March 5, 2009

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Act"). The Act reduces how much qualified employees must pay for continuation of health coverage under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Individuals who lose group health plan coverage due to an involuntary termination of employment between September 1, 2008 and December 31, 2009 may enjoy continued COBRA coverage for nine months paying only 35% of the cost. The balance (65%) is paid up-front by employers who will get offsetting credits against payroll tax deposits or federal income tax withholding liability.

Employee Eligibility

An assistance eligible individual is defined as one (1) who loses coverage during the period from September 1, 2008 to December 31, 2009 due to an employee’s involuntary termination (other than for gross misconduct) and (2) elects coverage during the special election period discussed below.

Special Election Period

As the law grants continuation coverage rights for those involuntarily terminated from September 1, 2008, individuals who were terminated between that date and enactment are entitled to a second chance to elect COBRA benefits. Those individuals who originally declined COBRA coverage and those who initially elected coverage but subsequently terminated coverage are entitled to the special election. Coverage will not be effective prior to March 1, 2009.

The special election period begins February 17, 2009 and ends sixty (60) days after the plan administrator provides the requisite notice.

By April 18, 2009 employers, insurance carriers and multi-employer plans must advise eligible individuals of their right to receive the subsidy as well as the right to modify their original election. Models for notification are to be issued by the Secretary of Labor by March 19, 2009.

The Length Of The Subsidy

An individual is entitled to a subsidy for a maximum of nine (9) months. Eligibility terminates sooner if the individual becomes eligible for coverage under Medicare or another health plan.

COBRA coverage continues to be measured from the date of the original qualifying event. Because of the retroactive eligibility of those involuntarily terminated on or after September 1, 2008, a number of individuals will enjoy the right to nine months of subsidized benefits starting March 1, 2009.

The Subsidy And How It Is Provided

The subsidy is 65% of the COBRA premium. The subsidy is paid up-front by employers. The employer’s portion is reimbursed by either a credit against its payroll tax deposits or federal income tax withholding. If the assistance eligible individual pays more than 35% of the COBRA premium during their first two (2) months of subsidy eligibility the employer must either reimburse the individual for the overpayment within sixty (60) days (taking a credit on the payroll tax for the reimbursed amount) or credit the overpayment toward the individual’s future COBRA payments (taking a credit on said amounts).

Regulations will clarify whether the 2% administrative fee currently permitted to be added to COBRA cost may be added to the individual’s 35% share.

NOTE: Individuals with adjusted gross income of $125,000.00 to $145,000.00 (double for joint filers) are entitled to reduced subsidy.

When Eligible Employees Must Be Notified

Eligible employees must be notified no later April 18, 2009. Those currently on COBRA will receive one form of notice. A different notice format must be given to those individuals terminated on or after September 1, 2008 who declined COBRA coverage or having elected coverage subsequently terminated it. Model notices will be prepared by the Department of Labor by March 19, 2009.

An employer may permit those eligible for subsidy to change coverage options (e.g., to a more affordable option) when electing coverage.

Current Employer Action Items

1. Review all terminations between September 1, 2008 and February 17, 2009 to identify those individuals who satisfy the involuntary termination standard for eligibility and who are entitled to a second chance election. Plan administrators must provide those individuals eligible for a second chance, and covered dependants, with proper notice of subsidy etc., by April 18, 2009.
2. Determine how you will effectuate notice to eligible individuals (you may modify your current notice or may wait for the Department of Labor's Notice).
3. Confirm with third party administrators that they are meeting the notice deadlines.
4. Review payroll processes to effectuate credit to payroll taxes or federal withholding.

We will keep you abreast of further developments. Of course, please feel free to contact Peter Schneider at 516.747.0300 ext: 179 to answer your questions and assist you in implementing COBRA changes.