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Labor and Employment Law Alert: New COBRA Premium Subsidies Result in New Employer Obligations

New COBRA Premium Subsidies Result in New Employer Obligations

March 1, 2009

On February 17, 2009, President Obama signed into law the new stimulus bill, the American Recovery and Reinvestment Act of 2009 ("ARRA"). One provision of ARRA requires the federal government to subsidize 65% of eligible employees’ COBRA health insurance continuation coverage for up nine months. Although the COBRA subsidy provisions are complex and contain many nuances, we have summarized the highlights of the new requirements below.

The subsidy provisions were effective as of the President’s signing; however, they cover employees who were involuntarily terminated from their employment between September 1, 2008 and December 31, 2009, and who earned under $125,000 (single filer) or $250,000 (joint filers) in the year in which the employee receives the subsidy. Employers are required to "front" the 65% subsidy by paying it on behalf of eligible employees who elect COBRA coverage. Employers will then be reimbursed by the Treasury Department by taking a credit against their quarterly payroll tax payments. The new subsidy is available for employees who were involuntarily terminated on or after September 1, 2008; however, the subsidy payments are not retroactive and only must begin as of March 1, 2009.

In certain circumstances, eligible employees who elect subsidized COBRA coverage may choose a lower-cost health plan if it is offered by the employer’s group health plan. This is a change from the current COBRA requirement that a participant generally can only continue the coverage in place at the time of the qualifying event. Regardless of which coverage employees choose, the subsidy is available until the earlier of (a) nine months after the first day of the first month for which the subsidy applies, (b) the date the employee becomes eligible for Medicare benefits or another group health insurance plan or (c) the end of the maximum required period of COBRA coverage. The new provisions provide for a 110% reimbursement penalty for any individual who does not inform the administrator of his or her eligibility under another group plan or Medicare.

Within 60 days of the ARRA’s enactment, employers must provide a notice to individuals who were terminated for any reason between September 1, 2008 and the date of enactment, but who did not choose coverage. This notice will advise employees that they have another chance to elect coverage. The special election period will be for 60 days commencing on the date the employee receives the notice. The Department of Labor expects to publish in mid-March sample notices that employers may use.

In addition to providing this special notice, employers must modify the COBRA notices that they provide to all employees terminated after the date of enactment. The modified notices must contain information on the availability of the subsidy, the terms of the subsidy, the option to choose different coverage (when applicable) and an explanation of the obligation to inform the group health plan administrator of new eligibility.

Employers should conduct a compliance review as soon as possible to assure compliance with the new COBRA subsidy provisions. In addition, employers should act immediately to identify employees terminated after September 1, 2008, work with their insurance carriers or legal counsel to modify their existing COBRA notice forms, develop procedures for administering the subsidy, and review other employment policies and agreements to determine if they will be affected by this law.

In response to numerous requests, we will be providing a brief seminar on this important change in the next month. In the meantime, if you have any questions about how this legislation may affect your responsibilities as an employer, please contact any member of the Carmody & Torrance LLP Labor & Employment Practice Group:

D. Charles Stohler (203) 575-2626; cstohler@carmodylaw.com 
Giovanna T. Weller (203) 575-2651; gweller@carmodylaw.com
Domenico Zaino, Jr. (203) 578-4270; dzaino@carmodylaw.com 
Howard K. Levine (203) 784-3102; hlevine@carmodylaw.com 
Vincent Farisello (203) 578-4284; vfarisello@carmodylaw.com
Molree Williams-Lendor (203) 575-2602; mwilliams-lendor@carmodylaw.com 

This Client Alert is issued periodically to keep Carmody & Torrance LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.

©2009 Carmody & Torrance LLP, All rights reserved.