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COBRA Subsidy Created by ARRA

Last Updated: March 29, 2010

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA) into law which brought significant changes to COBRA benefits and their administration. ARRA was then expanded and extended on December 19, 2009 by the Department of Defense Appropriations Act of 2010 (DOD Act), and again on March 2, 2010 by the Temporary Extension Act of 2010 (TEA). It has been a difficult task for employers to keep track of these ever-changing provisions, some of which have been implemented with retroactive implications and onerous and confusing notice requirements. In fact, more change in this area seems imminent, with additional legislation being considered at the current time.

As a reminder, federal COBRA applies to employers with 20 or more employees. Some states maintain COBRA-like plans that provide similar or additional benefits. These states would need to enact legislation to align with ARRA and any of its amendments.¹

The New Federal Benefits
The following benefits are available to Assistance Eligible Individuals (AEIs):

A COBRA Premium Subsidy of 65% of the monthly cost of the individual's COBRA coverage, for a period of up to 9 months under the initial ARRA legislation and then expanded to 15 months under the DOD Act;
Alternative Coverage - The ability of an employer to offer alternative coverage from what was in place at the time of the loss of coverage; and
Re-Election Rights - The ability to re-elect COBRA through an extended or special-election period for certain individuals who previously failed to elect COBRA or who elected COBRA and then subsequently declined the coverage. As many of the provisions of ARRA and its amendments had retroactive impact, there have been a number of special election periods during which individuals were afforded the opportunity to make a new decision about ARRA based on the terms and conditions of the subsidy offered at the time.

How the Subsidy Works
An AEI who elects COBRA or state COBRA-like coverage only needs to pay 35% of his/her full COBRA premium (individual AND dependent cost) in order to be deemed to have paid the full amount under ARRA as Amended. For federal COBRA - the premium reduction (65% of the full premium) is generally fronted by the former employer. For Cal-COBRA - the premium reduction is generally fronted by the insurance company. These entities are then reimbursed the 65% in the form of a payroll tax credit or direct reimbursement from the federal government.

Eligibility
The new COBRA benefits are available to Assistance Eligible Individuals (AEIs)² who are defined as a former employee or qualified beneficiary (spouse or dependent) who meet all of the following criteria:

The employee was:

involuntarily terminated between September 1, 2008 and March 31, 2010³ OR
lost coverage on or after September 1, 2008 due to a reduction in hours and then subsequently experienced an involuntary termination between March 2, 2010 and March 31, 2010; AND
Is eligible for COBRA continuation coverage or state COBRA-like coverage at some point during these dates; AND
Elects COBRA coverage or state COBRA-like coverage; AND
Is not eligible for Medicare or group health plan coverage (such as a plan sponsored by a successor employer or a spouse's employer).

Notice Requirements for Employers
ARRA as Amended has created a number of new notice requirements for employers, both to inform AEIs of their benefits and any retroactive election periods, as well as to inform all individuals who experience a qualifying event of the current availability of COBRA subsidies. For a complete list of these notice requirements, please see Vantaggio's Info Bulletin entitled "COBRA Notice Requirements." Additionally, employers now have new responsibilities to provide information to their medical insurance providers. For example, if your company is going to allow for alternative coverage elections to AEIs, you must notify the insurance carrier. If you have employees who may need to be afforded a new opportunity to elect COBRA (other than at the time of a "normal" qualifying event), you should be sure to let your carrier know.

Due to the costly fines and penalties that can be assessed and the significant liability for the employer in the event someone does not get the appropriate coverage, we urge our clients to take COBRA administration very seriously. You should review and update all COBRA procedures and documents on no less than an annual basis, or more frequently as the law changes.

If you do not have a third-party administrator (TPA) for COBRA, please contact Vantaggio for a recommendation. Although we believe that a competent TPA is the best course of action, for our clients who elect to keep this function in house, we have developed a self-administration kit. Please click here for more details: Vantaggio HR's COBRA Notice Kit.

¹Cal-COBRA exists in California and provides benefits very similar to federal COBRA but applies to companies with 2-19 employees. Hawaii currently has no state COBRA-like plan. While California did pass legislation in May 2009 aligning Cal-COBRA to the same notice requirements of ARRA, California has not yet passed legislation bringing the state's notice requirements in line with the subsequent amendments to ARRA. However, legislation in pending in California that would do so.

² Please note that the amount of the premium reduction is recaptured for certain high-income individuals. If the person's adjusted gross income for the year is more than $125,000 (or $250,000 for married couples filing a joint federal income tax return) all or part of the premium reduction may be recaptured by an increase in his/her income tax liability for the year.

³ Currently December 31, 2009 for Cal-COBRA.