Question:

In recent months, my company laid off a few employees because of the recession. I read that the recently enacted American Recovery and Reinvestment Act of 2009 contains provisions regarding a government subsidy for COBRA health plan continuation coverage that may apply to my former employees and their families. Could you please explain those provisions and how they affect employers?

Answer:

The American Recovery and Reinvestment Act of 2009 (“the Act”) provides a government subsidy for COBRA continuation coverage for “assistance eligible individuals.” This critical term is defined as any covered employee who was involuntarily terminated between September 1, 2008 and December 31, 2009 (including their spouses and dependent children who were covered by the health plan at the time of termination) who elects COBRA continuation coverage.
COBRA, the Consolidated Omnibus Budget Reconciliation Act, requires certain group health plans to offer covered employees, their spouses, and their dependent children the opportunity to continue to participate in group health plans for up to eighteen months after qualifying events such as termination of employment. Under COBRA, covered employees must pay an administration fee and their entire premium cost, which is often quite expensive. However, under the Act, the federal government will pay sixty-five percent of the premium cost for assistance eligible individuals for up to nine months. Pursuant to the Act, employers must provide notice of the subsidy to individuals.
Assistance eligible individuals who became entitled to elect COBRA continuation coverage before February 17, 2009 must be notified about the government subsidy. Employers have sixty days from February 17, 2009 (the effective date of the Act) to provide a new COBRA notice to assistance eligible individuals who did not elect COBRA continuation coverage, informing them of the government subsidy. Those individuals will have an additional sixty days from the date the notice is provided to elect subsidized COBRA coverage. Employers must also provide a new COBRA notice to assistance eligible individuals who accepted COBRA continuation coverage to inform them about the government subsidy.
Individuals who become entitled to elect COBRA continuation coverage after February 17, 2009 must also be notified of the subsidy. The notice may be accomplished by amending existing notice forms, or by creating a new COBRA notice. The Secretary of Labor is required to provide a model COBRA subsidy notice by March 17, 2009. The notice must include:

  • The forms necessary for establishing eligibility for the subsidy;
  • The name, address, and telephone number of the plan administrator;
  • A description of the individual’s obligation to notify the plan administrator of subsequent eligibility for coverage under another group health plan (such as that of a spouse) or under Medicare, as well as the penalty for failure to notify;
  • A description of the individual’s right to a reduced premium and any conditions on that right; and
  • A description of the option to enroll in different coverage if the employer permits that option.

Individuals who elect COBRA subsidized coverage will have to pay only thirty-five percent of the premium cost for up to nine months. However, the subsidy is not retroactive and thus only applies to premium payments made for periods of coverage beginning on or after February 17, 2009. Employers will have to temporarily pay the subsidy of sixty-five percent of the premium cost. Once an employer receives thirty-five percent of the premium payment from an assistance eligible individual, the employer will be entitled to reimbursement from the federal government for the remaining sixty-five percent of the premium payment. Reimbursement amounts will be credited against the payroll tax liability of employers. If the reimbursement amount exceeds such liability, employers will be directly reimbursed for the excess. Notably, employers are granted two months to implement the new requirements. Thus, employers will not violate the law by accepting payment of the entire premium amount from assistance eligible individuals before April 17, 2009. However, such overpayments must be credited against the individual’s premium cost for future months.
The subsidy also applies to state continuation coverage programs that are comparable to the continuation coverage provided by COBRA. To be comparable, the right under a state program must be to continue substantially similar coverage as provided under the group health plan. Accordingly, the subsidy and the requirements explained above also apply to CAL COBRA coverage, which will affect smaller employers.
In light of the American Recovery and Reinvestment Act of 2009, employers need to take the following steps:

  1. Identify employees who were plan participants and who were involuntarily terminated after September 1, 2008 as well as their spouses and dependents,
  2. Provide these individuals with a new COBRA (or CAL COBRA) notice explaining their election rights and the subsidy, before April 17, 2009, and
  3. Provide individuals who are involuntarily terminated in the future, and their eligible spouses and dependents, with a new COBRA (or CAL COBRA) notice by the applicable deadline.

There is no change in the COBRA and CAL COBRA rights and obligations for employees who were not involuntarily terminated, or who were involuntarily terminated before September 1, 2008. If you have questions regarding this new law, contact your employment law attorney.
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