COBRA Subsidy Extended and Modified

Newly-enacted legislation extends and expands the 65 percent federal COBRA subsidy under the American Recovery and Reinvestment Act (ARRA) in cases of involuntary termination of employment. A stopgap measure signed into law on March 2 by President Barack Obama extends the end of the eligibility period from February 28 to March 31, 2010, and makes other longer-lasting changes to the year-old subsidy arrangement. These changes include:

• Providing that health plan participants who initially lose coverage due to a reduction in hours, but are later involuntarily terminated, will be eligible for the COBRA subsidy. Under the original ARRA, a loss of coverage due to a reduction in hours would not have triggered a right to the federal subsidy. This new rule will apply to cases where the involuntary termination that follows the reduction in hours occurs on or after March 2, 2010. Affected individuals will have to get new notices and additional election rights.
• Creating a new penalty of up to $110 per day for plan sponsors or health insurers that fail to comply (within 10 days) with a Department of Labor (DOL) determination that an individual’s qualifying event was, in fact, an “involuntary termination.” Under the ARRA’s original COBRA subsidy provisions, individuals who are denied eligibility for the subsidy have the right to appeal to the DOL. This new penalty is effective as of March 2, 2010.
• Protecting employers from inadvertently overstating their employment tax credits based on the COBRA subsidy. If an employer makes a “reasonable interpretation” of the subsidy law and regulatory guidance, and determines that an employee was involuntarily terminated, and the employer maintains supporting documentation of that determination, then (for purposes of the employment tax credit) the qualifying event is “deemed” to be an involuntary termination. This is important for employers who had been concerned that interpreting the rules in ways more beneficial to employees could lead to allegations that the employers improperly inflated the amount of employment tax credit to which they were entitled. This protection is effective retroactively as if it were included in the original ARRA (which was enacted February 17, 2009).

This stopgap legislation, the Temporary Extension Act of 2010, marks the second – and likely not the last – time that Congress has extended the COBRA subsidy.