December 21, 2009Client Alert

COBRA Subsidy Period and Election Opportunities Extended

On December 19, 2009, President Obama signed the Department of Defense Appropriations Act, 2010 (the “DDAA”) into law. As it relates to the extension of COBRA continuation coverage, the DDAA is immediately effective.

Congress first created the COBRA continuation coverage subsidy (the “COBRA subsidy”) on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”). Under ARRA’s COBRA subsidy program, individuals who lost health coverage due to an involuntary termination (“assistance eligible individuals”) could continue COBRA coverage in the employer’s group health plan by paying 35% of the COBRA premium the employee would normally have to pay for COBRA coverage. The remaining 65% of the COBRA premium would be reimbursed to the employer (generally, but not in all cases) through a payroll tax credit.

The Changes

The DDAA expands the COBRA subsidy program in three significant ways. First, under ARRA the COBRA subsidy program was available only to assistance eligible individuals whose COBRA rights arose due to an involuntarily termination occurring between September 1, 2008 and December 31, 2009. The DDAA extends this period to February 28, 2010.

Second, under ARRA assistance eligible individuals were only eligible for a COBRA subsidy for a period of up to nine months (assuming the individual did not become eligible for other coverage). The DDAA extends this period to up to fifteen months.

Third, ARRA conditioned an assistance eligible individual’s status on the actual loss of coverage between September 1, 2008 and December 31, 2009, not merely the termination event that caused the loss of coverage. The DDAA appears to eliminate this requirement and instead merely requires that the qualifying event (i.e., the involuntary termination) occur during the period from September 1, 2008 to February 28, 2010.

Notice Requirements

Employers must give certain assistance eligible individuals notice of their right to additional subsidized COBRA coverage. Individuals who discontinued COBRA coverage when the original 9-month subsidy lapsed and individuals who continued to pay for COBRA coverage at the “non-subsidized” rate will be given an opportunity to elect to continue coverage at the subsidized rate retroactive to the date their subsidized coverage previously ended.

To that end, the DDAA requires notice must be provided to any individual who:

  • at any time on or after October 31, 2009, was an assistance eligible individual (including individuals who have become assistance eligible individuals since October 31, 2009); or
  • for periods of coverage beginning prior to December 19, 2009, was not eligible for subsidized COBRA coverage because the nine-month subsidy period lapsed, but who would have been eligible for subsidized COBRA coverage had the fifteen-month subsidy period applied at that time. A period of coverage is the month-long or shorter period with respect to which premiums are charged for health coverage.

For example, Acme Co. administers its COBRA continuation coverage on a monthly basis. Ed is terminated as part of a general reduction in force on February 20, 2009. Ed becomes eligible for COBRA coverage in the Acme Co. group health plan effective March 1, 2009. Assuming Ed was eligible for the subsidy (i.e., Ed did not have other coverage available), Ed would have received the subsidy for a period of 9 months—or through November 30, 2009. Under ARRA, Ed would have been eligible to continue COBRA coverage, but would no longer have received the subsidy. Assume Ed discontinued coverage beginning December 1, 2009 because he could no longer afford the coverage.

Under the DDAA, Ed is now entitled to retroactively elect to begin COBRA coverage again. The period of subsidized coverage would begin on December 1, 2009 and may extend up to May 31, 2010. Acme Co. must give Ed notice of his new rights under DDAA. Beginning June 1, 2010 and ending August 31, 2010, Ed would be eligible for unsubsidized coverage (assuming that no intervening event occurs that would lengthen Ed’s COBRA entitlement).

Employers have until February 17, 2010 to provide this notice to individuals. Although it is not entirely clear, it appears that the Department of Labor has 30 days within which to release draft notices complying with the law change.

Assistance eligible individuals who discontinued COBRA coverage after the nine-month subsidy ended must remit retroactive premium payments (based upon the applicable 35% subsidy) by the later of February 17, 2010 or 30 days following the date the individual receives notice of the extended benefit. Individuals who continued to pay for COBRA coverage after the nine-month subsidy ended will be credited for such payments by setting off the amount of the COBRA premium that exceeds the 35% subsidy against future COBRA premium liability or refunding the excess to the individual.

If you have any questions about the COBRA subsidy extension or its application to the administration of your group health plan, please contact your Michael Best attorney or any member of our Employee Benefits Practice Group.

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