Dramatic changes affecting every employer required to provide health insurance coverage under COBRA (20 or more employees) are included in the stimulus package signed into law by President Obama on February 17, 2009 (the American Recovery and Reinvestment Act of 2009 or ARRA). The law adds major administrative and short term financial burdens on employers. While the Department of Labor has yet to finalize guidelines, employers must act immediately if they have any former employees eligible for the new health insurance subsidies.

COBRA allows an involuntarily terminated employee to continue health insurance for up to 18 months from termination. Under the former version of the law an eligible employee paid up to 102% of the cost of their health insurance. With the current law, eligible former employees can receive a 65% government paid subsidy toward their COBRA premiums. Employers must pay the full premium and obtain reimbursement later via a payroll tax offset.

Who is eligible?
According to the Department of Labor the new benefit extends to anyone who was eligible for COBRA coverage from September 1, 2008, through December 31, 2009, as well as spouses and dependents. The effect of this law is immediate. The law covers anyone who was involuntarily terminated during that period (and does not include other COBRA qualifying events such as divorce). Former employees who were fired for gross misconduct are not eligible. The law does not extend the subsidy to a former employee whose spouse is eligible for any other health insurance coverage or for anyone eligible for Medicare. High wage earners do not benefit because of tax consequences (individuals earning $125,000 or more or a couple earning $250,000 or more) but must still be provided with notice.

What must employers do?

• Identify all individuals who became entitled to COBRA on or after September 1, 2008.
• Prepare (or have prepared) the notice required by the Act.
• Distribute the notice no later than April 18, 2009, to anyone who became entitled to COBRA on or after September 1, 2008.
• Offer a second COBRA election period to anyone eligible for the subsidy that previously declined coverage or lost COBRA coverage due to a failure to pay the premiums.
• For individuals terminated on or after February 17, 2009, provide a modified elections notice including the availability of the COBRA premium subsidy.
• Determine the premium (35%) to be paid by individuals eligible for the subsidy.
• Determine the procedure to recover the 65% premium subsidy for each payroll period where eligible individuals receive reduced COBRA premiums, including necessary documentation for the tax credit as required by the IRS. A credit must be claimed on IRS form 941, line 12(a). See the IRS website for more details.