Health Care and COBRA

Employers will have to scramble to comply with federal legislation providing a federal subsidy of COBRA health insurance premiums to laid-off employees according to a recent report published by BusinessInsurance.com. Workers who were laid off from Sept. 1, 2008, through Dec. 31, 2009, will be eligible for a 65% federal subsidy of their COBRA premiums under provisions in the massive economic stimulus bill.

According to the U.S. Department of Labor, the American Recovery and Reinvestment Act of 2009 (ARRA) provides for premium reductions and additional election opportunities for health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly called COBRA. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. The premium reduction applies to periods of health coverage beginning on or after February 17, 2009, and lasts for up to nine months for those eligible for COBRA during the period beginning September 1, 2008, and ending December 31, 2009, due to an involuntary termination of employment that occurred during that period. The TAA Health Coverage Improvement Act of 2009, enacted as part of ARRA, also made changes with regard to COBRA continuation coverage. More details about COBRA are available at http://www.dol.gov/ebsa/faqs/faq_consumer_cobra.HTML .

According to FamiliesUSA.org, losing a job can be financially catastrophic. The impact of such a loss is often compounded by the concurrent loss of health coverage. Most people get their health coverage through the workplace: 61% of those under the age of 65 receive coverage through their jobs or through the job of a family member. As a result, when workers are laid off, they (and their families) often lose their health coverage as well. A recent study of multiple years of data from the U.S. Census Bureau regarding unemployment and insurance concluded
that, for each one percentage point rise in the unemployment rate, the number of uninsured
Americans rises by about 1.1 million. For unemployed workers and their families, lack of insurance can cause major problems. Many uninsured Americans delay or forgo needed medical care. As a result, uninsured adults are more likely than those with insurance to be diagnosed with diseases, such as breast cancer, when the diseases have reached an advanced stage. When uninsured Americans do get care, many end up with medical debt or have problems with medical bills. These problems include difficulty paying bills, being contacted by collection agencies, or having to change their way of life to pay medical bills. In fact, 61% of adults who were uninsured at some point in 2007 had medical debt or problems with medical bills.

According to LongfellowBenefits.com, the American Recovery and Reinvestment Act of 2009 (the “Act”) defines eligible individuals as “Assistance Eligible Individuals” (AEI’s for short). AEI’s are employees (and their eligible dependents) who were/are involuntarily terminated for a reason other than gross misconduct between September 1, 2008 and December 31, 2009. The Act does not specify that an individual must have been a part of a Reduction in Force. AEI’s are NOT eligible if they are eligible for other group coverage (ex: through a spouse) or eligible for Medicare. Of those eligible for the subsidy:
--Current COBRA beneficiaries will become eligible for the subsidy on March 1, 2009.
--Current COBRA beneficiaries may also be given an opportunity to change to a lower cost plan if one is available to them through COBRA effective March 1, 2009, should the employer allow them to do so.
--COBRA qualified beneficiaries who have declined COBRA or who’s COBRA has ceased for non-payment will be given a one-time opportunity to elect COBRA with the subsidy for an effective date of March 1, 2009. However, coverage will not extend beyond what the original termination date would have been if COBRA had been elected as of the original qualifying event date.
--Must have a modified Adjusted Gross Income of less than $145,000 ($290,000 for joint filers).
--The subsidy is only available for the unpaid portion of the COBRA premium. Therefore, whatever is unpaid by the severance agreement will be subsidized 65% and the employee would pay the remaining 35%. If the employer as part of a severance agreement pays COBRA in full, the subsidy is not available.

According to the New York State Insurance Department, ARRA states that multi-employer plans and large employers with 20 or more employees will be responsible for paying the 65% subsidy. In such situations, the multi-employer plan or large employer will claim the payroll tax credit. In the case of small employers with fewer than 20 employees, the insurance company is responsible for paying the 65% subsidy. In such situations, the insurance company will claim the payroll tax credit. Eligible individuals can receive the subsidy for up to 9 months. The subsidy will end when the person is eligible for group coverage or Medicare, after 9 months of subsidy payments, or when the individual’s eligibility for COBRA coverage ends, whichever occurs first.
As soon as an individual receiving the subsidy is eligible for group health benefits, he or she must notify the entity administering the COBRA coverage of this or face a penalty equal to 110% of the subsidy amount. Individuals eligible for the subsidy will have sixty days from the date they receive notice of the subsidy to enroll in writing. Enrollment is not automatic. An individual must elect the subsidy.

When a worker loses health insurance through job loss, the option to pick up COBRA benefits has been cost prohibitive in most cases--especially if their is no new insurance coverage within the 18 months of availability to COBRA. The current administration has placed a huge burden on businesses to compensate 65% of the bill, although it does soften the blow for the ex-employee and his/her family. According to Newsmax.com, business owners are warning that Obama administration efforts to help unemployed workers by subsidizing their COBRA health insurance premiums actually may harm their chances of getting what they need most: a job. Problematic COBRA regulations attached to the $787 billion stimulus plan now require businesses to “front” the cost for tens of millions in insurance premiums each month for workers who have lost their jobs. The growing controversy over the new rules may be only the first of many unintended consequences created by the Obama administration as it rapidly expands the size and scope of government.

