PrintPrintTucked into the $787 billion stimulus plan that Congress passed in February is a subsidy meant to help thousands of laid-off American workers afford health insurance. Though it’s good news for Americans who have lost coverage, it could become an accounting and financial headache for employers, who are responsible for much of the implementation.
By Ashley Fletcher Frampton
aframpton@scbiznews.com
Published March 30, 2009
Tucked into the $787 billion stimulus plan that Congress passed in February is a subsidy meant to help thousands of laid-off American workers afford health insurance.
Workers terminated since September have the chance to re-join their former employers’ group health insurance plans for nine months for 35% of the premium cost.
Traditionally, workers have had to pay 100% of the employee and employer share, plus a 2% fee, to continue coverage through the federal program known as the 1986 Consolidated Omnibus Budget Reconciliation Act. That cost is often prohibitively expensive for those without jobs.
Though the COBRA subsidy is good news for Americans who have lost coverage, it could become an accounting and financial headache for many employers. That’s because the law places most of the implementation burden on businesses, and there has been little advance notice.
Now, many companies are scrambling to comply with the April 18 deadline to notify former employees that they can participate.
The responsibility doesn’t end there. Employers must navigate detailed rules for signing employees back up for the plan, and they must front the government’s 65% subsidy. Mistakes in the process could leave employers facing hundreds of dollars in fines per employee per day, plus potential fraud liability.
Hardest-hit
Those familiar with the details of the subsidy say small and midsized businesses that handle their own COBRA administration will be hit hardest by the new requirements.
Many large companies outsource those duties to third-party administrators or have human resources staff to keep up with regulations and changes in benefits. Some smaller companies outsource too, but many do not.
Liz Speidel, an employment attorney with Haynsworth Sinkler Boyd in Charleston, said those employers are probably too busy trying to sell their goods or services to keep up with the nuances of employment laws.
“If you’re doing anything outside of the employment arena, how could you?” she said.
Who qualifies?
The subsidy is available to employees involuntarily terminated since Sept. 1. Going forward, it will apply to all employees involuntarily terminated through the end of 2009.
In most cases, COBRA benefits are available for 18 months to employees who leave a company and its group insurance plan. The subsidy is limited to nine months, but those who participate in the subsidy can continue for the other nine months if they pay the full premium cost.
Businesses with 20 or fewer employees are exempt from COBRA requirements, but they are not exempt from the new subsidy law, Speidel said. South Carolina requires businesses with fewer than 20 employees to extend group benefits to separated employees for up to six months, and the federal subsidy appears to apply to those state laws as well.
Those laws are known as “state continuation” or “mini-COBRA laws.” Some studying the COBRA subsidy say details are scarce on how it applies to such programs, but most say it does apply.
Employers must notify former employees about the subsidy by April 18. Even employees terminated since Sept. 1 who already signed up for COBRA must be notified, said Mendel Boykin, president of Benefit Coordinators Inc., a third-party administrator in Columbia. Those already paying for COBRA can receive the subsidy for nine months, going back to coverage periods starting after Feb. 17, the date the stimulus plan became law.
But not every employee who was terminated since September and participated in the company’s insurance plan is guaranteed eligibility, Boykin said. If a terminated employee had the option of obtaining coverage from a spouse’s plan — even if he or she chose not to do so — the employee is not eligible, he said.
Income is another variable. Former employees with adjusted gross income of $145,000, or $290,000 if married, are not eligible for the subsidy. If such former employees take the subsidy anyway, they will owe the subsidy amount on their income tax returns.
Cast a wide net
The National Association of Health Underwriters is advising employers to cast as wide a net as possible in notifying former employees, said John Greene, the group’s vice president of congressional affairs. Greene spoke recently in Charleston at a forum organized by third-party administrator McLaughlin and Smoak.
Boykin said his company will not attempt to sort out who is eligible based on income and spouse plans. Benefit Coordinators Inc. will explain eligibility in a letter and largely will leave it to the former employees to determine whether they qualify.
“No one can go and interrogate the spouse or call the spouse and find out where (he or she works),” Boykin said. “That’s not going to happen. But you’ll notify the employee of the rules.”
If employers send proper notification, they won’t be on the hook for anyone who signs up but is not eligible, he said.
Penalties for employers who do not properly notify eligible former employees can start at $210 per employee per day, Boykin said.
The U.S. Department of Labor recently posted samples of employee notification letters on its Web site. Speidel said she is advising clients to use them to notify former employees of the subsidy.
The sample notices aren’t exactly form letters ready for the mail, however. Employers must determine which version employees should receive, for example, and they must fill in certain details about their group insurance plan.
Paying the bill
If former employees choose to participate in the COBRA subsidy, employers are responsible for paying 65% of the premium cost. That amount can be subtracted from federal payroll taxes as employers pay it, which usually is quarterly.
Alternatively, employers who owe less in payroll taxes than the cost of the premiums can request a refund from the federal government.
Either way, some say the obligation could be a burden for businesses.
“We’re in a down economy where a lot of employers are having a hard time as it is,” said Mark Riley, who owns Columbia-based American Benefit Services, a third-party administrator. “Now the federal government is telling them they have to front the money” for the subsidy.
Colin Smoak, a principal with McLaughlin and Smoak, said he suspects the process of getting money back from the federal government will not be quick or straightforward.
Boykin said another wrinkle exists: Former employees must pay their share of the bill to the employer or third-party administrator before the employer can claim the payroll tax credit. Otherwise, the Internal Revenue Service could view the credit as illegal, he said.
Waiting game
As of late March, Riley said many employers and third-party administrators were preparing notification letters and waiting on more information from the U.S. Department of Labor and others before moving ahead.
“Everyone’s playing the waiting game to see how it works,” Riley said.
Riley said third-party administrators like his are seeing interest in their services pick up as employers seek help complying with the new requirements.
“It’s good, but it’s crazy, too,” he said.
Riley, for one, suspects that the Dec. 31 expiration date on the subsidy will not come to pass.
“Most of us have this odd feeling it won’t go away,” he said.
Reach Ashley Fletcher Frampton at 843-849-3129.
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