March 9, 2010

COBRA Subsidy Extended Again

By Kristy N. Britsch

On March 2, 2010, President Obama signed into law the Temporary Extension Act of 2010 (the “Extension Act”), which contains several modifications to the COBRA subsidy rules originally included in the American Recovery and Reinvestment Act of 2009 (“ARRA”) and later modified by the Department of Defense Appropriations Act of 2010 (the “Defense Act”).  Some of the key provisions of the Extension Act include:

1. One Month Extension of the COBRA Subsidy Eligibility Period.  The Extension Act extends the February 28, 2010, deadline for eligibility for the COBRA subsidy until March 31, 2010.
2. Expansion of Assistance Eligible Individuals.  The Extension Act also extends the COBRA subsidy program to “assistance eligible individuals” (“AEIs”) who lost their health coverage as a result of a reduction of their hours of employment and who are later involuntarily terminated on or after March 2, 2010.  Under prior law, these former employees were not eligible for the COBRA subsidy because their COBRA eligibility was not triggered by an involuntary termination of employment. However, these former employees now fall into a new group of AEIs so long as they:
   
   (a)  experience a COBRA qualifying event due to a reduction of hours between September 1, 2008, and March 31, 2010; and
   
   (b)  experience an involuntary termination of employment between March 2, 2010, and March 31, 2010.
3. New Election Period.  A new second election right is provided under the Extension Act to those individuals who did not elect COBRA coverage following a reduction of hours, but who are now eligible for the COBRA subsidy.  Thus, if an AEI had a reduction of hours and did not elect COBRA coverage and then experiences an involuntary termination of employment between March 2 and March 31, 2010, the involuntary termination will be a new “qualifying event” and will trigger a new round of COBRA notices.  However, notwithstanding this new qualifying event, the AEI’s period of COBRA coverage will begin upon the reduction of hours, not upon the involuntary termination.
4. COBRA Notice Requirements.  The Extension Act requires plan administrators to provide new COBRA subsidy notices to AEIs within 60 days following the date of such AEI’s involuntary termination.  These notices will be similar to those provided under ARRA and the Defense Act, but should also include information of the special rules created under the Extension Act.  Specifically, COBRA subsidy notices must be updated to reflect the 30 day extension and the new rules that apply to those who lost coverage as the result of a reduction of hours prior to an involuntary termination of employment.
5. Employer Payroll Tax Liability.  Currently, employers are at risk for improper payroll tax withholding when they make an incorrect determination regarding an AEI’s eligibility for the COBRA subsidy.  The Extension Act minimizes this risk by providing a safe-harbor for employers who maintain proper documentation and attest to the involuntary nature of the AEI’s termination. However, employers must base their decisions on a reasonable interpretation of the provisions under ARRA, the Defense Act and the Extension Act.
6. Increased Penalties for Noncompliance.  The Extension Act exposes employers to increased penalties for violations of ARRA. Specifically, the Extension Act imposes a civil penalty in the amount of $110 per day for failure to provide the COBRA subsidy to an AEI within 10 days of receipt of an agency determination that such AEI is eligible for the COBRA subsidy.  This penalty may be assessed in addition to other penalties under ERISA and the Internal Revenue Code.

Please refer to our March 5, 2009, March 20, 2009, and March 23, 2009, alerts for details on the other requirements that continue to apply for an individual to be eligible for the COBRA subsidy.