COBRA Premium Subsidy Extension Arrives Just in Time for the New Year

By: Lesley A. Russo , Jill E. Hall and Lenna R. Chambers

On December 19, 2009, President Obama signed the Department of Defense Appropriations Act of 2010 (“2010 DOD Act”), which includes changes to the COBRA premium subsidy program initially established by the American Recovery and Reinvestment Act of 2009 (ARRA).  This legislation makes two important changes to the program: it extends the end of the eligibility period for the subsidy from December 31, 2009 to February 28, 2010, and increases the period of availability of the subsidy to eligible individuals to a maximum of fifteen (15) months, from the maximum nine (9) months permitted under ARRA. 

These changes require immediate action on the part of employers, insurers and health plan administrators to ensure they are correctly administering the premium subsidy program as amended by the 2010 DOD Act.  Updated notices must be provided to individuals to whom these extensions apply.  Individuals who dropped coverage when their initial subsidy expired must also be given the opportunity to retroactively continue COBRA coverage, and those who paid full premiums upon the expiration of the initial subsidy must be reimbursed for these overpayments.  Notice of these opportunities and rights must be provided no later than February 17, 2010; therefore, plan administrators should act now to ensure this deadline is met.

Background
ARRA’s COBRA premium subsidy provisions were enacted on February 17, 2009 to provide some relief to individuals affected by widespread layoffs in late 2008 and 2009, by reducing the cost of maintaining health care coverage under COBRA.  ARRA established a program whereby certain individuals (called “assistance eligible individuals”) could obtain COBRA continuation coverage by paying only 35% of the total premium that would be paid absent the subsidy.  The federal government then “reimbursed” employers, insurers and plan administrators by providing a credit of the remaining 65% against payroll taxes payable by these entities.  Refunds from the federal government were paid to employers, insurers and administrators only to the extent the payroll tax credit did not fully compensate the entity for the subsidized portion of the COBRA premiums.

To be an assistance eligible individual, an individual had to lose eligibility for his or her group health care coverage as a result of a COBRA qualifying event of involuntary termination.  Under ARRA, both the involuntary termination and the loss of eligibility for health care coverage had to occur between September 1, 2008 and December 31, 2009.  An individual could not receive the subsidy if he or she was eligible for other group health coverage, such as through a spouse’s employer.  Assistance eligible individuals became eligible for the premium subsidy beginning with the first coverage period beginning on or after February 17, 2009, and continuing for a maximum of nine (9) months.  If individuals became eligible for other group health coverage or Medicare coverage, or lost eligibility for COBRA continuation coverage altogether, the subsidy was cut off before the end of this maximum period.

Changes to Premium Subsidy Made by the 2010 DOD Act
The 2010 DOD Act expands the premium subsidy in two ways:
(1) by extending the end of the period during which an involuntary termination can trigger the subsidy, from December 31, 2009 to February 28, 2010; and (2) by increasing the maximum length of time an assistance eligible individual can receive the subsidy, from nine (9) months to fifteen (15) months.  The 2010 DOD Act also clarifies that eligibility for the premium subsidy is now based on the date of the qualifying event (i.e. the date of termination of employment) and not the date of the individual’s loss of health care coverage resulting from that qualifying event.  Therefore, an individual who is terminated on February 28, 2010, but because of an employer practice or severance agreement does not lose health care coverage until after February 28, 2010, is still eligible for the premium subsidy, provided all other eligibility criteria are met.

Implementation of the Amendments to the COBRA Premium Subsidy Program
The 2010 DOD Act establishes several new notices and administrative requirements to ensure these expansions are implemented. 

Transition Period Rules
Because more than nine (9) months have passed since the premium subsidy first became available in February 2009, some individuals have exhausted the subsidy.  Recognizing that, the 2010 DOD Act establishes special rules for individuals who dropped COBRA after their initial nine (9) month subsidy period ended, and for those who paid an unsubsidized premium during the period after their subsidy ended. 

The 2010 DOD Act permits members of the first group – those who dropped COBRA after their nine (9) month subsidy period ended – to maintain COBRA coverage through a “transition period” by retroactively paying premiums that were due during this period.  The “transition period” is defined as any period of coverage beginning before December 19, 2009, during which an assistance eligible individual would have been eligible for premium assistance had the extension enacted in the 2010 DOD Act been available earlier.  Payment from these individuals is due by February 17, 2010, or if later, 30 days after notice of the extension is provided by the plan administrator (see below).

Members of the second group – those who paid one or more unsubsidized premiums during the period after ARRA’s subsidy ended and before the 2010 DOD Act was implemented by the plan administrator – must be provided with either a refund or credit against future premiums for the amount of the excess payments.  Administrators are permitted to offer a credit against future premiums as long as it is reasonable to believe that the credit will be used by the individual within 180 days of the date on which the administrator received payment of the full premium amount.

New Notification Requirements
To ensure that members of the two groups described above, as well as those who initially become eligible for the premium subsidy over the next two months, receive proper notice and information about the premium subsidy program, the 2010 DOD Act includes notice requirements.  A general notice describing the extensions and new rules must be provided to anyone who was an assistance eligible individual on or after October 31, 2009, and to anyone who experiences a qualifying event of involuntary termination of employment on or after October 31, 2009, within 60 days of the enactment of the 2010 DOD Act, or in the case of a qualifying event occurring after the enactment of the Act, consistent with COBRA’s generally applicable timing rules.  Individuals who dropped their coverage after the ARRA premium subsidy expired must be provided with an additional notice regarding the opportunity to elect to maintain coverage under the transition period rules described above.

The Department of Labor has informally stated that it will issue updated model notices; therefore, plan administrators may decide to wait several weeks for these notices before updating and providing the notices required by the Act.  In the meantime, plan administrators may want to send an informal notice to assistance eligible individuals to alert them of the amendments and their right to continue to receive continuation coverage at the subsidized rate, provided that such notifications are reviewed by counsel to ensure that the new law is accurately described and answers questions that are sure to be raised by such individuals.

To review our e-alert describing ARRA’s premium subsidy provisions in more detail, see our February 18, 2009 and March 19, 2009 e-alerts.  To keep up with DOL guidance on the COBRA premium subsidy program, visit www.dol.gov/cobra.