Publication

March 12, 2010Client Alert

Congress Extends and Expands COBRA Premium Subsidy Program: Employers Must Review Participant Roles for Participants Eligible for COBRA Based Upon Reduction in Hours

Overview

On March 2, 2010, President Obama signed the Temporary Extension Act of 2010 ("TEA 2010") into law. TEA 2010 modifies the COBRA subsidy program created under the American Recovery and Reinvestment Act of 2009. In particular, employers sponsoring group health plans need to be aware that TEA 2010:

  1. Expands the population of individuals who may be considered assistance eligible individuals ("AEIs"). The population now includes individuals who lost coverage under the group health plan based upon a reduction in hours and who were subsequently involuntarily terminated from employment on or after March 2, 2010. Previously, such employees were not eligible for subsidized COBRA coverage because the loss of coverage was not due to an involuntary termination. The law requires that the individual’s termination of employment be treated as a “qualifying event” (though it will not extend the maximum period of coverage which will still be measured from the loss of coverage due to reduction in hours).

    Employers must provide notice and an additional election period, described below, to this new class of AEIs.

  2. Extends the end of the COBRA subsidy program to individuals who are involuntarily terminated on or before March 31, 2010. The program had ended on February 28, 2010.

When is the new rule effective?

With regard to the application of COBRA subsidies to individuals who lost coverage due to a reduction in hours, and who were subsequently involuntarily terminated, TEA 2010 applies to periods of coverage beginning on or after March 3, 2010. While provisions within the Act also suggest that it will apply to individuals who are involuntarily terminated on or after March 2, 2010, it appears that such individual’s period of coverage would begin no earlier than March 3, 2010 anyway.

The extension of the COBRA subsidy to March 31, 2010 is effective immediately.

Which employees are covered?

The COBRA subsidy applies to individuals involuntarily terminated between September 1, 2008 and March 31, 2010. It also now applies to individuals who:

  • Experienced a COBRA qualifying event based upon a reduction in hours of employment (e.g., moved from full-time to part-time status which caused the employee to no longer be eligible under the group health plan) which occurred between September 1, 2008 and March 31, 2010; and

  • Were involuntarily terminated from employment on or after March 2, 2010.

There appear to be two groups of individuals affected by this change:

  • Employees (and dependents) who elected COBRA coverage following the employee’s reduction in hours and who remained on COBRA coverage through their termination of employment. They will be eligible for subsidized COBRA coverage for periods of coverage following the involuntary termination of employment.

  • Employees (and dependents) who did not make a COBRA election following their reduction in hours, or who did but have since discontinued coverage. These individuals are entitled to a new election period to resume COBRA coverage on a subsidized basis.

EXAMPLE 1: Acme Corp. sponsors a group health plan for its full-time employees. As of January 1, 2010, Acme’s employee, John, participated in the plan. On January 31, 2010, John was reduced to part-time employment and became eligible for COBRA coverage. He was sent the COBRA paperwork and elected coverage in the plan on a non-subsidized basis. On March 4, 2010, John is terminated. John will now be eligible for subsidized COBRA coverage for periods of coverage beginning on or after March 4, 2010.

EXAMPLE 2: Assume the same facts as Example 1, except that John was terminated on February 28, 2010. In this case, John will not be eligible for subsidized coverage because his termination date precedes March 2, 2010.

EXAMPLE: Assume the same facts as Example 1, except that John does not elect COBRA coverage at the time his hours were reduced because he cannot afford unsubsidized COBRA premiums. In this case, John will have a second chance to elect COBRA coverage following his termination of employment on a subsidized basis. The COBRA subsidy may last up to 15 months (assuming John remains otherwise eligible for the subsidy), but the maximum period of COBRA coverage will still run from the date of his loss of coverage due to a reduction in hours (February 1, 2010).

In all instances, it appears that Acme must provide John notice of his new COBRA rights.


Notice Requirements

Employers must provide notice to the new group of AEIs of their opportunity to obtain subsidized COBRA coverage and of the new election period within 60 days of the date the individual was involuntarily terminated from employment (not the date the individual’s hours of employment were reduced). It appears that this notice will apply to both groups of individuals who lost coverage due to a reduction in hours. The law requires that the Department of Labor issue model notices for employers to send to this new group of AEIs by April 1, 2010.

TEA 2010 raises some questions which are not answered. The individual’s maximum period of coverage is not extended. Therefore, the 18-month period will run from the date of the reduction in hours. Assuming the reduction in hours occurred on September 1, 2008, the individual’s COBRA eligibility should have already lapsed. It is unclear whether an employer would still have to send such employee a notice of these new COBRA rights.

Additionally, TEA 2010 does not distinguish between individuals who suffered a partial reduction in hours and those who suffered a full reduction in hours (e.g., layoff). The latter group was already considered to be AEIs and had the opportunity to obtain subsidized COBRA coverage. It is unclear whether members of the latter group who opted not to take subsidized COBRA coverage and let their election period lapse will now have a second opportunity to elect subsidized COBRA coverage.

Finally, while it is not explicit in the TEA 2010, it appears that the Department of Labor will also need to issue revised General Election Notices for use by employers.

Action Items

1. Identify all employees who have lost group health plan coverage due to a reduction in hours (other than layoff or termination) between September 1, 2008 and March 31, 2010 and, of these employees, those who have been/will be terminated from employment on or after March 2, 2010.

2. Provide notice to individuals who lost coverage due to a reduction in hours of their opportunity to obtain subsidized COBRA coverage within 60 days of the date the individual was involuntarily terminated from employment (not the date the individual’s hours were reduced).

3. Allow AEIs in this group who elect COBRA coverage will be entitled to begin COBRA continuation coverage retroactive to the date of the involuntary termination of employment.

4. Be prepared to issue revised COBRA General Election Notices to individuals who had a qualifying event on or after March 1, 2010, but prior to March 31, 2010 to ensure that proper notice is provided.


For additional information, please contact your Michael Best attorney or any of the attorneys in our Employee Benefits Practice Group.

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