Stimulus Bill COBRA Amendments Require Immediate Action

The recently enacted American Recovery and Reinvestment Act of 2009 (the “Act”) modifies COBRA coverage rights applicable to group health plans in several respects: 

COBRA Premium Subsidy.  Under the Act, employees who are “involuntarily” terminated from employment (other than for gross misconduct) between September 1, 2008 and December 31, 2009 may elect COBRA coverage for up to nine months at a reduced cost of only 35% of the otherwise applicable COBRA premium.  The 35% rate also applies to COBRA qualified beneficiaries who are covered spouses and dependent children of such involuntarily terminated employees.  After expiration of the nine-month reduced premium period, the COBRA premium reverts to the normal rate.  In most cases, this change goes into effect March 1, 2009.

Generally, the employer must pay the remaining 65%, subject to reimbursement by the U.S. government through a credit against the employer’s future employment tax obligations.  For example, suppose an employer sponsors a group health plan with a COBRA premium of $1,000 per month.  An eligible ex-employee could elect to continue coverage under the plan and keep such coverage for nine months by paying $350 per month.  The employer would advance the remaining $650 per month and then claim an offsetting credit against its employment tax liability. 

Notably, the reduced premium and second election provisions (described below) do not apply to individuals who lose coverage due to divorce, losing dependent status, or voluntary resignations.  Also, the COBRA subsidy is phased out for individuals with adjusted gross income in excess of $125,000 ($250,000 for joint filers).  These exceptions will create administrative issues for employers (e.g., was the termination in question “voluntary” or “involuntary”).

Additional COBRA Election Period.  Any employee who was involuntarily terminated from employment on or after September 1, 2008 (and the covered spouse and dependent children of such ex-employees) may now elect COBRA coverage within 60 days following the date the employer provides notice of the new COBRA rules as described below.  This new COBRA election may be made even if the individual previously declined or failed to timely elect COBRA coverage.  Fortunately this “second chance” COBRA coverage is not retroactive to the original loss of coverage.  Rather the special coverage generally would begin on March 1, 2009 and would continue only for the remainder of the period during which the COBRA coverage would have otherwise been available had there been a timely initial election.  Thus, an employee who was involuntarily terminated on October 1, 2008 and who declined COBRA coverage at that time can now elect COBRA coverage effective as of March 1, 2009.  But any claims incurred during the period from October 1, 2008 through February 28, 2009 would not be covered and the COBRA coverage could not continue beyond April 30, 2010 (18 months from October 2008).

Additional Coverage Options.  Employers may, but need not, permit qualified beneficiaries who elect COBRA coverage to initially select a different, less costly coverage than the coverage they had when the qualifying event occurred.  Such an election change can be made prior to open enrollment if the employer wishes to allow it.

Additional Notice Obligations.  Within 60 days of enactment (i.e., by April 18, 2009), employers must give additional special notices that the subsidized COBRA benefit is available, that certain eligible individuals may now obtain coverage despite having previously failed to elect coverage, and that COBRA participants may enroll in different coverage if permitted by the employer.  A general notice of the new rules must be issued to all persons who incur a COBRA qualifying event of any type during the period September 1, 2008 through December 31, 2009.  A more specific notice of eligibility for subsidized COBRA and the additional election period must be given to any former employees who were involuntarily terminated between September 1, 2008 and February 17, 2009 (and to their covered spouses and dependent children).  The Department of Labor is to publish a model notice within 30 days of enactment.  Additionally, employers must amend their regular COBRA forms and disclosures to reflect the COBRA-related provisions of the Act.