Experts are warning that COBRA regulations intended to ease the burden on vast numbers of unemployed workers will also create more red tape and expenses for the very businesses that are expected to serve as the spawning ground for future U.S. job growth, according to Newsmax.com. Initially, the former employers of the laid-off workers are responsible for that other 65 percent. The federal government will reimburse employers for that 65 percent share, in the form of a tax credit deducted from payroll taxes that are due from employers each quarter. Companies will simply deduct the 65 percent owed to the government when they submit their payroll taxes. That might appear to be a win-win proposition. The early rumblings from the small-business community, however, suggest that it may hurt workers’ chances of finding new employment, by discouraging businesses from hiring. That’s because businesses will hire new workers knowing they may be required to pay 65 percent of workers’ health-insurance premiums, if they have to lay off the workers later. And the fact that the government will reimburse the 65 percent eventually isn’t sweetening the bitter medicine as much as the administration had no doubt expected.

According to NewsMax.com, one major objection is that it asks businesses to advance what could be a substantial amount of money at a time when credit is tight and businesses are desperate for capital. Companies that advise smaller firms on their health insurance needs say they’re already hearing stories about how some employers will use the federal subsidy to lower their insurance costs – essentially gaming the system to take advantage of government subsidies. Extra costs, they say, will inevitably shift from employers to the taxpayers, who probably don’t want to pay others’ insurance premiums. The new COBRA hits hardest those firms that are struggling the most. It is backdated to Sept. 1, 2008. So if you laid off 10 workers that month because you were barely able to make payroll, and each of them has a $1,000 monthly health insurance premium, your monthly overhead would increase $6,500 – at least until you receive reimbursement. That does not include the additional paperwork and administrative costs.

Additional reasons that this new legislation is onerous for small businesses is noted by NewsMax:
1.) Paperwork and administrative costs associated with the program will substantially increase. The reason is simple: With premium costs plunging to 35 percent, many more employees are expected to opt for the coverage. The employer will be expected to contact the employee to collect their 35 percent portion of the premium each month. That may be a small issue for major employers, it could eat up precious time for mom-and-pop stores. For small businesses that don’t have a dedicated HR department, it’s a burden. It’s that much more paperwork. They’ve got to track down employees each month, they’ve got to collect money from you each month. Any small business will tell you it’s a pain. Also, the program requires an additional tax report to be filed with the IRS.
2.) Small firms that employ a limited number of people will be tempted to game the system. A business run by a husband and wife may “lay off” a spouse, thereby cutting the spouse’s insurance cost by 65 percent. Taxpayers would underwrite that discount.
3.) Some small firms will save money by taking employees off the books. A firm paying $500 to $1,000 per month for an employee’s insurance might let the employee go. That way you’ll get 65 percent of your health insurance paid, and you can go collect unemployment compensation.
4.) State COBRA plans may exacerbate market distortions. Massachusetts officials, for example, are planning to add their state plan to the federal COBRA subsidy of 65 percent. This will reduce insurance costs for unemployed workers to just 7 percent of premiums – far less than ordinary workers.
5.) The federal subsidy is supposed to last for only nine months of unemployment. But with reports filed on a quarterly basis, it may be difficult to track if a worker remains on the program beyond nine months. The government may say the subsidy only lasts 9 months, but there can easily be people collecting it the whole 18 months.
6.) Businesses may react to the subsidy by discontinuing their voluntary efforts to aid workers. For example, many companies now pay laid-off employees’ COBRA premiums for a few months to help ease the transition for jobless workers. With the government now picking up 65 percent of the tab, they may no longer find that an economically rational practice – again, thereby shifting more of the healthcare cost to taxpayers.
7.) Companies with seasonal hiring patterns may be affected disproportionately. In the Northeast, for example, there’s not much work for pavers, painters, and landscapers in the winter. Companies in those sectors could face a deluge of COBRA premiums on a seasonal basis, which at the very least will wreak havoc with cash flows.
8.) Also, some firms could actually accumulate more tax credits than they would owe in payroll taxes. How long it would take them to receive a reimbursement from the federal government for the additional amount is unknown. There is a special form they must complete to request the refund.

Overall, the law is not positive for business, and it is very confusing and costly to administer. Small business drives the American economy. It is the engine of financial and economic progress. With businesses already wary of the administrative hurdles involved in hiring new employees, and the prediction in the business community, according to PatriotFiles.com, is that the new COBRA law will absolutely discourage the hiring of new workers. The COBRA premiums are the money they need for capital to make things happen to keep the rest of the people busy. It is just one more burden that the government has deemed to force on the small businesses in America. The current administration is looking for ways to "help" the common man, but only punishes him in the end by creating a bureaucratic and financial nightmare for those companies who are looking to hire new workers.

Until next time. Let me know what you think.