The economic stimulus legislation signed by President Obama on February 17, 2009, provides a subsidy for COBRA premiums for certain employees who are involuntarily terminated from employment on or after September 1, 2008 and before January 1, 2010. The subsidy will result in additional reporting and disclosure obligations for employers which will need to be undertaken within a short period of time. The subsidy provision will also present employers with immediate issues regarding the design of existing severance arrangements for employees who are involuntarily terminated.

Under the new legislation, employers will provide a 65 percent subsidy to eligible COBRA beneficiaries. Employers will recoup the subsidy by taking a credit against their liability for income tax withholding from wages or FICA taxes. The credit against the employer's tax liability cannot be taken until the employee pays his or her share of the COBRA premium. Employers will be required to report information regarding each covered employee for whom an offset of payroll taxes is claimed to the IRS. Therefore, employers may need to coordinate reporting between their third party COBRA vendors and payroll providers.

The subsidy is provided for a nine month period, unless the eligible employee's period of COBRA coverage ends sooner or the eligible employee or his or her beneficiary becomes eligible for Medicare benefits or coverage under another group health plan prior to the expiration of the nine months. Employers should review their records to determine whether otherwise eligible employees have other benefit coverage which would indicate they are not entitled to the subsidy. Individuals who know that they are not eligible for the subsidy will be permitted to waive the subsidy on a form supplied by the employer. If an individual who is receiving the subsidy should subsequently become eligible for other coverage, the onus will be on the individual to notify the employer of the change in eligibility. Failure to provide such notification will result in a penalty on the individual.

Individuals whose modified adjusted gross income exceeds specified thresholds are not entitled to the subsidy. If the subsidy is provided with respect to any COBRA continuation coverage which covers the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer during a taxable year, and the taxpayer's modified adjusted gross income exceeds $145,000 (or $290,000 for joint filers), then the taxpayer must repay the amount of the subsidy through an increase in tax liability. For taxpayers with modified adjusted gross income between $125,000 and $145,000 (or between $250,000 and $290,000 for joint filers), the amount of the subsidy for the taxable year that must be repaid is reduced proportionately. Employers will need to advise employees whose income will exceed the income threshold that they can waive the subsidy to avoid incurring the obligation to repay.

Employers will need to notify all individuals who had a COBRA qualifying event on or after October 1, 2008 of the change in the law. The notification obligation does not appear to be limited to only those employees who were involuntarily terminated. The notice will advise the employee that he or she has a 60 day special election period within which to elect coverage at the reduced rates. This election can be exercised by eligible individuals currently receiving COBRA coverage as well as employees who previously declined COBRA coverage or discontinued it. The group health plan cannot impose any preexisting condition limitation which would otherwise apply because of cessation of coverage after October 1, 2008 to an individual entitled to the special election. Generally, if the employee exercises the election, coverage will commence on March 1, 2009.

Plan Administrators of group health plans subject to these new COBRA rules (medical, hospital, dental, and vision, but not health care FSAs) will now need to provide COBRA continuation coverage notices that provide qualified beneficiaries with information about their right to the premium reduction (and subsidy), the conditions on the subsidy, a description of the obligation of the qualified beneficiary to notify the group health plan of eligibility under another group health plan or eligibility for Medicare benefits, and the penalty for failure to provide this notification. The DOL has been directed to issue a model notice for this purpose by March 19, 2009.

Employees who are eligible for the subsidy are those who were involuntarily terminated during the specified period. As of yet, no guidance exists with respect to the definition of involuntary termination. Employers will need to examine their records to determine which terminations are likely to qualify.

Employers will also want to examine their severance policies to determine what impact their current practices have on the obligation to provide a subsidy under the stimulus package. For example, an employer who pays 100 percent of the premium for an employee who is involuntarily terminated for the first three months of COBRA coverage is not entitled to recoup any portion of the employer paid subsidy because the employee does not pay for COBRA coverage. Assuming the employee would otherwise pay for his or her COBRA coverage during the next six months of COBRA coverage, the stimulus subsidy would apply and the employee would pay the reduced premium.