New Law Extends COBRA Subsidy

President Obama signed new legislation on December 19, 2009 which extended the COBRA subsidy for involuntarily terminated employees that was set to expire on December 31, 2009. The COBRA subsidy was originally enacted in February 2009 as part of the American Recovery and Reinvestment Act (ARRA) to provide involuntarily terminated "assistance eligible individuals" (AEIs) with a 65 percent subsidy for COBRA continuation coverage for up to 9 months. The new legislation extends the period during which an AEI can receive a COBRA subsidy from 9 months to up to 15 months, and also extends the end of the eligibility period from December 31, 2009 to February 28, 2010. Additionally, it is no longer required that COBRA coverage begin by the end of the eligibility period, February 28, 2010, so long as the involuntary termination of employment occurs by February 28 and the AEI is entitled to COBRA coverage as a result. In other words, an individual involuntarily terminated on February 28, 2010, whose COBRA coverage becomes effective on March 1, 2010, may be eligible for the subsidy. All other subsidy rules, such as the definition of "involuntary termination," are unchanged by the Act.

The extension affects AEIs as follows:

1. AEIs Currently Receiving the Subsidy. AEIs currently receiving the subsidy whose subsidy period has not yet expired can continue to pay the reduced 35 percent COBRA premium for up to an additional six months. An AEI's COBRA subsidy eligibility now ends on the earliest of 15 months after the date of the AEI's original subsidy eligibility, the AEI's eligibility for coverage under another group health plan, or the termination of the AEI's COBRA coverage.

2. AEIs Whose COBRA Coverage Terminated After 9-Month Subsidy Period Was Exhausted. AEIs whose COBRA coverage terminated on or after they had exhausted their COBRA subsidy period will be permitted an extended period of time, until the later of 60 days after enactment (February 17, 2010) or 30 days after required employer notices are distributed, to pay the past due premiums at the lower subsidized rate and retroactively reinstate their COBRA coverage. AEIs who dropped their coverage before the maximum subsidy period are not eligible for this retroactive election.

3. AEIs Whose 9-Month Subsidy Period Was Exhausted and Continued COBRA Coverage Paying Full COBRA Rates. AEIs who paid full COBRA premiums for coverage after the 9-month subsidy period ended must be reimbursed for their overpaid COBRA premiums. The employer will have the option to either issue a refund or apply the credit to future premium payments, if it is reasonable to believe that the credit can be used within 180 days after the overpayment was made, similar to the rules set forth under ARRA.

This new legislation requires the distribution of notices regarding the subsidy extension and the right to retroactively reinstate COBRA coverage. The Department of Labor is expected to release new model notices and additional guidance within the next 30 days, just as it did with the original ARRA subsidy. Ice Miller will continue to monitor developments and will send future e-updates as guidance is issued.  Meanwhile, you should ensure that your COBRA provider will continue to accept reduced COBRA premium payments from currently eligible subsidy recipients, and you may wish to informally notify your employees and current COBRA recipients of the extension.