The New COBRA Subsidy Law – Action Steps

March 5th, 2009

In our last Short Report, we outlined some of the key points of the new COBRA subsidy provisions in the American Recovery and Reinvestment Act of 2009. In this Short Report, we outline some of the steps employers should take to prepare for and implement those provisions.

Brief Review

The Act provides for a 65% subsidy for the cost of premiums for continuation of coverage under health, dental and vision plans (but not flexible spending or health reimbursement plans) for individuals who: (1) are involuntarily terminated from September 1, 2008 through December 31, 2009; (2) are otherwise eligible for continuation coverage either under COBRA or Wisconsin’s continuation of coverage law; and (3) timely elect continuation coverage. Former employees who declined COBRA or state law continuation coverage or who elected and then dropped such coverage must be given an opportunity to elect subsidized continuation coverage.

Employers initially pay the 65% subsidy, but can obtain a tax credit to cover the amount and can be reimbursed for up to the full 65% for any amount not covered by the tax credit. The subsidy lasts up to nine months unless the individual becomes eligible for other coverage, becomes eligible for social security benefits, or if continuation coverage expires under any other existing COBRA or state law continuation of coverage provisions. 

IMPORTANT:  The continuation of coverage subsidy provisions of the Act apply to all Wisconsin employers offering group health plans to their employees, even those employers with less than 20 employees that are not generally subject to COBRA. 

Action Steps

To prepare for and comply with the new law, employers should take the following steps:

  1. Revise COBRA or Wisconsin continuation of coverage eligibility notices to include information about subsidy eligibility and the extended "second chance" deadline for eligible individuals who previously declined or elected and then dropped continuation coverage. The Department of Labor will be issuing model notices in mid-March.  
  2. Identify former employees who were involuntarily terminated between September 1, 2008 and February 17, 2009.
  3. Within 60 days of February 17, 2009, notify these former employees of their eligibility for the subsidy and, for those who initially declined continuation coverage or who elected and then dropped continuation coverage, the extended deadline for electing such coverage.
  4. Modify system procedures for: paying 65% of the premiums;reflecting the beneficiary’s subsidized share on premium statements if applicable; reporting and processing payroll taxes in order to receive credits and reimbursements.
  5. Determine if any COBRA participant has already overpaid premiums through March or April and, if so, determine whether those amounts need to be reimbursed or applied as a credit towards future premiums.
  6. If more than one plan option is currently offered to active employees, decide whether or not to allow an alternative coverage option to subsidy-eligible individuals.
  7. Determine whether to eliminate employer contributions to continuation coverage premiums from severance packages, since a payment of any part of the eligible individual’s 35% by the employer may trigger loss of the subsidy.

If you would like help with working your way through the necessary action steps, or if you have any other employment-related questions, please contact Meg Vergeront at 608.259.2663 or mvergeront@staffordlaw.com.

Filed Under: Business Law, Employment and Labor Law

Note: The SR Short Report is published by Stafford Rosenbaum. The SR Short Report is provided for informational purpose only and should not be construed as legal advice or an opinion on specific situations. The legal issues raised by a particular situation may differ from those addressed in the publication. We encourage you to contact one of the Stafford Rosenbaum attorneys before making a legal decision.