The End of the Line? Administering the COBRA Subsidy Until December 31, 2009 and the Possible Extension
October 29, 2009

As we near December 31, 2009, the end of the COBRA subsidy period is here and the next steps for employees and those suffering from involuntary termination are important to consider as well as a possible extension of the subsidy benefit. Employers must also take note of how to treat involuntary terminations in December, especially if they offer coverage until the end of the month.

COBRA Background

The Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") provides individuals who have suffered a Qualifying Event, such as termination of employment or reduction in hours, access to a group health care plan for a fixed period of time, 18, 29, or 36 months, upon loss of coverage ("Qualifying Individuals"). Qualifying Individuals have a right to purchase health coverage at 100 percent of the cost of coverage plus up to a 2 percent administrative fee.

ARRA Premium Subsidy

The American Recovery and Reinvestment Act of 2009 ("ARRA") requires an employer to subsidize the COBRA premium for an Assistance Eligible Individual ("AEI"). An AEI is an employee whose qualifying event under COBRA is a result of his or her involuntary termination from employment between September 1, 2008 and December 31, 2009, who is eligible for COBRA coverage and timely elects such coverage.

The former employer must pay 65 percent of the COBRA premium, and the AEI must pay 35 percent of the COBRA premium. The employer may receive a Federal tax credit to recoup the 65 percent premium payment made on the AEI's behalf.

ARRA Extension

With economic experts forecasting a "jobless recovery," the Extended COBRA Continuation Protection Act of 2009 (HR 3930) was introduced into the House of Representatives this week. The Act extends the COBRA subsidy period from 9 months to 15 months, makes workers involuntarily terminated between January 1, 2010 and June 30, 2010 eligible for the subsidy, and extends the COBRA period from 18 months to 24 months for AEIs. The Act sunsets subsidies and extended COBRA periods on December 31, 2010, providing a limited window for individuals to take advantage of these additional benefits. The Obama Administration has indicated support of extended benefits, but there is uncertainty whether the extension will pass the House and then the Senate.

Workers Involuntarily Terminated in December 2009 but Losing Coverage January 1, 2010

If the COBRA subsidy period is not extended, employers must begin to prepare for the end of the subsidy period as to new AEIs. One major issue not referenced in the legislation is the eligibility of employees for the subsidy who are involuntarily terminated as of December 2009 but do not lose coverage under the health plan until the "last day of the month." Do these individuals lose coverage as of December 31, 2009 (an AEI) or lose coverage as of January 1, 2010 (not an AEI)?

To illustrate this uncertainty an example is helpful: An employee is involuntarily terminated December 5, 2009, and the health plan provides that the employee receives coverage until the "last day of the month." The employee timely receives COBRA forms and elects coverage and asks whether he or she is eligible for the subsidy. You, as the employer, ask "What is the date the employee lost coverage?"

If the ARRA subsidy was not an issue, almost all employers, as part of common COBRA practice, would answer that the last day of coverage is December 31, 2009, and the first day the employee loses coverage is January 1, 2010. A health claim submitted as incurred at 11:59 PM on December 31, 2009 would be covered, and a health claim submitted as incurred at 12:01 AM on January 1, 2010 would not be covered. The relevant COBRA statute, Internal Revenue Code Section 4980B(f)(8), states that a health plan may provide an optional extension of coverage (until the end of the month) and that the COBRA period will commence as of the date of the loss of coverage. The date of the loss of coverage would, thus, appear to be January 1, 2010.

However, the IRS ARRA information indicates a different potential answer.

IRS Notice 2009-27 (ARRA Questions and Answers) includes an example in Q/A 14 stating that if an employee is involuntarily terminated on November 15, 2009, and if the employer does not use the optional extension of coverage (until the end of the month), the COBRA period is November 15, 2009 plus 18 months to May 15, 2010. If the employer does use the optional extension of coverage, then the COBRA period, and thus the date of loss of coverage, is November 30, 2009 (last day of month) to May 31, 2010. Additionally, if an employee were to be involuntarily terminated on December 31, 2009 as the legislation states, being eligible for the subsidy, there is no situation where the employee would be actually eligible for the subsidy because the employee would have coverage through midnight as of the day of his or her termination.

Next Steps for Employers

We will keep updating our clients on the potential passage of the COBRA subsidy extension legislation. As for the date of loss of coverage for December terminated employees, we are hopeful the IRS will address this situation in a specific Q/A. If the IRS does not provide further guidance, employers must make a determination whether to offer the subsidy and risk the eligibility of tax credit or not offer the subsidy and risk the penalties under ARRA. Each situation will likely be a facts and circumstances decision. At this time, employers need to be mindful about reductions in force and other involuntary terminations that may occur in December and communication to such employees regarding subsidy eligibility in COBRA election forms and in severance agreements.