COBRA Subsidy under the New Stimulus Act: A First Look

1. General Background

What we know: At this time, we understand the program will start on March 1, 2009. It provides for a 65% employer-paid subsidy for COBRA premiums for up to 9 months from March 1, 2009 through December 31, 2009. The employer-paid (aka former employer) subsidy will be reimbursed to the employer by deducting the subsidy from the bottom line payroll taxes. What we don't know: We have not received official word that this program will be extended to State Continuation for employer groups under 20 employees.

2. Make Sure You Know Who Will Be Responsible for Preparing and Sending Notices

Within 30 days, we will be getting a model notice from the Department of Labor regarding the new COBRA subsidy program. There will be a 60-day implementation window for employers retroactive to the Act's COBRA provision effective date, which we believe will be March 1, 2009.

3. Know Who May Be Required to Get a Notice

The subsidy applies to those who suffered an involuntary loss of coverage between September 1, 2008 through December 31, 2009. But the Act does not specify what it will consider "involuntary" loss, and it also states that ALL qualified beneficiaries, regardless of the reason for their qualifying event, must get the notice. Employers and plan sponsors should go back to September 1, 2008 and identify EVERYONE (including dependents) who had a qualifying event, and confirm that these individuals will get a notice. This can be for voluntary and involuntary terminations, reduction to part-time hours, and also applies to those made eligible as a result of divorce, death or age. They may not get the subsidy, but you must be prepared to send them a notice if required.

4. Determine Who Has Actually Elected COBRA Coverage and If It Has Continued

The Act includes a retroactive provision that allows those who were eligible for COBRA since September 1, 2008 and who did not elect it. It creates a window for them to now elect continuation coverage retroctive to the first date of the qualifying event. Even if they did not actually elect coverage when first eligible, they may now use the subsidy to elect. We will get further guidance on this, but the employer should prepare for the finncial impact of the subsidy by knowing who has already elected, and who might be entitled to a reimbursement. What we don't know: Whether the subsidy will also be retroactive, or just from the date of the Act forward.

5. Prepare for Employee Questions

At this point, employers may already be receiving questions about entitlement to subsidy and how it will be handled. Please note that the Act specifically gives employers a transition period equal to two (2) COBRA premium periods after the first day of enactment. No employer is required to make any immediate subsidy payement nor is any qualified beneficiary relieved of the obligation to pay 100% of the premiums for continuation of their coverage during this transition period. Employee and qualified COBRA beneficaries should simply be advised that the employer is aware of the Act and its requirements and is prepared to comply after the close of the transition period (again 60 days from enactment of the Act). Until then, the employer may choose to reimburse for the 65% subsidy, or apply it against future premium payments, but NO commitment has to be made immediately!

6. Consider the Impact of the Subsidy on Future Reductions in Workforce

Recognize that there is now an added cost to reductions in workforce that equates to paying 65% of the COBRA premiums. Employers must account for this added expense when considering the cost benefit of a reduction in payroll. While not all employees will elect COBRA because of the subsidy, and some will not qualify, it can be reasonably anticipated more will elect than before. If you are in the process of reducing your workforce, affected employees should be advised that the subsidy is avilable, but application of the subsidy will not be finalized until the close of the current transition period.

7. Don't Panic!

Above all, don't over react to this change. More details will develop over the next several weeks via frequent updates as more regulatory instruction becomes available.