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Employment Law Alert – Stimulus Law Provides COBRA Subsidy

March 1, 2009

Under the stimulus bill signed by President Obama, eligible involuntarily terminated employees and their covered dependents will be eligible for up to a 65% subsidy of their COBRA premiums for up to 9 months.  Some of the important elements of this subsidy program are:

  • An employee involuntarily terminated between September 1, 2008 and December 31, 2009 who is otherwise eligible for COBRA coverage and who earns less than $125,000 if single or $250,000 if filing a joint income tax return is eligible for a 65% non-taxable subsidy of the employee’s COBRA premium (for those earning above those limits, the subsidy becomes taxable through and income based phase in).
  • The subsidy is effective February 17, 2009 or, for plans that have a monthly period of coverage, on March 1, 2009.
  • The person to whom premiums are payable (the employer, the plan, or the insurer, depending on the type of group health plan) provides the subsidy by collecting only 35% of the COBRA premium and paying the 65% balance.  This 65% is “reimbursed” through a credit against that person’s quarterly federal payroll tax payments.
  • The subsidy ends for any covered individual no later than the earlier of 9 months after the first day of the first month the subsidy coverage begins or the date COBRA coverage would otherwise expire.
  • COBRA notices provided by employers (or plan administrators) must be modified to inform individuals who become eligible for COBRA coverage between September 1, 2008 and December 31, 2009 of this subsidy program.  The Department of Labor (DOL) is required to issue by March 19, 2009 a model notice that can be used.
  • For COBRA-eligible employees involuntarily terminated after September 1, 2008 who did not elect COBRA and whose election period expired prior to February 17, 2009, the notice explaining the subsidy must be provided by April 19, 2009, and a new 60-day period to elect coverage and receive the subsidy must be given.  Such coverage would be prospective (no reach-back) but cannot extend eeyond the period of coverage that would have been required had the person timely elected coverage at the time of initial eligibility.
  • This subsidy requirement also applies to comparable continuation coverage provided under state law.

To comply with these new COBRA provisions, employers should:

  1. Identify those persons who are eligible for the subsidy.
  2. Determine how notice will be provided to eligible persons – immediately or wait until the DOL notice is available.
  3. Review payroll processes and procedures and change them as necessary.

The above is only a brief synopsis of this complex aspect of the stimulus law.  There are issues with respect to this subsidy that the law leaves unclear and for which further guidance may be required by the appropriate government agencies.