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The Economic Stimulus Package and COBRA

Immediate Action Required From Employers


The American Recovery and Reinvestment Tax Act of 2009 (the "Act") was signed into law on February 17, 2009. This new law dramatically affects employers whose group health plans are subject to COBRA, which includes virtually all employers who employed 20 or more employees on 50% of its typical business days during the preceding calendar year.

As an employer who is potentially impacted by this legislation, prompt attention must be paid to the substantial requirements under the Act and its affect on COBRA. Specifically, the Act provides a 65% government subsidy toward COBRA coverage to employees who are involuntarily terminated between September 1, 2008 and December 31, 2009, as well as their family members who are eligible for COBRA due to such termination.

Significantly, the employer must first provide this 65% payment toward the COBRA premium and then be reimbursed by the government. Additionally, the Act imposes numerous COBRA notice and other obligations on plan administrators and employers. Immediate action is required as the subsidy portion of the Act becomes pertinent for periods of coverage beginning on or after February 17th (i.e., March 1, 2009 for those plans using a calendar month for their COBRA periods of coverage).

Individuals Eligible for the Subsidy

Individuals who are eligible for the subsidy are called assistance eligible individuals (AEIs). An AEI includes any qualified beneficiary who is eligible for COBRA as a result of the covered employee’s involuntary termination (for reasons other than gross misconduct) which took place between September 1, 2008 and December 31, 2009.

However, AEIs can lose eligibility for the subsidy if they become eligible for Medicare or eligible for other group health plan coverage (including coverage under a spouse’s plan, but specifically excluding only dental, vision, counseling or referral services, or on-site medical facilities of an employer primarily for first-aid, prevention or wellness services). Additionally, high income individuals may lose a portion of or all of their subsidy.

Specifically, the subsidy is phased out through additional taxation for taxpayers with a modified adjusted gross income for the calendar year of more than $125,000 (or $250,000 if married filing jointly). Additional taxation is capped by the full amount of the subsidy for taxpayers whose modified adjusted gross income reaches $145,000 (or $290,000 in cases of a joint return). Taxpayers reaching these thresholds can permanently waive their right to a subsidy to avoid this issue. In such case the taxpayer would simply pay the full COBRA premium charged.

Subsidy Coverage and Duration

The government will provide the 65% subsidy toward any coverage to which COBRA is applicable (ie. medical, dental, vision), except for health flexible spending accounts. The subsidy is not retroactive to when COBRA coverage was, or could have been elected by the AEI. Instead, it will continue for a maximum period of nine (9) months for periods of coverage beginning on or after February 17, 2009 (ie. March 1st or thereafter for most plans).

Specifically, the subsidy terminates at the earlier of:

  • 9 months;
  • eligibility for other group health plan coverage as discussed above;
  • Medicare eligibility;
  • the end of the maximum COBRA coverage period required by law; or
  • for those electing COBRA during the special election period, the end of the COBRA period starting from the initial time period when the AEI could have elected COBRA.

An AEI who does not notify the employer of (b) or (c) above is subject to a penalty of 110% of the premium reduction received for disqualifying months.

Special Election Period

A special election period exists for AEIs whose qualifying event occurred on or after September 1, 2008 but who were not covered under COBRA as of February 17, 2009. The employer must provide them with notice of their special election right by April 18, 2009. The AEIs will then have 60 more days after receiving this notice to elect coverage.

This COBRA coverage, however, will not be retroactive to the date of the involuntary termination. It will only take effect as of the first day of the first period of coverage beginning on or after February 17, 2009. (Any resulting gap in coverage will be disregarded for purposes of determining the 63 day period which would affect one's creditable coverage subjecting him/her to pre-existing condition exclusions).

Additionally, the COBRA coverage will not be extended and will instead terminate at the same point it would have if the AEI had elected COBRA when it was first made available.

If the employer allows, employees may elect coverage different than that in effect at the time of termination; however, the premium must not exceed the premium for the coverage enrolled in at the time of termination, the different coverage must also be offered to active employers, and the different coverage must not be: (a) only dental, vision, counseling or referral services; (b) a health FSA; or (c) coverage providing treatments in an on-site medical facility of the employer providing primarily first-aid and prevention services.

Find out the specifics of what you need to do now: How Does This Affect Employers?

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