The President signed The American Recovery and Reinvestment Act of 2009 (the "Act") on February 17, 2009. The Act amends the health care continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to provide a subsidy of 65% of the COBRA premiums for employees involuntarily terminated between September 1, 2008 and December 31, 2009. The Act also permits any such individual who did not elect continuation coverage (or who dropped coverage) to re-elect continuation coverage.

Applicability of the Subsidy

The COBRA amendments in the Act apply to all health plans that are subject to healthcare continuation coverage requirements under the Employee Retirement Income Security Act of 1974 ("ERISA"), the Public Health Service Act ("PHSA"), and "a State program that provides comparable continuation coverage."

Thus, the provisions of the Act apply to group health plans both in the private sector and the public sector. The Act does not define a "State program that provides comparable continuation coverage" and thus, further Treasury guidance will be necessary to better understand how the new subsidy will apply to small employers who are only subject to state continuation coverage requirements. The Act specifically excludes health plan coverage under a health flexible spending arrangement from the subsidy.

Eligibility for the Subsidy

Assistance Eligible Individuals

The Act provides a subsidy of 65% of the COBRA premium to an “assistance eligible individual.” An "assistance eligible individual" is any COBRA qualified beneficiary who, at any time during the period that begins September 1, 2008 and ends December 31, 2009, meets all of these conditions:

  • the qualified beneficiary is eligible for COBRA continuation coverage,
  • the qualified beneficiary elects continuation coverage, and
  • the qualifying event with respect to continuation coverage is the involuntary termination of the qualified beneficiary's employment during that period.

The Act does not define the term "involuntary termination." This term may be further defined once Treasury regulations or other guidance are issued.

Income Limitations

An "assistance eligible individual" will not be entitled to the subsidy, if during the year in which the subsidy would be received, he or she has adjusted gross income that exceeds $145,000 (or $290,000 if filing a joint return). For an individual with adjusted gross income between $125,000 and $145,000 ($250,000 to $290,000 for joint filers), the amount of the subsidy is reduced. The Act applies the income limitation by requiring that the assistance eligible individual repay the subsidy on his or her federal income tax return. Thus, it is not necessary for the employer or other plan sponsor providing COBRA coverage to determine whether the assistance eligible individual's adjusted gross income exceeds the income limitation. An assistance eligible individual whose adjusted gross income is above the income limitation may make a permanent election to waive the COBRA subsidy. The election to waive the subsidy must be made in a form and manner prescribed by the Treasury Secretary, and the assistance eligible individual must notify the employer of the decision to waive the subsidy.

Review of Subsidy Denials

If an individual believes that he or she is eligible for a COBRA premium subsidy but has been denied the subsidy by a group health plan, the individual may submit an appeal to the Secretary of Labor or to the Secretary of Health and Human Services, as applicable, who in consultation with the Secretary of Treasury will review the appeal on an expedited basis. A decision regarding the individual's eligibility for the subsidy will be made within 15 business days after receipt of the appeal. The review is de novo and is the final determination.

Details of the Subsidy

Effective Date

The subsidy applies in the case of any premium for a period of coverage beginning on or after February 17, 2009, the date of the enactment of the Act. For most plans that require premiums to paid monthly, the subsidy will become effective on March 1, 2009.

Amount and Duration of the Subsidy

The amount of the subsidy is 65% of the COBRA premium. Assistance eligible individuals will be required to pay only 35% of the otherwise applicable COBRA premium for up to 9 months. Thus, if an employer subsidizes part of the COBRA premium, then the assistance eligible individual would only be required to pay 35% of their portion of the premium.

The subsidy does not extend the maximum period of continuation coverage under COBRA (generally 18 months for an involuntary termination). An assistance eligible individual also ceases to be eligible for the COBRA subsidy upon the earlier of the following events:

  • the date the individual becomes eligible for Medicare, or
  • the date the individual becomes eligible for coverage under any other group health plan (other than coverage consisting of only dental, vision, counseling or referral services, a flexible spending arrangement, or coverage of treatment that is furnished in an on-site medical facility maintained by the employer that is primarily for first-aid, prevention and wellness care)

The Act mandates that the assistance eligible individual notify the group health plan in writing upon becoming eligible for Medicare or eligible for coverage under another group health plan. If the assistance eligible individual fails to notify the group health plan of their cessation of eligibility for the subsidy, the individual may be assessed a penalty equal to 110% of the ineligible subsidy unless the failure to notify is due to a reasonable cause.

COBRA Special Election and Enrollment

60 Day Special Election Period

The Act requires that group health plans again offer COBRA continuation coverage to assistance eligible individuals who are not receiving COBRA currently either because they did not elect COBRA continuation coverage or because they elected but discontinued COBRA continuation coverage. The special COBRA election period begins on February 17, 2009 and ends 60 days after the date the plan administrator provides a required election notice to the assistance eligible individual.

