The New COBRA

Federal Stimulus Package Makes Substantial Changes to Post-Termination Benefit Requirements

By Mark P. Santagata

With most workers dependent upon their employers for health insurance, the recent spike in unemployment has left millions of people without medical coverage. In an effort to provide relief, the American Recovery and Reinvestment Act, the massive stimulus package signed into law by President Obama on February 19, 2009, changes the way that certain employees can access health, dental and vision insurance after losing a job.

COBRA is the 1985 federal law that allows employees to continue to receive health benefits following their termination. Before the recent changes, COBRA required all employees to pay 100% of the cost of the insurance, and gave the employer the option to impose an additional 2% fee for administrative costs associated with providing post-termination benefits. Effective February 17, 2009 qualified employees need only cover 35% of the premium; employers or insurers must cover the other 65%. The 65% subsidy is available for up to 9 months.

In order to be eligible for the new benefits, an employee must qualify as an Assistance Eligible Individual (AEI). To be an AEI, an employee must be “involuntarily terminated” between September 1, 2008 and December 31, 2009. Employees involuntarily terminated “for cause” qualify as AEI’s, unless the cause constituted “gross misconduct.”

Employees must also satisfy income requirements to qualify. Individual tax return filers earning over $145,000 annually, and joint filers with incomes over $290,000 are not entitled to the subsidy. If an ineligible person claims the benefit, the 65% subsidy and a substantial penalty will be added to his income tax liability. It is the responsibility of the employee, not the employer, to determine if the income threshold is met.

Although employers pay the 65% benefit, they are actually advancing the subsidy for the federal government. Employers recover the money through a payroll tax credit. If the employer’s payroll tax liability is less than the cost of the insurance subsidy, the employer can take the excess credit as a refund.

Federal COBRA standards only apply to employers with more than 20 employees. A similar Connecticut statute requires extension of post-termination insurance benefits regardless of the number of employees. Recently the state Department of Labor reconciled the new federal standards with Connecticut law by imposing the 65% premium subsidy on insurers, rather than employers, if the employer has fewer than 20 employees.

Employers should make sure that the COBRA notice provided to terminated employees complies with the new standards. Careful consideration should also be given when benefits are extended as part of a severance package. Severance contributions to insurance costs are not reimbursable, and the 65% subsidy must be provided to the employee, even if a portion of the employee’s insurance costs are being covered by severance payments.

It is estimated that 7,000,000 laid-off workers will qualify for the enhanced benefits and that the new plan will result in a 300% increase in employees seeking COBRA benefits following termination. The potential cost to the government: $25 billion.