COBRA Changes in Stimulus Bill Require Immediate Attention

One of the more significant items for employers in the AMERICAN RECOVERY AND REINVESTMENT BILL OF 2009 that President Obama signed into law on February 17 was a temporary federal subsidy of premiums that employees pay to continue their health care coverages after they lose their jobs. This provision will have a significant and immediate impact on the administration and cost of group health plans.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) applies to group plans at employers of at least 20 people. COBRA allows most people to continue the health care coverages for themselves and dependents, usually up to 18 months, after they lose their jobs. The cost of continued coverage is high. Those who elect to continue coverages under COBRA can be required to pay the share of premiums once covered by their employer as well as their own share from the old group plan plus an administrative fee of up to 2%.

Under the stimulus bill, effective March 1, 2009, the government will temporarily pick up 65% of the total cost of the COBRA continuation premium that an eligible employee would otherwise have to pay for the first nine months of continued coverage. The subsidy terminates upon the individual’s eligibility for any new employer-sponsored coverage. The cost of the new federal subsidy has been estimated at $24.7 billion.

Subsidies will only be available to employees who were or are “involuntarily terminated” from employment between September 1, 2008 and the end of this year. The Act does not define “involuntary termination.” A new 60 day special election/enrollment period must be provided to those who were terminated as far back as September 1, 2008 and who either did not elect to have their coverages continue or did elect COBRA continuation but lost their coverages due to a failure to pay the applicable premiums. These COBRA coverages would not be retroactive, but would be applicable to the period of COBRA coverage beginning after the enactment of the Act. The coverages will not continue past the date that otherwise would have been the maximum coverage period (generally 18 months after the termination).

The subsidy works by requiring employers to pay for the amount of the premium covered by the subsidy and then reimbursing employers with a tax credit against FICA and/or wage withholding. Amounts that the employer itself pays for continued coverages after employment separations, either voluntarily or pursuant to a collective bargaining agreement, are not included in the amount eligible for the 65% subsidy.

The Stimulus Bill imposes significant administrative burdens on administrators of group plans subject to COBRA that need to be addressed immediately. These include implementing procedures to provide the subsidy effective March 1, 2009, providing notices to all qualified beneficiaries that specifically describe the new subsidy in addition to other required COBRA notices and the availability of other lower-cost options, and amending plan documents to incorporate the changes.

The new notice requirements are not only applicable to those who are involuntarily terminated after the enactment date of this legislation, but also to all eligible beneficiaries who were affected by involuntary termination as far back as September 1, 2008. The new notices are required to be issued by plan administrators within 60 days of the enactment date. The Secretary of Labor is expected to issue model notices within 30 days of enactment.

We strongly recommend that employers immediately contact their COBRA Administrator to ensure timely compliance with the new COBRA requirements.

The COBRA related provisions of the new Stimulus Act are complicated and this notice is not intended to provide comprehensive or detailed guidance.