Significant Changes to COBRA Enacted

The recently enacted American Recovery and Reinvestment Act (economic stimulus package) includes significant changes to how employers must offer continuation of health benefits under COBRA and state continuation laws (mini-COBRA)  to employees who were involuntarily terminated between September 1, 2008 and December 31, 2009.  

Employers now must subsidize the premium payments for qualified beneficiaries for 9 months.  The employer will pay 65%; the employee 35%.   If the employer is voluntarily paying a portion of the COBRA premium already, then the employer must pay 65% of the balance.  The subsidy will begin with the first premium payment following the Act's enactment on February  17, 2009 - generally March 1.  The subsidy ends when COBRA coverage would otherwise end.

Employers can take a tax credit for the subsidy, but not for COBRA payments they are already voluntarily paying.

Taxpayers whose federal modified adjusted gross income is more than $145,000 ($290,000 for a taxpayer filing a joint return) are not eligible for the subsidy.  Accordingly, employees can take a one time waiver of the subsidy.

Employers must offer continuation coverage to employees who suffered a qualifying event between September 1, 2008 and the enactment of the Act, even if they originally rejected coverage.  The election period is 60 days, and coverage will begin February 17 and run through the end of the original COBRA period.

While new notice forms should be issued within 30 days, in the meantime employers should develop their own form or update existing forms to provide notice of the subsidy.  In addition, employers must keep accurate records of subsidy payments, as more specific reporting requirements are to come.

These changes should be taken into consideration in a cost analysis of any RIF.  In addition, many employers offer payment of COBRA premuims for some period to employees as consideration for a release of claims.  Only the portion of the premium for which the employee is responsible can be used in this way. 

For more information on these significant developments, visit our Employee Benefits Blog: