Important Changes to COBRA Regulations

The new economic stimulus act, the "American Recovery and Reinvestment Act of 2009" (the "Act"), mandates several key changes to COBRA.  COBRA (formally known as the Consolidated Omnibus Budget Reconciliation Act of 1985) requires employers with 20 or more employees to continue health care coverage of workers and their families following loss of employment or reduction of work hours.  

The Act, which became effective immediately upon its adoption on February 17, 2009, reduces the financial burden of COBRA coverage for employees, while shifting that burden to employers.  Employers, who previously had no financial obligations for COBRA, must now advance 65% of the cost of COBRA coverage.  Employees had previously been required to pay the full cost and are now required to pay only 35%.

Employers will be reimbursed for their share of the COBRA payments through federal payroll tax credits.  However, the rules for claiming those credits have not yet been determined.  The COBRA subsidy is available to all employees who are involuntarily terminated between September 1, 2008 and December 31, 2009 and who fall within specified income guidelines.

Note:  Employers who had previously elected to pay all or a part of a COBRA premium as part of a severance package may now be able to take advantage of the federal tax credit for these COBRA payments, but it is currently unclear if that is the case.  Prince Lobel is monitoring this issue. 

Employers who terminated employees on or after September 1, 2008 have until mid-April to notify those employees of the new COBRA regulations.  Even if the employees had not previously elected COBRA benefits, they must now have the opportunity to do so under the new coverage terms. 

The new law also requires that employers revise their COBRA election notices to include information regarding the COBRA subsidy.  

Note: AN EMPLOYER'S FAILURE TO COMPLY WITH THESE NOTICE REQUIREMENTS WILL BE TREATED AS A FAILURE TO PROVIDE ADEQUATE COBRA NOTICE UNDER EXISTING COBRA PENALTY PROVISIONS.

Clearly, any employer who has issued a COBRA notice since September 1, 2008 or who is currently carrying health coverage under pre-existing COBRA rules should promptly consult with counsel.