Economic Stimulus Package Includes COBRA Changes

President Barack Obama is expected to sign the American Recovery and Reinvestment Act—commonly known as the economic stimulus package—into law on February 17. Among its many measures to provide relief for the unemployed, the act creates a temporary subsidy to assist laid-off employees in continuing employer-provided health care benefits under COBRA and comparable state and governmental continuation coverage requirements. The subsidy does not apply to health flexible spending account benefits.

Before the newly enacted changes to COBRA, employees electing COBRA continuation coverage had to pay up to 102 percent of the cost of the premiums for such coverage. The new law provides that COBRA continuation premiums for employees who are involuntarily terminated between September 1, 2008 and December 31, 2009 may not exceed 35 percent of the cost— effective March 1—with the remaining percentage to be subsidized by employers. Employers will then be able to claim a tax credit against wage withholding and payroll taxes to cover the COBRA subsidy.

Eligibility Factors Include Income and Termination Date

The COBRA subsidy is recaptured as additional income tax if the employee's income exceeds $145,000 (single filers) or $290,000 (joint filers), with a phase-in of the recapture starting at annual incomes exceeding $125,000 ($250,000 for joint filers.) Individuals who expect their incomes to exceed these maximums in a given taxable year may waive the premium subsidy for that year.

The premium subsidy lasts for up to nine months for eligible employees (and their covered family members) whose employment is or was involuntarily terminated (other than terminations for gross misconduct) between September 1, 2008, and December 31, 2009. Employees who voluntarily terminate employment are not eligible for the subsidy. However, the new law does not contain a definition of involuntary termination, so there are likely to be disagreements about whether particular individuals were voluntarily or involuntarily terminated. Individuals whose health plans deny them eligibility for the subsidy may appeal to the Department of Labor through a newly created expedited appeal process. The Department of Labor will have 15 days to review the employee's eligibility for the subsidy.

Because the law applies to employees who were involuntarily terminated since September 1, 2008, all such employees who did not previously elect COBRA will now be provided with a new 60-day election period during which they can prospectively elect the newly subsidized COBRA coverage. Any COBRA continuation coverage that is elected during the special election period begins on March 1 and does not apply retroactively to any prior period.

Continuation Coverage Not Extended

The new law does not extend the maximum COBRA continuation coverage period otherwise available. The normal 18-month continuation coverage period will still be measured from the individual's loss of coverage as a result of his/her involuntary termination of employment.

Individuals who become eligible for Medicare or coverage under another group health plan will lose their eligibility for the COBRA subsidy and must notify their former employers. If they fail to notify their former employers and continue taking the subsidy, they will be penalized up to 110 percent of the amount of the subsidy they receive after their eligibility for the subsidy terminates.

Employers are responsible for notifying individuals who terminated involuntarily during the affected timeframe of the new election rights. The Department of Labor must issue a model notice within 30 days after enactment of the COBRA changes.

Coverage Can Be Changed to Less Expensive Option

The new law also provides that employers may allow eligible individuals to change their health plan coverage option under the plan to a less expensive option in conjunction with electing COBRA. Prior to this change, COBRA eligible individuals could only elect to continue coverage under the same health plan option under which they were covered as an active employee.

Provision to Bridge Medicare Gap May Resurface

Prior to passage, the bill in the House of Representatives contained a provision extending COBRA for individuals who were 55 or older, or had 10 or more years of service with an employer and whose employment terminated voluntarily or involuntarily, or who had a reduction of hours resulting in a loss of coverage. Such employees would have been eligible to remain on COBRA continuation coverage until eligible for Medicare or another employer group health plan. This provision was not part of the economic stimulus package that became law. However, it is expected to resurface in later bills proposing comprehensive health care reform.

Employers Must Update COBRA Notices, Summary Plan Descriptions

The new subsidy raises a number of administrative issues that employers will need to address. For example, if employers provide continuation coverage to certain individuals who are not legally entitled to COBRA (such as domestic partners), employers will need to decide whether to offer such individuals the subsidy. If employers provide the subsidy to such individuals, they will need to report the value of the subsidy to the individuals as taxable income and will not be able to obtain the credit for the subsidy that is otherwise available.

Employers will need to act quickly to update their COBRA notices and summary plan descriptions to describe the new COBRA subsidy and to contact terminated employees who are eligible for the subsidy. Additionally, employers who laid off employees between September 1, 2008, and March 1, 2009, will need to consider whether revisions are needed to the terms of the continuation coverage they provided in previously awarded severance packages.