On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRI). While the ARRI is intended to stimulate the economy, it also makes important changes to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

COBRA requires employer-provided group health plans to offer individuals who would otherwise lose their group health plan coverage as a result of a termination or other qualifying event the opportunity to continue their group

health plan coverage for a specified time at the employee’s expense. The ARRI provides for a federal subsidy of 65% of the COBRA continuation coverage premiums for qualified beneficiaries receiving COB RA continuation coverage due to the covered employee’s involuntary termination between September 2008 and the end of 2009. The subsidy does not apply to health flexible spending accounts offered under a cafeteria plan.

Qualified beneficiaries that elected COBRA coverage after September 1, 2008, but before the ARRI’s passage will be allowed to receive the subsidy on a go-forward basis beginning on the enactment date. Qualified beneficiaries that did not elect COBRA, but who otherwise would be eligible for the subsidy, must be provided another opportunity to elect COBRA during a second 60-day election period. This second election period also applies to qualified beneficiaries who elected COBRA coverage but subsequently lost coverage due to non-payment of premiums.

The subsidy is pro-rated based on income levels. If a qualified employee is eligible for the assistance, the employee pays 35% of the premium. The employer, plan, or insurer must pay the remaining amounts, and will be reimbursed by the government through tax credits. The IRS and Treasury will be issuing additional details regarding how the tax credit process will work.

Eligible employees can receive the subsidy for up to nine months. If an employee becomes covered under another group health plan or Medicare, the employee must provide timely written notice that s/he no longer qualifies for the COBRA subsidy. Failure to provide the notice could result in a penalty of up to 110% of the subsidy received after becoming eligible for the other coverage.

Employers are required to provide modified COBRA election notices and send out separate supplemental notices to all individuals who became, or become, entitled to elect COBRA between September 1, 2008 and the end of 2009. Employers should be able to obtain compliant notices by contacting their plan administrator or health insurance broker.