Federal Stimulus Bill Makes Major Changes to COBRA That Will Require Immediate Action

February 24, 2009

President Obama signed The American Recovery and Reinvestment Act of 2009 (commonly known as the stimulus bill) into law on February 17, 2009.  Part of the nearly $800 billion of new spending in the bill is used to provide  a temporary COBRA subsidy for employees whose employment is involuntarily terminated between September 1, 2008 and December 31, 2009.  This change will require immediate action by employers and health plan administrators.

Key Rules Regarding the COBRA Subsidy

• Eligibility for Subsidy.  The subsidy is generally available to any employee who experiences an "involuntary" termination of employment, other than due to gross misconduct, between September 1, 2008 and December 31, 2009.  The legislation does not define what constitutes an involuntary termination.  The subsidy generally is phased out for "high-income individuals" with adjusted gross income in excess of $125,000 ($250,000 if married filing jointly) and is not available to any individual with adjusted gross income in excess of $145,000 ($290,000 if married filing jointly) for a year in which the subsidy is otherwise payable.  A plan administrator must allow a high-income individual to waive the subsidy and pay the full premium (otherwise, the individual must repay the government for the subsidy).
• Amount of Subsidy.  The subsidy generally is up to 65% of the COBRA premium actually charged to the eligible individual.
• Mechanics of Subsidy.  The subsidy is not a direct payment to the eligible individual.  Rather, the health plan must charge the eligible individual the subsidized rate, and the employer receives a credit for the subsidy toward its payroll tax liability.
• When the Subsidy Begins.  The subsidy applies for periods of coverage (monthly or shorter) beginning after enactment of the stimulus bill.  For most plans, this means March 1, 2009.  Because many plan administrators will not be able to implement the subsidy before March 1, the bill’s "grace period" permits a plan to charge eligible individuals the full COBRA premium for one or two months, and then allow the individuals to recapture the subsidy by crediting it against future premiums or refunding it.
• Length of the Subsidy.  The subsidy ends (and the full COBRA premium may be charged) upon the earliest of (i) nine months after the first month to which the subsidy applies; (ii) the individual becoming eligible under another group health plan or for Medicare coverage; (iii) the end of the maximum COBRA coverage period provided by law; or (iv) for an eligible individual who elects COBRA coverage during the special enrollment period described below, the end of the maximum COBRA period that would have applied if COBRA had been elected when it was first available.

Notification Obligations/Special Enrollment Period

The notices required to be provided to COBRA-eligible individuals must specifically describe the availability and mechanics of the subsidy.  In addition, special notices must be provided within 60 days of enactment of the stimulus bill to two groups of subsidy-eligible individuals:

• All eligible individuals who have already elected and are receiving COBRA coverage must be advised of the availability of the subsidy and the requirements to qualify for the subsidy.
• Any individual who is eligible for a special enrollment period must also receive a notice.  The special enrollment period applies to any individual who does not currently have a COBRA election in effect, but who otherwise qualifies for the subsidy.  Any such individual must be provided the right to enroll in COBRA coverage, even if the time period for such election has expired.  If coverage is elected under this special enrollment period, it is effective beginning on the first day of the first COBRA coverage period after enactment of the stimulus bill (generally March 1, 2009).  Retroactive coverage is not required.  In effect, this provision allows individuals who were involuntarily terminated on or after September 1, 2008 but did not elect COBRA coverage a second bite at the apple to elect COBRA coverage now at the subsidized rate.  COBRA coverage for these individuals ends no later than when it would have ended if the eligible individual had elected COBRA when first eligible to do so.

If these required notices are not distributed by April 18, 2009, the excise tax applicable to COBRA violations of $100 per eligible individual per day will be imposed on the employer.

Action Items

Employers and plan administrators need to act quickly to ensure compliance with these new COBRA rules.  In particular:

• COBRA forms need to be updated to reflect the subsidy.  Among other things, the forms need to describe the eligibility requirements for the subsidy.
• Subsidy-eligible individuals need to be identified so that the special notification and enrollment rules can be implemented.  This will require employers to identify all employees who have been involuntarily terminated since September 1, 2008.
• Procedures need to be adopted for permitting high income individuals to choose between waiving the subsidy or paying it back to the government.
• Assuming that the subsidy is not applied beginning March 1, 2009, procedures need to be adopted to make eligible individuals whole for the foregone subsidy until it is implemented.
• Administrative systems will need to be modified to reflect the maximum 9-month length of the subsidy.

Conclusion

This brief summary highlights some of the key issues with the new COBRA subsidy enacted under new stimulus bill.  The rules outlined above are very complicated, and a number of key interpretive issues remain (e.g., how the rules work for employers who contribute to Taft-Hartley health and welfare plans).  The Department of Labor is expected to issue guidance and model notices within the next few weeks, but it is safe to assume that there will still be unanswered questions.   In the interim, in light of the March 1, 2009 effective date, employers and plan administrators need to begin implementing procedures to comply with these important modifications to COBRA.

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