include the failure to return after a leave of absence, or a short-term disability absence that turned into a long-term disability? What about a military leave where the employee decides not to come back?” she asked.
• Broad notice requirements
The act requires that written notice of the COBRA changes be sent to all AEIs, explaining the availability of the COBRA premium and the extended election period, as well as the AEI’s rights and obligations.
But because the act didn’t define “involuntarily terminated,” employers should be over-inclusive when considering who to notify, said Angela Marie Hubbell, a partner at Wildman Harrold in Chicago who has an employee benefits practice.
“Unless [a former employee] was convicted of stealing, I’m counseling my clients to notify everyone,” she said.
The notice must also be sent to active, current employees, Wynkoop added, because of the pre-existing requirement under the act that notice of COBRA rights be given as part of the summary plan description provided by the employer.
• Increased appellate process
Giving more employees notice means more employees — even if they don’t meet the criteria — will request COBRA benefits.
In addition, the act includes an updated appeals process for employees when an employer refuses to give them benefits.
The employee can appeal the decision directly to the Department of Labor, “and the statute says the DOL will rule on such appeals within 15 days,” noted Wynkoop.
• Contractual rights may be implicated
When terminating employees, some employers chose to provide a severance package that included funding for COBRA benefits, Hubbell said.
For example, an employer may have agreed to pay 50 percent of a former employee’s COBRA costs. But it’s unclear how the changes in the statute relate to those existing contractual obligations, she said.
Do employers still have to pay the 50 percent and then pay an additional 65 percent of the employee’s remaining 50 percent? Or can an employer seek the return of the 50 percent as part of their 65 percent subsidy?
At this point, Hubbell said she is advising her clients to wait for DOL guidance on this issue because it is unclear.
• Timing of payments
Another administrative burden for employers will be the timing of the subsidy reimbursement, Wynkoop said.
Typically, employees will send their 35 percent payments directly to the insurer, so the employer will not know when the money has been paid. That will be problematic because employers can’t seek their credit under the federal payroll tax until they know the employee has made the payment, Wynkoop explained.
“We are going to have to establish some sort of communication mechanism on the timing of employee payments to the insurer so the employer can figure out when to take its credit,” she said.
• State laws implicated
Hubbell noted that the act implicates state laws that require the continuation of coverage to employees, which will create a large burden for some smaller employers.
The majority of states have such laws in place, she said, and in New York, state law covers employers with just two employees in a group plan.
“Smaller employers are going to be taken aback by these changes, and the amount they have to pay for the subsidy could exceed their payroll taxes,” she said.
• Increased number of COBRA
beneficiaries likely
Historically, a low number of employees chose to continue their benefits under COBRA, Wynkoop said. And the people who did so were typically those with high medical bills, such as the very sick or those with a chronic condition.
The increased number of people using COBRA could lead to a “very negative experience for an employer’s policy or group coverage as a whole, leading to an increased cost of coverage for all employees,” Wynkoop said. “With more people electing COBRA, employer plans are going to become more and more expensive.”
• Possible extension of the changes?
The changes are set to cover AEIs for a specific time period, ending Dec. 31, 2009. But Wynkoop said she had heard “murmurings” that depending on the speed of the country’s economic recovery, the class of AEIs could be expanded to include another calendar year’s worth of employees.
“I actually think it’s very likely we could see an extension of the changes by late summer,” she predicted.
