March 4, 2009

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The American Recovery and Reinvestment Act of 2009: COBRA Becomes More Expensive for Employers

The Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") provides certain "covered employees" who experience a "qualifying event" with continuation health plan coverage rights. Generally, an Employer with a health plan, including dental plans, vision benefit plans, and health FSAs, that was subject to COBRA, must permit each "qualifying beneficiary" to elect and receive continuation rights for between 18 and 36 months, in exchange for the qualified beneficiary paying up to 102% of the total cost of that coverage.

The president signed the American Recovery and Reinvestment Act (the "Act") on February 17, 2009, and in so doing subjected Employers to an additional cost of providing required COBRA continuation coverage during this current recession.

Under the Act, the Employer must notify every former employee that had been "involuntarily terminated" from the company at any time between September 1, 2008 until December 31, 2009 of their new rights, and the Employer's new responsibilities. The notice must explain that the Employer will pay sixty-five percent (65%) of the former employee's COBRA premium for up to 9 months of COBRA continuation coverage under certain plans, whether or not the former employee had elected COBRA when he/she was first offered continuation coverage at the time of the involuntary termination. The notice must be provided by April 18, 2009, and must provide the former employee with an election, even if it gives him/her a second chance to elect the COBRA continuation coverage, with a retroactive effective date for the premium subsidy back to February 17, 2009. The election period for this second chance again gives each former employee 60 days to decide whether to accept this benefit from the Employer.

This new law will cost the Employers. First, the Employer has to pay the initial 65% subsidy for participants who elect COBRA continuation coverage. The Employer will be reimbursed through a credit against payroll taxes paid. The required subsidy payments are phased out for certain higher paid former employees.

Second, the Employer has to offer a second COBRA notice. That means that the Employer will have to now validate mailing lists to ensure the notice is sent to former employees and their dependents whom the Employer may not have been in contact since September, 2008.

This law will be troublesome for some Employers. The U.S. Department of Labor is committed to issue a model notice that will help to explain the requirements and the rights that the covered former employees and their dependants now enjoy.

Please contact us to learn more about the solutions available under this new Act and assistance with former employee communications required now.