Small Employers Should Be Aware of State Mini-COBRA Laws

Since the passage of the American Recovery and Reinvestment Act (ARRA) in February 2009, at least 18 states and the District of Columbia have made changes to their “mini-COBRA” laws—provisions enacted since the passage of the federal COBRA in order to offer the health insurance continuation provided by the federal law to companies with fewer than 20 employees. Similar to the COBRA provisions in ARRA, most of these changes give some employees who have been involuntarily terminated a second opportunity to choose COBRA continuation. The stimulus bill itself provides that the COBRA subsidy is available for state continuation coverage.

Although much of the burden of complying with these state laws falls on insurance brokers, “the burden comes back on the employer to be educated, to know the state laws and to work with outside vendors to make sure things work properly,” Frank Palmieri, an attorney with the law firm of Palmieri & Eisenberg, with offices in Princeton, N.J., and Alexandria, Va., told SHRM Online. Further, HR professionals need to be familiar with what their particular state continuation coverage law requires, said Christine Keller, an attorney with Groom Law Group in Washington, D.C., because the laws vary in several respects, including which employees are covered and the length of the subsidized coverage available.

What Exactly Are ‘Mini-COBRA’ Laws?

The federal Consolidated Omnibus Budget Reconciliation Act, better known as COBRA, was enacted in 1986 to give workers who are separating from their employment—voluntarily or involuntarily—the option of continuing their health coverage temporarily at group rates by paying the full premiums. This can be quite costly for the former employees.

The federal act regulates only companies with 20 or more employees. States have to pass laws to offer the insurance extension to small businesses as well. These state laws are the “mini-COBRA” laws. According to the National Conference of State Legislatures, 40 states and the District of Columbia have some sort of mini-COBRA law. (Alabama, Alaska, Arizona, Delaware, Idaho, Indiana, Michigan, Montana, Pennsylvania and Washington had no such laws as of May 2009.)

Even before the recent changes, these laws varied from state to state. In Maine, for example, which has not changed its law since passage of the stimulus package, only employees at small businesses who are laid off temporarily or suffer an on-the-job injury qualify for continued coverage. Also, while most of the states with mini-COBRA laws allow coverage for at least nine months—the length of time the stimulus will help workers with payments—others limit coverage anywhere from one month to six months.

Effect of the Stimulus Bill

One of the many provisions of ARRA gives a 65 percent reduction in COBRA premiums to employees and covered family members who lost or will lose health coverage because of an involuntary termination of employment that occurs from Sept. 1, 2008, through Dec. 31, 2009. This 65 percent is to be paid by employers, who will then be reimbursed by the federal government in the form of tax credits.

While the stimulus allows former employees of large companies who declined COBRA coverage before February 2009 to apply again for coverage and receive federal help paying the premium, states have to pass laws to allow similar action for former employees of small companies. As of June 3, 2009, the District of Columbia and 16 states had done so (California, Connecticut, Georgia, Kansas, Kentucky, Maryland, Minnesota, New Hampshire, New Jersey, New York, Oregon, Rhode Island, South Dakota, Utah, Virginia and West Virginia.) In Texas, North Carolina and Vermont, bills allowing a second election had been passed by both houses and sent to the governor.

Further, as of June 3, Georgia, Ohio, Oregon, Utah, Virginia and the District of Columbia had extended their coverage to nine months. In Texas and Vermont, bills extending the coverage period had been passed by both houses and sent to the governor. Oklahoma extended its period of coverage to four months, up from one.

Pennsylvania is considering enacting a mini-COBRA law, but the current bill doesn’t have a provision to allow retroactive enrollment.

Keller noted that “employers have been focused on the federal COBRA rules.” They also should focus, she recommended, on making sure that they are staying aware of all the new state laws being enacted and on deciding whether additional action is required as to the new state continuation requirements.

Paying the Subsidy

Pursuant to the COBRA provisions of the stimulus bill, large employers covered by the federal law initially have to pay the 65 percent subsidy out-of-pocket, Palmieri said. The employers get back the payments through immediate tax credits on their payroll tax returns. But, state COBRAs are not subject to the regular COBRA rules because of federal pre-emption issues, Keller noted, and therefore the subsidy has to work in a different way.

The subsidy has to go through the insurance carrier. For example, Palmieri explained, imagine an employer with 10 employees that lays off two employees because the economy is bad. The employer is fully insured with XYZ insurance company. It is the insurance company—not the employer—that must go out-of-pocket for the 65 percent of the cost of premiums, and it is the insurance company that gets the tax credit. So the insurance company gets a tax credit for someone who was never its employee. “The insurer needs to claim the credit on its own corporate tax return,” Keller noted.

“The interesting thing here is that you have to cooperate,” Palmieri said. For example, you have to be sure to tell the insurance company whether a particular termination was voluntary or involuntary because the tax credit is available only for involuntary terminations.

“Even a 10-employee company is probably not doing its own payroll. The company therefore has to coordinate between HR, the insurance company and the payroll company.”

Palmieri offered the following recommendation to small employers: “You have to be able to pick a vendor who values your business and will make your life easier as an employer. If your vendor doesn’t help you, maybe it is a good time to change vendors. Are you properly matched with your vendor so that you are leveraging their knowledge and not reinventing the wheel?”

Joanne Deschenaux is SHRM’s senior legal editor.

Related Articles:

Employers Encouraged to Provide Detailed Reasons for COBRA Subsidy Denial , SHRM Online Legal Issues, May 28, 2009

COBRA Coverage Expansion: HR Action Steps to Take Now, SHRM Online Legal Issues, Feb. 17, 2009