An In-Depth Look at the New COBRA Provisions in Stimulus Bills

Both the House and Senate versions of the 2009 Stimulus Bill include sweeping revisions to ERISA’s continuation of coverage provisions (commonly known as “COBRA”). While the exact form that these provisions may take in the final package is unknown, it is almost certain that some version of the current drafts will be included. The new provisions will impose additional burdens and hidden costs on employer-sponsors of group health plans.

The key concept of the new COBRA provision involves creation of a new “qualifying event” that makes involuntarily-terminated employees (and their covered dependents) eligible for a 65% COBRA premium subsidy. The employer “fronts” the subsidy by collecting only 35% of the applicable premium, and then is reimbursed from the employer’s payroll tax transmittals (or with a direct payment, if payroll tax transmittals are insufficient). Under the Senate bill, the employer can elect to make available to these subsidy-eligible employees any other broad-based medical coverage option that is also offered to active employees, and that has a lower premium than the option in which the employee was enrolled prior to termination. The subsidy ends for any covered individual as soon as another group health plan is made available to that individual, or 9 months (in the Senate bill) or 12 months (in the House bill) after the first month of subsidy coverage, or at the date COBRA would otherwise expire.

A subsidy-eligible employee must otherwise be eligible for COBRA coverage (which means that the “gross misconduct” exclusion will still apply), and must have been involuntarily terminated between September 1, 2008 and December 31, 2009 (and must have become eligible for COBRA coverage during that period). If the election period had already expired by the time the law is enacted, the employer will be required to provide a COBRA notice and a new 60-day election period to any subsidy-eligible former employee who did not elect COBRA, but the effective date of such coverage would be the enactment date of the new law (in the House bill). In the Senate bill, the effective date is the first of the month beginning at least 30 days after enactment.

The period of non-coverage could not be counted toward any pre-existing condition exclusion. The “retroactive” COBRA notice must be provided within 60 days after enactment of the new law. Any denial of eligibility (such as a gross-misconduct determination) will be subject to expedited review under the auspices of the Department of Labor.

Any former employee who is paying full COBRA premiums when the law is enacted will also be entitled to the subsidy. The employer will be required to refund the excess (retroactive to the enactment date) or provide a credit in future premium payments for the overpayment (to be made up within 6 months). Of course, these reimbursements or credits will also be entitled to the employer tax credit provisions.

The House bill also would extend COBRA coverage to Medicare entitlement (or coverage under another employer’s group health program) for any voluntarily- or involuntarily-terminated employee who had attained age 55 or had 10 or more years of service with the employer. This coverage extension would also apply to such employees who lose coverage because of a reduction of hours.

While the reimbursement of the subsidy would appear to make these provisions cost-neutral to the employer, they, in fact, would not. In general, COBRA beneficiaries have significantly worse experience than active employees as a group – primarily because of the cost of COBRA coverage, but also because former employees with high medical expenses may be less likely to obtain other coverage as quickly as healthier (often younger) former employees. While the subsidized coverage may be more attractive to those former employees with less expectation of high medical expenses, the fact remains that laid-off employees have limited resources, and purchasing medical care may be of lower priority to those with less claims experience, even at subsidized rates. In addition, the retroactive election period (of at least 60 days) afforded to those who were laid off after September 1, 2008 and who did not originally elect COBRA is likely to lead to elections of coverage by those who did not expect high medical bills when they were laid off but who have developed serious medical conditions in the interim. Thus, we expect that the pattern of higher-than-average COBRA experience will continue.

The new law would not eliminate the termination of COBRA coverage when the employer ceases to provide any group health plan. And, as noted, the new law does not eliminate the “gross misconduct” exclusion. Employers who have not previously enforced the “gross misconduct” exclusion might consider adopting procedures for determining COBRA eligibility to reduce the impact of the new law.

This article was authored by Susan Hoffman, a shareholder in Littler's Philadelphia office.

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.