Just in time for the holidays, and as part of the 2010 appropriations bill for the Defense Department (the Act), President Barack Obama today signed into law an extension to the subsidy for COBRA created by the American Recovery and Reinvestment Act (ARRA). The legislation extended the period during which involuntary terminations would trigger subsidy eligibility, as well as expanding the duration of the subsidy. Employers and plan administrators also will face new notice and administrative requirements to implement the subsidy extension on a retroactive basis. Below are a few of the highlights.

First, the Act expands the maximum subsidy period from nine months to 15 months, including individuals currently receiving subsidized COBRA coverage.

Next, the Act extends the period during which a COBRA-qualifying event resulting from an involuntary termination of employment can trigger eligibility for the subsidy, extending the end of that period from December 31, 2009 to February 28, 2010.

The Act resolves a thorny issue created by the language of the ARRA regarding eligibility for the subsidy. Originally, the ARRA required that both the qualifying event and the beginning of the COBRA coverage period occur on or before December 31, 2009, for an individual to be eligible for the subsidy. This meant that individuals whose employment terminated in December and coverage expired on December 31, but whose COBRA coverage commenced on January 1, would not have been eligible. The Act changes this by conditioning subsidy eligibility solely on the timing of the qualifying event, which is the event causing the loss of coverage. Assistance-eligible individuals who experience an involuntary termination (a qualifying event) on or before February 28, 2010 would be eligible for the subsidy (even if their COBRA coverage would not start until March).

The Act also protects individuals who, before the Act, exhausted their nine months of subsidized COBRA coverage and then did not continue coverage by paying full COBRA premiums. Under a transition period, those individuals would be able to pay those premiums retroactively if they do so by a certain date – the later of February 19, 2010, or 30 days from receipt of a new required notice.

For those assistance-eligible individuals who exhausted their nine-month subsidy but continued to pay the full COBRA premium in order to keep coverage in place, the amendment allows employers to apply the same refund or crediting rules that were in the ARRA.

Plan administrators will be required to issue a notice describing the new subsidy rules to all individuals who were or are assistance-eligible individuals on or after October 31, 2009, or who are terminated from employment on or after October 31, 2009. In addition, the Act requires special notice to those assistance-eligible individuals who either dropped COBRA or paid the full premium for it when their nine-month subsidy ended, explaining that they are now eligible either to reinstate their coverage retroactively at the subsidized rate or to receive a credit or refund if they paid more than the Act would have required.

The other terms and conditions of the initial COBRA subsidy will continue to apply (see our April 2, 2009 E-Alert).