Common Misconceptions About COBRA Subsidy Provisions in Stimulus Bill

As previously discussed, the stimulus provisions regarding changes to the Consolidated Omnibus Budget Reconciliation Act (COBRA) are complex and confusing. Below, we address some common misconceptions about these provisions.

Misconception 1: The notices about the COBRA subsidy need to be distributed only to those employees who are involuntarily terminated.

Clarification: The COBRA subsidy provision requires that notices about the Federal COBRA subsidy are distributed to all employees who had or has a qualifying event from September 1, 2008 to December 31, 2009. Even if the employer believes that the employee will not qualify for the subsidy (e.g., the employee voluntarily terminated employment), that employee must receive the notice about the subsidy.

Example: Employee's hours are reduced and employee is reassigned, and employee resigns in response. Employee is entitled to the normal COBRA notice of rights and opportunity to elect continuation coverage, and in addition, the notice of the COBRA subsidy.

The terminated employee may claim that he/she was "constructively discharged" or, as a practical matter, involuntarily terminated. The terminated employee will have the right to apply for the subsidy, and if the request is denied, the terminated employee may appeal directly to the Department of Labor (DOL) under regulations to be issued. Other situations may be where the employee alleges that the employee was told that if the employee did not quit, he/she would be fired. The DOL/IRS have not issued regulations on such alleged "constructive discharge" situations, but such regulations may be expected, as claims of this nature are already being made.

Misconception 2: The COBRA subsidy only applies to companies that are subject to Federal COBRA.

Clarification: The legislation relating to the Federal COBRA subsidy includes certain State COBRA rules (also known as "mini-COBRA"). If the mini-COBRA rule provides continuation coverage comparable to the Federal COBRA laws, then employers who are subject to mini-COBRA will be subject to the COBRA subsidy provision. However, the rules are not as strict in some instances; for example, employers providing mini-COBRA do not need to provide information about the subsidy to those employees who had a qualifying event prior to the date of enactment.

Example: California COBRA (Cal-COBRA) applies only to employers with 2 to 19 employees. Since COBRA applies to employers with 20 or more employees, Cal-COBRA is designed to 'fill the gap' of employers with fewer than 20 employees and therefore not subject to Federal COBRA. The Federal COBRA subsidy rules are designed to apply to employers that are subject to Cal-COBRA even though they are not subject to Federal COBRA. (Note that Cal-COBRA will apply only to an employer with a fully insured group medical plan, but not to a self-insured plan.)

Misconception 3: An employer who subsidizes COBRA must wait to get a tax credit in its annual income tax return.

Clarification: If an employer is eligible for the tax credit due to its requirement to subsidize COBRA, the tax credit will be in the form of an offset to the employer's payroll taxes. An employer is obligated to file a quarterly Form 941 to report payroll taxes, and the new Form 941 has a line item for the COBRA subsidy. If an employer does not have enough payroll taxes to offset the COBRA subsidy tax credit, the employer may apply excess credit to a future quarter or apply for a refund. It is important to note that an employer cannot use the credit until the covered employee; or covered dependent, pays for his or her portion of the COBRA premium and attests that he or she qualifies for the subsidy.

Misconception 4: A former employee who was involuntarily terminated on September 1, 2008 must be given retroactive continuation coverage under the COBRA subsidy law.

Clarification: The new COBRA election applies to coverage beginning March 1, 2009 (in the case of a plan with monthly coverage), but the maximum COBRA period continues to start with the original qualifying event. So in this example, the former employee who did not elect continuation coverage when first eligible has a second chance to make a COBRA election, but the coverage begins March 1, 2009, and the maximum COBRA period continues to be 18 months from September 1, 2008.

This article was co-authored by Susan K. Hoffman, a shareholder in Littler’s Philadelphia office, and Russell D. Chapman, Of Counsel in Littler’s Dallas office.

For more insight into the new COBRA provisions, see Littler’s Benefits ASAP: “Stimulus Package: An In-Depth Look at the New COBRA Subsidy in the ARRA” by Steven J. Friedman, Susan K. Hoffman and J. Rene Toadvine.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.