Coverage elected by an assistance eligible individual during this 60 day election period will begin with the first period of coverage beginning on or after February 17, 2009. In most cases, this will be March 1, 2009. Preexisting condition limitations will not apply for assistance eligible individuals electing coverage during this special election period.

Thus, employers will need to locate former employees who involuntarily terminated and who did not elect COBRA, so as to provide them with this additional notice of their right to elect COBRA coverage with the subsidy.

Voluntary Special Enrollment

Under COBRA, a qualified beneficiary is entitled to elect COBRA continuation coverage under the plan from which he or she received coverage on the day before the qualifying event. The Act permits (but does not require) an employer to allow an assistance eligible individual to elect coverage under either the plan in which the individual was enrolled on the date of the qualifying event or under a different plan with an equal or lower monthly premium. The different plan must be available to active employees and may not consist solely of coverage for dental, vision, counseling or referral services, a flexible spending arrangement, or coverage at an on-site medical facility maintained by the employer providing primarily first-aid, prevention and wellness care.

If an employer provides this special enrollment option, the assistance eligible individual will have 90 days after the date of notice of the plan enrollment option to elect coverage.

COBRA Subsidy Notice Requirements

General Notice Employers and plan administrators must comply with the Act’s general notice requirements regarding the COBRA subsidy. The notice must be provided to all employees who terminate employment between September 1, 2008 and December 31, 2009 (not just those employees who are terminated involuntarily). The notice must specify (i) the availability of the premium subsidy and (ii) the option to enroll in different coverage if the employer is permitting a choice.

Under the Act, the notice must also satisfy these requirements:

  • the notice must include the forms for establishing eligibility for the subsidy;
  • the notice must contain the name, address, and telephone number of the plan administrator to contact regarding the subsidy;
  • the notice must include a description of the extended election period;
  • the notice must contain a description of the obligation of the assistance eligible individual to notify the plan when he or she becomes eligible for Medicare or other group health plan coverage and the penalty for failure to notify the plan;
  • the notice must contain a description, displayed in a prominent manner, of the assistance eligible individual's right to the COBRA subsidy and conditions on entitlement to the subsidy; and
  • the notice must contain a description of the option to enroll in different coverage with the employer, if applicable.

Special Election Period Notice The notice of the special election period must be sent within 60 days after the enactment of the Act (i.e, by April 18, 2009) to assistance eligible individuals who were entitled to the COBRA subsidy before the enactment of the Act and who are entitled to the special election period. The United States Department of Labor is required to issue model notices no later than 30 days after the Act's enactment (i.e., by March 19, 2009). Failure to provide the required notices subjects employers and plan administrators to the same penalties that apply to a failure to meet other notice requirements under COBRA. Employer Reimbursement and Filing Requirements Who is entitled to Subsidy Reimbursement? The Act requires the federal government to reimburse a plan sponsor or other entity who is required to provide the premium subsidy to assistance eligible individuals. This reimbursement is available to: (i) a multi-employer group health plan, (ii) the employer maintaining a group health plan subject to federal COBRA continuation coverage, and (iii) an insurer providing coverage under an insured plan.

How is the Subsidy Reimbursed?

The subsidy is reimbursed by a refundable payroll tax credit on the employer's quarterly employment tax return (Form 941). Payroll taxes under the Act include wage withholding for income taxes and amounts withheld for both employee and employer FICA (Social Security and Medicare) taxes.

The employer or plan entitled to reimbursement for the subsidy is treated as if it had paid payroll taxes equal to the subsidy on the date the assistance eligible individual's COBRA premium payment is received.

Any subsidy for an amount in excess of the payroll taxes owed is treated in the same manner as a tax refund. An overstatement of a subsidy is a payroll tax violation and the reimbursed employer or plan may be assessed penalties.

Reporting Requirements

Under the Act, a health plan or employer entitled to reimbursement for the subsidy must submit these reports to the Treasury Secretary:

  • An attestation of involuntary termination of employment for each assistance eligible individual for whom a reimbursement is claimed;
  • A report of the amount of payroll taxes offset for the reporting period and estimated offsets of such taxes for the subsequent reporting period; and
  • A report containing the tax identification numbers of all assistance eligible individuals, the amount of subsidy reimbursed with respect to each assistance eligible individual and a designation with respect to each assistance eligible individual as to whether the subsidy reimbursement is for coverage of one individual or two or more individuals

The Act requires the Treasury Secretary to issue regulations or other guidance to assist employers and plans with reporting such information.


The Act's provisions amending the healthcare continuation coverage requirements of COBRA require group health plans and employers to provide a special election period and subsidized COBRA premiums to assistance eligible individuals. The Act also requires employers to provide new COBRA notices to all employees terminated between September 1, 2008 and December 31, 2009.

Under U.S. Treasury Regulations, we are required to inform you that any tax advice contained in this message or in any attachment is not intended to be relied upon, and cannot be relied upon, as substantial authority to avoid penalties under the Internal Revenue Code.