Immediate Attention Required: COBRA Subsidies and Required Minimum Distribution Relief
Recent legislation requires immediate decisions and action with respect to COBRA premiums and retirement plan required minimum distributions for 2009.
COBRA Premium Subsidy
On February 17, 2009, the President signed the American Recovery and Reinvestment Act of 2009. This new law includes a COBRA premium subsidy for employees terminated between September 1, 2008 and December 31, 2009.
Beginning March 1, 2009, employees who are eligible for the subsidy will have to pay only 35% of the COBRA premium normally charged to an individual in order to continue coverage. The entity designated by this new law as the person to whom the COBRA premium is deemed payable (e.g., the employer in the case of self-funded plan and the insurance company in the case of an insured plan) is responsible for the balance, but is entitled to recoup this subsidy from the federal government. The entity must claim a credit against its federal payroll taxes, or if necessary, request a direct payment from the government.
Several issues in this new COBRA law require an employer’s immediate attention:
- COBRA election notices must be revised to include information about the premium subsidy.
- By April 18, 2009, employers must notify certain employees who were involuntarily terminated on or after September 1, 2008 and their dependents that they are entitled to a new 60-day period during which they may elect continuation of coverage. Failure to timely provide this notice could result in penalties up to $110 per day.
- Employers must file a report with certain required information along with its claim for credits against federal payroll taxes.
- COBRA premiums already received for March (or later months) must be partially refunded or credited toward future premiums to reflect the subsidy.
Required Minimum Distributions for 2009 are Suspended
Enacted on December 23, 2008, the Worker, Retiree, and Employer Recovery Act of 2008 suspends the required minimum distribution requirement for 401(k), 403(b), and governmental 457(b) plans for calendar year 2009. The provision became effective January 1, 2009, and employers maintaining affected plans need make critical decisions and take appropriate actions as soon as possible.
Employers should consult with their plan advisors regarding whether to cease required minimum distributions for some or all participants, continue with required minimum distributions, or allow participants to elect whether to suspend required minimum distributions for 2009. The employer’s decisions will have consequences in related areas of plan administration, including rollovers and income tax withholding. Employers should also provide appropriate notices or other communications to participants. Finally, each employer must determine whether its plan(s) need to be amended. Depending on the plan’s language and the chosen course of action, an employer may have to amend its plan(s) no later than the last day of the plan year beginning in 2011 (2012 for governmental plans).