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Obama’s Stimulus Package Offers COBRA Premium Reduction to Involuntarily Terminated Employees

The Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) provides for a temporary extension of employer-provided group health coverage, which is commonly referred to as COBRA continuation coverage. The American Recovery and Reinvestment Act (“Act”), which President Obama signed on February 17, 2009, includes several changes to COBRA continuation coverage that employers quickly need to address. The most notable impact is a significant reduction in the COBRA premiums paid by certain employees whose employment is involuntarily terminated. Under the Act, eligible individuals are required to pay only 35% of his or her COBRA premium. The remaining 65% of the COBRA premium will be reimbursed to the employer through a payroll tax credit.

Who is eligible

The subsidy is available to employees terminated involuntarily between September 1, 2008 and before January 1, 2010 due to a covered employee’s involuntary termination of employment. The Act does not define “involuntary termination,” but it does not include employees who were terminated for gross misconduct. The premium reduction, however, may apply to employees who voluntarily resign as part of an agreement in lieu of termination.

Duration of the Subsidy

The subsidy is available for a period of nine months. The subsidy, however, does not extend beyond the end of the maximum period of coverage required under COBRA or the individual’s becoming entitled to coverage under another group health plan.

Special Election Period

Individuals who were involuntarily terminated and who did not elect COBRA continuation coverage as of February 17, 2009 have a sixty day special election period to elect subsidized COBRA continuation coverage. For example, an eligible individual who lost her job on September 19, 2008 could decide in March or April 2009 to elect COBRA continuation coverage. The total eighteen month eligibility period, however, runs from the date when the employee stopped working.

Notice Requirements

Employers are required to modify existing COBRA notices to inform individuals about the availability of the subsidy and the availability of potential lower cost health insurance options. The Secretary of Labor will make model notices available to employers later this month.

Effective Date

The subsidy applies to health insurance premiums paid for COBRA continuation coverage beginning on or after February 17, 2009. The subsidy is not retroactive to individuals who were involuntarily terminated between September 1, 2008 and February 16, 2009.

What Should Employers Do Now

Employers and plan administrators should update COBRA forms, summary plan descriptions and required notices to ensure compliance with the new law. In addition, employers must identify those individuals who are or were COBRA eligible based on an involuntary termination since September 1, 2008 and must notify those individuals of the availability of the subsidy. Moreover, employers should review severance agreements and other separation-related documents to determine the effect of the new law.