Employers Front COBRA Premium Subsidy Pending Reimbursement from Federal Government

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the "Act"). Among its provisions, the Act requires the federal government to provide COBRA subsidies for employees who are involuntarily terminated between September 1, 2008 and December 31, 2009. The Act creates new COBRA notice requirements for employers and requires that employers provide subsidy coverage pending reimbursement from the federal government. Employers must act immediately to locate former employees who are eligible for the COBRA subsidy and update COBRA administration processes to comply with the Act. To comply, employers must:

  1. Identify employees who have been involuntarily terminated since September 1, 2008 and notify them of the decrease in premium amounts and their new enrollment options.
  2. Prepare a notice to former employees and their covered dependents informing them about the subsidy and distribute those notices within sixty (60) days after enactment of the Act.
  3. Establish procedures to identify employees who are involuntarily terminated in the future through December 31, 2009.
  4. Revise existing COBRA notices to include a summary of the new COBRA subsidy provisions and distribute revised COBRA notices as needed.
  5. Begin to establish procedures for filing reimbursement requests.

In order to properly complete the action items above, employers should understand the following:

Subsidy Amount. The subsidy is equal to 65% of the monthly COBRA premium for the employee and his/her eligible dependents for up to nine (9) months. It applies to medical, dental and vision benefits, but does not apply to medical flexible reimbursement accounts.

Assistance - Eligible Individuals. Employees and covered dependents who are/were covered under a group medical plan and lost their coverage due to an involuntary termination between September 1, 2008 and December 31, 2009 and who elect COBRA continuing coverage are eligible under the Act. Although the Act intended to address recent issues as a result of economic reductions-in-force, the language does not limit "involuntary" terminations to reductions-in-force. By contrast, the language suggests that any type of involuntary termination qualifies for the subsidy, including an involuntary termination for cause unless it amounts to gross misconduct as defined in COBRA.

The Act includes special election opportunities for eligible individuals who were eligible to elect COBRA coverage when they were terminated from employment, but chose not to elect coverage. These individuals who declined coverage are entitled to an extended election period that begins on February 17, 2009 and ends no sooner than sixty (60) days after an extended election notice is provided to individuals. The sixty (60) day election period begins on the date notice is provided to the eligible individual about the special election period.

Employer Notice Requirements. Within sixty (60) days after the legislation is enacted, employers are required to notify affected former employees and their eligible dependents that they have a right to elect COBRA and receive this governmental subsidy.

Additionally, employers must amend their current COBRA election notices temporarily to include general information about the availability of the federal subsidy. The revised notice must include: (1) forms necessary to determine eligibility, (2) plan administrator contact information, (3) a description of the extended election period for those who previously declined COBRA coverage, (4) an eligible individual's obligation to report to the employer the employee's eligibility for another group medical plan or Medicare which would cause eligibility for the subsidy to end and the penalty for failing to do so, (5) eligible individuals right to the subsidy and conditions on the subsidy, and (6) if applicable, the option to enroll in different coverage.

The Act directs the Department of Labor to develop a model notice within thirty (30) days of enactment of the Act.

Employer Reimbursement. Employers will be eligible to receive reimbursement from the federal government for COBRA premiums subsidized to former employees through reduction in the employer's payroll withholding tax obligations. Employers should determine total amount of subsidy provided and then may use that amount as an offset to its federal payroll tax liability. To the extent that the subsidy amount exceeds the amount of the employer's liability for federal payroll taxes, the Internal Revenue Service will reimburse the employer for the excess directly. The mechanism for reporting and transmitting these subsidies has not been established, but is expected to be established in the near future by the Treasury Department.

For questions regarding administration of the new federal COBRA subsidy or preparing draft COBRA subsidy notices, please contact Mary Elizabeth Davis.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.