On Tuesday, February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 ("the Act") into law.  The Act contains several provisions that will directly impact the provision of COBRA coverage[1] to former employees beginning on March 1, 2009.  Importantly, the changes will impact any employer that sponsors a group health plan for employees and has terminated employees after September 1, 2008.  These changes include:

Initially, as of March 1, 2009, individuals who were or will be involuntarily terminated after September 1, 2008 but before January 1, 2010 will qualify for a 65% subsidy of their COBRA premium for a maximum of nine months, or until the employee becomes eligible for Medicare or other group coverage.  In order to receive the subsidy, the terminated employee must pay the remaining 35% to the employer or other entity responsible for collecting the COBRA premium.  That entity is required to accept the 35% as full payment from the employee, and the entity receiving the 35% payment will be required to pay the remaining 65%, which will be reimbursed by means of a payroll tax credit.  In the event the payroll tax credits are less than the COBRA subsidy, the paying entity will receive the remainder of the reimbursement directly from the government.  The Secretary of Treasury will be issuing guidance regarding the process for receiving the tax credit.

There are income limitations with respect to the subsidy.  Specifically, the full subsidy is available for individuals with Adjusted Gross Income of up to $125,000 (single filer) or $250,000 (joint filer).  A reduced subsidy is available for individuals with income up to $145,000 (single filer) and $290,000 (joint filer).  A subsidy received by individuals with income above these limitations will result in imputed income which will be recovered in income taxes.  An individual who does not qualify for the subsidy or otherwise does not wish to receive the subsidy may waive his or her right to the subsidy.

Furthermore, those individuals terminated after September 1, 2008 but before enactment of this law and who declined COBRA coverage must be located and notified in writing that they have 60 days to elect COBRA coverage.  Importantly, however, the 18-month COBRA qualification period is not changed by the special election opportunity, and will continue to run from the date the employee lost coverage.

In addition, the Act provides that a COBRA recipient eligible for the subsidy must be given an opportunity to change his or her health insurance coverage option, which must have the same or lower premiums, and the change election must be made within 90 days of receipt of the COBRA election notice.

Employers must amend their COBRA election notices to include, among other things,  language about the subsidy and the availability of any lower cost health plans.  The Department of Labor is expected to publish a revised model COBRA election notice by mid-March 2009.   For those employers who have third party COBRA administrators, we recommend contacting your administrators to ensure compliance with the new law.

It is unclear how the subsidy will apply if under the terms of a separation agreement, an employee is required to pay only a portion of the applicable COBRA premium (typically 102% of the total cost).  However, employers who already fully subsidize terminated employees' COBRA coverage will not benefit from the law, since the Act applies only to COBRA premiums paid by terminated employees or by someone else on behalf of the terminated employees.  Therefore,  employers who anticipate additional employee terminations during 2009 will want to review and perhaps modify their COBRA subsidy programs in order to benefit from the Act's subsidy.

If you wish to discuss your company's obligations or have other questions about this new law, please contact the Nukk-Freeman & Cerra attorney with whom you normally work, or Liza Hecht at  973-564-9100 or via e-mail at lhecht@nfclegal.com.

[1] The Act applies to any entity subject to continuation coverage requirements, whether under the federal COBRA or a state mini-COBRA law.