View Library

Client Alert: Temporary COBRA Premium Subsidy

March 9, 2009

The American Recovery and Reinvestment Act, signed into law on February 17, 2009, includes a temporary government subsidy for the cost of COBRA continued healthcare coverage. Currently, under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers who sponsor group health insurance plans are required to allow certain employees and dependents the option to continue their health, dental and vision insurance under those plans following involuntary termination of employment if the employee pays the full COBRA premium. The new economic stimulus plan provides for a nine month, 65% employer-paid subsidy for the cost of COBRA premiums for employees or dependents who became eligible for COBRA due to an involuntarily termination between September 1, 2008 and December 31, 2009. This subsidy applies not only if COBRA applies but also if a comparable state program requires healthcare continuation coverage. Employers will receive reimbursement for the cost of this subsidy through a tax credit against their payroll taxes (FICA and withholdings) in the amount of the COBRA subsidy payments they make (subject to reduction if the employer does not charge the employee the full COBRA premium).

What will this mean for employers?

An employer who terminates any of its employees between September 1, 2008 and December 31, 2009 must:


Note: Employees’ eligibility for the subsidy will end once they become eligible for other group coverage or Medicare, or if their income exceeds certain specified income limits.

What is the effective date?


Generally, the subsidy applies beginning March 1, 2009. Notices to affected employees must be sent by April 18, 2009. The Department of Labor has been tasked with providing a model notice by March 18, 2009.

What is the cost of non-compliance?


Failure to provide the required notices or offer the subsidy may expose employers to penalties ranging from $100 to $200 per day, per affected individual.

Changes to State Children’s Health Insurance Program (SCHIP)

SCHIP, originally enacted in 1997, is a joint federal-state program designed to provide health insurance coverage to children in families whose incomes are too high to qualify for Medicaid but still are unable to afford health insurance on their own. On February 4, 2009, President Obama signed the Children’s Health Insurance Program Reauthorization Act of 2009 into law. The new law reauthorizes SCHIP and expands the basic eligibility provisions of SCHIP, imposes certain disclosure and notification requirements on employers that sponsor group plans for their employees, and allows states to subsidize employer health insurance coverage in certain cases.

What will this mean for employers?

Employers who sponsor a group health insurance plan are now required to:

What is the effective date?

The effective date of the Act is April 1, 2009. The Act’s special enrollment rights are effective April 1, 2009, and the employer notice provisions will become effective for plan years beginning after the date when the government agencies tasked with developing the model notices have finalized the notices (which under the Act is to be completed within one year).

What is the cost of non-compliance?

The new law amends the Employee Retirement Income Security Act (ERISA) to impose penalties of up to $100 per day per individual violation. Each failure to give notice is treated as a separate violation which means that extended failure to comply could result in substantial penalties.