Economic Stimulus Bill Provides COBRA Premium Subsidy that Requires Employer Action

On February 17, 2009, President Obama signed the Economic Stimulus Bill, which provides a federal subsidy to assist individuals with premium payments for continuation of group health coverage under COBRA. Under the new law, the federal government will pay 65% of COBRA premiums for covered employees who are "involuntarily" terminated between September 1, 2008, and December 31, 2009. The new law requires many employers to pay 65% of the COBRA premiums up front, and then seek federal reimbursement by taking a credit against the income tax withholding and FICA taxes. Premium assistance lasts for up to nine months.

Federal COBRA generally applies to group health plans sponsored by employers with 20 or more employees. To be eligible for the subsidy, a covered employee must be terminated "involuntarily" during the applicable period, although the new law does not define the term "involuntarily." It is not clear whether premium assistance extends to employees who resign voluntarily in the face of a pending involuntary termination, as is the case in many severance arrangements. The law also includes an income cap on the subsidy, providing that premium assistance will be "recaptured" from individuals with adjusted gross incomes of more than $125,000 (or $250,000 in the case of joint filers) in the year in which they receive assistance.

The new law places immediate and significant responsibilities on employers. In many cases, employers are responsible for up front payment of 65% of COBRA premiums for eligible individuals, and then must seek reimbursement of the amounts paid. For employers subject to Federal COBRA, the new law provides a second chance to elect COBRA continuation coverage when an effective election was not in place on February 17, 2009. Employers must provide notice to eligible individuals by April 17, 2009. Going forward, employers must revise their standard COBRA notices and election forms to include additional information about the premium assistance program. The Secretary of Labor is expected to issue a model notice by March 18, 2009.

Given the short time frame, employers should begin revising forms and notices without delay. Failure to comply with the new requirements can result in significant penalties for employers and failure to offer COBRA continuation coverage when required can result in the employer being liable for medical expenses incurred by an eligible individual.

We are currently developing amended forms and notices to assist employers with the new COBRA requirements. Please contact Jim Paul or Jennifer Krengel with any questions.