Economic Stimulus Act - Impact on COBRA Health Continuation Coverage

Date: August 3, 2009
Economic Stimulus Act - Impact on COBRA Health Continuation Coverage

Frequently Asked Questions

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, referred to in the press as the "Economic Stimulus Act."  One provision in this Act that has received relatively little publicity is a subsidy for former employees and their dependents who elected, or were offered the opportunity to elect, to continue health insurance coverage following termination of employment.

The following are some frequently asked questions about the new requirements.

Who is eligible for the subsidy?
Generally, a former employee or dependent of the former employee (collectively, “qualified beneficiaries”) who lost coverage or will lose coverage under a group health plan between September 1, 2008 and December 31, 2009 as a result of an involuntary termination of employment with the employer sponsoring the group health plan.

To which group plans does the subsidy apply?
The subsidy applies only to group health plans.  COBRA premium payments for flexible spending plans are not eligible for the subsidy.

What is the amount of the subsidy?
Qualified beneficiaries who are eligible for the subsidy are required to pay 35% of the required COBRA premium.

How long does the subsidy last?
The subsidy lasts for nine months.  However, the subsidy will end if the qualified beneficiary is eligible for coverage under another comparable group health plan or Medicare.  For these purposes, the qualified beneficiary does not have to actually become covered under the group health plan or Medicare – simply being eligible for coverage is sufficient to end the subsidy.

Does the subsidy extend the amount of time a qualified beneficiary will be eligible to continue coverage?
No.  COBRA coverage still ends on the statutory termination date - 18, 29 or 36 months following loss of coverage, depending on the event causing the loss of coverage.

Does the employer receive a credit for the subsidy?
Yes.  The employer providing the subsidy will receive a credit against its payroll taxes for the amount of any subsidies provided to eligible individuals.

When is the subsidy effective?
Eligible individuals are entitled to the subsidy for the first period of coverage following enactment of the Economic Stimulus Act – typically, March 1, 2009.  Apparently recognizing the need for some lead time to implement the subsidy, the Act includes a 60-day grace period to provide updated notices.

What are the notice requirements are imposed on employers?
Employers must update their COBRA election forms to include information regarding the subsidy or provide an additional form or notice describing the subsidy. 

What about otherwise qualified beneficiaries who did not previously elect continuation coverage?
An individual who loses coverage because an employee was involuntarily terminated on or after September 1, 2008 must be notified of the option to continue coverage with the subsidy. 

Is the subsidy taxable to the recipient? 
Generally, no.

Are there income limits on qualified beneficiaries on exclusion of the subsidy from gross income?
Yes.  The tax free aspect of the subsidy phases out for individuals with adjusted gross income of $125,000 or more ($250,000 for joint filers) with a complete phase out for individuals earning $145,000 ($290,000 for joint filers).  These individuals may elect to waive the subsidy.

Is additional help with implementing the subsidy available?
The Act includes a directive to the U.S. Department of Labor to develop notices and outreach programs to assist employers with implementation of the new requirements.  Ideally the outreach program will contain clarification of some of the requirements – for example, if an individual quits his or her job for good reason, will that count as an involuntary termination of employment?  Or, does availability of coverage under a spouse's health plan count as eligibility for coverage under a group health plan if the subsidy is not available?

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