Stites & Harbison, PLLC

The American Recovery and Reinvestment Act of 2009 which was signed into law by President Obama on February 17, 2009, among other things, provides a temporary 65% subsidy for the cost of COBRA coverage for up to nine months for eligible individuals.  Eligible individuals are generally those employees who were involuntarily terminated (other than for gross misconduct) from September 1, 2008 through December 31, 2009 and certain qualifying dependents who were otherwise eligible for COBRA.  Certain high income individuals are not eligible for the subsidy.  The subsidy will apply for periods of coverage generally beginning as early as March 1, 2009.  Eligible individuals will be responsible for paying only 35% of COBRA premiums during the nine month period.  The employer generally will pay the remaining 65% of the premium but can recoup these premiums as a credit against federal payroll tax withholdings or, if necessary, seek direct reimbursement from the federal government.

Employers have 60 days from February 17, 2009 to notify all eligible individuals of the premium subsidy and, if not currently enrolled, eligible individuals will have a special 60 day enrollment period from the date of the notice to enroll in COBRA.  COBRA coverage would be retroactively effective back to March 1, 2009.

Since the March 1 start date is so soon and the necessary administrative procedures likely cannot be implemented by such date, eligible individuals may be required to pay the full premiums for March and April but within 60 days the employer must either credit the subsidized portion of the premium against future COBRA premiums or refund the subsidized portion.

The subsidy generally applies to all plans covered by federal COBRA law and those plans exempt from federal COBRA (e.g. small employer plans) but covered by state laws that require continuation coverage comparable to COBRA.

What Must Employers Do

Employers must take immediate actions to implement and administer this subsidy.  Among other things, employers will need to (1) identify all individuals involuntarily terminated on or after September 1, 2008 other than for gross misconduct; (2) determine who amongst these individuals elected or did not elect COBRA and who is currently covered by COBRA; (3) establish new billing systems to only charge 35% of the applicable premium to eligible individuals and a mechanism to recover the subsidy amounts through federal tax withholding credits; and (4) send special notices.

The Department of Labor has been charged with creating a Model Notice no later than March 19, 2009.  Employers may not want to wait and may wish to prepare their own notice and send it earlier so as to get the COBRA election period running earlier.  Stites & Harbison can provide the notice.

For More Information

Please contact any of our lawyers or Andy Jacobs (ajacobs@stites.com) in our Employee Benefits Department for more information.