Economic Stimulus Expands Cobra Coverage

February 27, 2009

The sprawling American Recovery and Reinvestment Act of 2009 (“Act”) expands COBRA continuation coverage for certain displaced workers and provides a whopping 65% premium assistance subsidy to eligible individuals. 

COBRA enables terminated employees to continue their group health plan coverage for up to eighteen (18) months, provided the employee pays the monthly premium which can be as much as 102% of the cost of coverage.  The Act makes COBRA more affordable and accessible to terminated workers in three ways.

First, the Act offers a 65% COBRA premium subsidy for up to nine months for workers who are involuntarily terminated between September 1, 2008 and December 31, 2009.  Second, the Act permits employers to provide terminated workers with a more affordable enrollment option.  Third, the Act provides employees who lost coverage after September 1, 2008 with an extended opportunity to elect or re-elect COBRA coverage and take advantage of the subsidy.

Premium Assistance Subsidy

A COBRA “qualified beneficiary” will be an “Assistance Eligible Individual” eligible for the subsidy if he:

  • becomes eligible for COBRA during the period September 1, 2008 through December 31, 2009 because of the involuntary termination of the covered employee; and
  • actually elects COBRA coverage.

The Act also imposes income thresholds on the availability of the subsidy.  An individual who is otherwise an Assistance Eligible Individual would not be eligible for the subsidy if he has an adjusted gross income of $145,000 ($290,000 for joint filers). Subsidies are reduced proportionately for taxpayers with adjusted gross income between $125,000 and $145,000 ($250,000 and $290,000 for joint filers).

The subsidy actually works as a tax credit to employers.  An Assistance Eligible Individual would be required to pay 35% of the COBRA premium.  Employers would not receive any subsidy payment upfront, but would be able to recover the other 65% of the COBRA premium in the form of a credit against their income tax withholding and FICA taxes (employer and employee portion).  If the COBRA premiums due an employer exceed its tax obligations in a given quarter, the U.S. Treasury will issue a check to make up the difference.  Finally, the premium subsidy is not includible in the gross income of an Assistance Eligible Individual. 

Plan Enrollment Change

The Act now permits employers to provide involuntarily terminated employees and their dependents with a ninety (90) window to select coverage under a different, lower-cost coverage option than the one they were enrolled in at the time of involuntary termination.  But, if an employer chooses to allow involuntarily terminated employees and their dependents to change their enrollment options, the employer must make that opportunity available to all active employees, and the opportunity to change to a lower cost option cannot be limited to dental, vision or health FSA benefits, or certain treatment provided at on-site medical facilities.  The ninety (90) day election period runs from the day that the COBRA beneficiary receives notice of the new enrollment option.

Extended Election Period

The extended COBRA election period is available to any individual who does not have a COBRA election in effect on February 17, 2009 (the day President Obama signed the Act), but who would have been an Assistance Eligible Individual if he had made a COBRA election.  As a result, employees who were terminated as far back as September 1, 2008, and who did not elect COBRA coverage now have a new election period under the Act.  Such employees will have 60 days from the date they receive notice of the extended election period to elect COBRA coverage at the subsidized rate.  Their actual COBRA coverage would begin as of February 17, 2009 and would only continue until the end of the maximum coverage period had they elected COBRA coverage when they were first involuntarily terminated. 

In addition, employees who were involuntarily terminated on or after September 1, 2008 and who did elect COBRA coverage when initially eligible are eligible for the subsidy for the remainder of their coverage period.  Finally, employees who elected COBRA coverage initially, but whose coverage lapsed because of non-payment of premiums are entitled to re-elect COBRA and take advantage of the premium subsidy. 

The extended election period and the subsidy are only available to those COBRA qualified beneficiaries whose qualifying event was the involuntary termination of the covered employee.  Other COBRA qualifying events such as voluntary termination, divorce, reduction in hours or a dependent child reaching a limiting age under a health plan are not covered by the Act. 

An Assistance Eligible Individual who became eligible for COBRA on or after September 1, 2008, but before February 17, 2009, must receive notice no later than April 19, 2009 of the availability of the premium subsidy, the right to choose different coverage (if offered), and the extension of the COBRA election period (if the individual is not a COBRA participant as of February 17, 2009). 

Effective Date

The Act became effective as of February 17, 2009.  The premium subsidy is available to Assistance Eligible Individuals for the first “period of coverage” beginning after February 17, 2009 which may be a monthly (or shorter period) during which premiums are charged.  For most Assistance Eligible Individuals, eligibility will commence March 1, 2009, and the first “period of coverage” will be the month of March, 2009. 

Finally, the Act permits employers to charge the non-subsidized COBRA rate for the first two “periods of coverage” following February 17, 2009 (typically, March and April, 2009).  But, employers must later reimburse or credit the individuals for the missed subsidy. 

Immediate Action Items

  • Identify all qualified beneficiaries who became eligible for COBRA between September 1, 2008 and February 17, 2009 due to involuntary termination.
  • Determine whether to offer the right to elect a different, lower-cost coverage option.
  • No later than April 18, 2009, notify Assistance Eligible Individuals of the premium subsidy and the right to elect a different coverage option (if offered).
  • No later than April 18, 2009, notify all Assistance Eligible Individuals who were not COBRA participants as of February 17, 2009 of their extended right to elect COBRA coverage.
  • Update all COBRA notices and election forms to reflect the premium assistance subsidy and the election changes available to workers who are involuntarily terminated between February 17, 2009 and December 31, 2009.
  • Review accounting and payroll procedures to capture the subsidy for the payroll tax credit.