Stimulus Package Creates New Employer Obligations Under COBRA

February 18, 2009

Yesterday, President Obama signed into law the American Recovery and Reinvestment Act of 2009. Among many other things, this $787 Billion Dollar, 1,000 page "stimulus package" includes a number of key revisions to the federal health benefit continuation law commonly known as "COBRA."

These new and fairly complex rules apply to all U.S. employers subject to COBRA (i.e., companies with 20 or more employees who offer health plans subject to COBRA). The Secretaries of Labor, Health and Human Services, and the Treasury have been tasked with providing further guidance to employers on how to comply with the new rules. In the interim, because this bill went into effect when signed, all employers subject to COBRA should take prompt action to meet their new COBRA obligations.

New COBRA Subsidy

The stimulus bill creates a new government COBRA subsidy for eligible employees. The subsidy will cover 65% of an eligible employee's monthly COBRA premiums for up to 9 months. The most notable part of this new law is that, depending on the nature of the group health plan, it may require the employer to front the subsidy payments for the government, and be repaid through tax credits. In addition, the subsidy is retroactive in that employees laid off or involuntarily terminated during the last 4 months of 2008 will have a second chance to elect COBRA coverage and begin receiving the subsidy.

Specifically, employees (and their dependents) who were otherwise eligible for federal COBRA and who were involuntarily terminated between September 1, 2008 and December 31, 2009 will be required to pay only 35% of their COBRA premium. Depending upon the nature of the group health plan, either the employer, the multiemployer group health plan, or the insurer providing coverage under an insured plan will be required to pay the remaining 65% of the premium, and then will recoup that cost from the federal government by taking a credit against payroll tax transmittals sent to the IRS or by receiving a direct payment from the federal government. Although employees are entitled to the COBRA subsidy for up to 9 months, the subsidy would terminate earlier if an employee's entitlement to COBRA coverage would otherwise expire, the employee becomes eligible for coverage under another group health plan, or the employee fails to pay his or her reduced COBRA premium on a timely basis.

New COBRA Notices

Employers must provide a special election COBRA notice to all employees terminated between September 1, 2008 and February 17, 2009 (the date the law was enacted), who did not elect COBRA coverage when first eligible. This special election notice must inform employees and their dependents of the availability of the COBRA subsidy and provide a new 60-day COBRA election period. Coverage for eligible employees and their dependents who make this special COBRA election would begin no earlier than March 1, 2009. In the event that an eligible individual pays for a full COBRA premium on or after March 1, 2009 and subsequently elects to accept the subsidy, the employer or other relevant party must credit the subsidized portion against future COBRA premiums (as long as the credit is exhausted within 180 days) or refund the subsidized amount.

Employers must also provide a new COBRA notice to those employees who leave (or have left) employment for any reason between September 1, 2008 and December 31, 2009, that explains the new COBRA rights, including the information about the subsidy. The Department of Labor is expected to issue model COBRA notices for employers within the next 30 days. Employers or their COBRA administrators must distribute the new COBRA notices to all eligible individuals within 60 days of the law's enactment, i.e. by April 18, 2009.

Effective Date And Premium Due Dates

The new law is effective for periods of coverage beginning after February 17, 2009. For group health plans using calendar months as the period of coverage, the subsidy applies beginning on March 1, 2009.

Although the law does not provide any direct guidance for premium due dates, eligible individuals who elect the subsidy at the same time they make their initial COBRA election must pay their premium within 45 days of the election. Individuals already paying COBRA premiums who elect the subsidy coverage may pay 35% of the premium immediately following the election. Individuals who elect COBRA subsidy coverage as part of the special election process should be given a 45-day grace period from the date of election to make the first premium payment.

What This Means

While the subsidy may make COBRA coverage more affordable for terminated employees, the new law imposes significant burdens and hidden costs on many U.S. employers. To comply with the new COBRA obligations, covered employers should compile a list of employees terminated since September 1, 2008 to determine who may be eligible for the COBRA subsidy and/or the special election notice. Employers should also consult with their brokers and plan administrators to ensure that COBRA premiums are set correctly, and determine the timing of when COBRA subsidy payments must be made. Employers should also determine whether their payroll departments or vendors are prepared to claim COBRA subsidy credits against payroll tax transmittals. Finally, employers must prepare or obtain new COBRA notices and make sure the notices are delivered to the appropriate employees and their eligible dependents.

This e-update was authored by Brenda Kasper and Denise Brucker. For more information, or questions, please contact Ms. Kasper, Ms. Brucker or any Paul, Plevin attorney at (619) 237-5200.

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