COBRA Update

05/06/2009 / Mary L. Komornicka

The American Recovery and Reinvestment Act (ARRA) introduced a new feature to the health insurance continuation program known as COBRA, the federal subsidy. Under ARRA, individuals who have been involuntarily terminated from their jobs since September 2008 are eligible for a federal subsidy of 65 percent of the COBRA premium. The subsidy provision was enacted on February 17, 2009 and required employers to notify terminated employees since September 2008 about their eligibility for the subsidy by April 18, 2009. Although the federal COBRA law applies only to employees with 20 or more employees, since Minnesota has a “mini-COBRA” law that mirrors most aspects of the federal law, the ARRA subsidy applied to even the smallest of Minnesota employers. Most companies have completed this notification process with the assistance of their health insurance provider or COBRA administrator.

Having navigated their way through the initial confusion of the notices, it is important that employers now focus on the procedures and policies regarding this subsidy which will be effective for employees who are terminated as late as December 31, 2009. This means more than just the modification of COBRA notices to employees terminated throughout 2009 to reflect information regarding the subsidy. There are additional administrative requirements for employers, which include maintaining records of proper notification of terminated employees and dependents; the timely election by an employee or dependent for both COBRA and the subsidy; an employee’s subsequent notification of eligibility for health insurance and thus loss of subsidy eligibility; and the employer’s determination that the employee’s termination qualified as involuntary under ARRA. The DOL has developed Model Forms that can be used by employers to notify employees as well as document the eligibility of employees for the subsidy. These forms and additional information can be found at https://www.dol.gov/ebsa/cobra.html .

Going forward, employers must carefully record the termination reasons for employees to properly document whether the termination was “involuntary” under the terms of ARRA. The IRS has provided clarification regarding what is an “involuntary termination” in Notice 2009-27. In general, it is a severance of employment that is due to the employer’s exercise of unilateral authority and where the employee is willing and able to continue employment. For example, an employee who is terminated because of continued failure to report to work is not an “involuntarily terminated” employee since he has not demonstrated a willingness to work. A furlough or layoff would qualify as involuntary termination, but a reduction in hours that resulted in loss of health insurance would not qualify the employee for the ARRA COBRA subsidy.

Employers who violate these COBRA subsidy notification requirements are subject to a potential excise tax of $100 per affected employee per day that the violation continues. As this can be a significant penalty, employers should work closely with their health insurance provider, COBRA administrator and legal counsel to ensure that they remain in compliance with all aspects of the ARRA subsidy provisions.