The American Recovery and Reinvestment Act of 2009 (the stimulus plan, or “Act”) signed into law by President Obama on February 17, 2009, temporarily modifies aspects of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Its most important feature provides a 65%subsidy for up to nine months for the cost of COBRA benefits in respect of employees who lose health care coverage due to an involuntary termination.

The provisions are effective upon enactment and require prompt attention. Employers and administrators should start reviewing the records of terminations from September 1, 2008 to date and prepare to provide notice of the rights given by the Act as soon as a model notice due by mid-March is available (if not earlier). Existing or proposed employer subsidies of COBRA coverage in termination situations also call for review, since the subsidy is not available for COBRA premiums paid by the employer.

Eligibility and Amount of Subsidy. The Act provides a 65% subsidy, for up to nine months, for the cost of COBRA benefits for employees who lose health care coverage due to an involuntary termination and for any of their dependents eligible for COBRA coverage in respect thereof as “qualified beneficiaries.” Individuals who voluntarily terminate employment and employees terminated due to gross misconduct are not eligible. The provision treats an assistance-eligible individual as having paid the premium required for COBRA continuation coverage if the individual pays 35% of the full COBRA premium. The requirement for payment of 35% of the premium may be met by payments made by others on behalf of the qualified beneficiary, so long as the payment is not made by the employer. If the employer subsidizes a portion of the COBRA continuation premium (e.g., employees need pay only the premiums for coverage paid by active employees), the Act can be read to allow the subsidy for the employee-paid portion. If this more liberal reading of the Act is correct (which currently is uncertain), if an employee pays 25% of the premium, the subsidy will equal 16.25%of the total premium (65%times 25%).Hopefully, confirmation or clarification of this question will be available in time for employers to adjust and respond accordingly. Provisions in current or contemplated severance arrangements providing for employer subsidies for COBRA coverage should also be reviewed in light of this.

Period of Availability. The subsidy is provided only with respect to involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010. Eligibility for this subsidy ends on the earliest of: (i) nine months from the start, (ii) the individual becoming eligible for coverage under another group health plan, (iii) the individual becoming eligible for Medicare, or (iv) expiration of the individual’s eligibility for COBRA. For those eligible, the 65% subsidy is available for the first period of coverage that begins after February 17, 2009 (which will generally commence onMarch 1, 2009).

Second Election Period. The Act also allows qualified beneficiaries who initially declined COBRA coverage upon termination, or who had lost coverage because of a failure to pay the premium (e.g., because they couldn’t afford to continue payment of the premiums), and who are eligible for the subsidy at the date of enactment, to elect or reinstate coverage during a period of 60 days from the date of notice of this right. However, individuals who take advantage of this second election period will receive coverage only from February 17, 2009 forward (and not retroactively to the date of initial COBRA eligibility), and the expiration date of the coverage will be the same as if they had elected the coverage initially.

Lower Health Care Plan Options. Generally, COBRA permits a former employee to elect only to continue the coverage he or she received immediately prior to the qualifying event. However, the Act gives an employer the option of allowing an employee to elect a lower cost health care plan option under the employer’s plan, so long as the premium for the new coverage does not exceed the premium for the coverage the individual was enrolled in at the time of the termination, and the same coverage is offered to active employees at the time the election is made. The new coverage may not be (i) coverage that provides only dental, vision, counseling or referral services (or a combination of these services), (ii) a flexible spending arrangement or (iii) coverage for services or treatments furnished in an on-site medical facility.

Notice Requirements. A notice of the rights under the Act must be included with initial COBRA notices for all employees terminated during the applicable time period (not just employees that were involuntarily terminated), and also provided to employees terminated on or after September 1, 2008 who previously received the prior standard notice (which of course did not refer to such rights). The notice must contain information regarding the availability of the subsidy, including any necessary forms for establishing eligibility, contact information and conditions on entitlement; the second enrollment opportunity; the availability of lower health care options (if applicable); and the obligation of a qualified beneficiary to notify the employer of eligibility under another plan or Medicare (and the penalty under Code Section 6720C for failure to provide such notice). Where the termination occurred before enactment of the Act, the notice must be provided within 60 days after the date of enactment. Any failure to provide the required notice may incur the severe penalties generally imposed on a failure to meet COBRA notice requirements. The Act also requires the Secretary of Labor to prescribe model notices within 30 days of enactment.

Income Limits. The Act includes an income threshold as an additional condition on an individual’s entitlement to the subsidy. If the premium subsidy is provided with respect to any COBRA continuation coverage covering a taxpayer, a taxpayer’s spouse, or any dependent of the taxpayer during any taxable year in which the taxpayer’s modified adjusted gross income exceeds $145,000 (or $290,000 for joint filers), the amount of the subsidy must be repaid. The mechanism for repayment is an increase in the taxpayer’s income tax liability. For taxpayers with modified adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), a proportionately reduced subsidy is available.