Congress Extends and Expands the COBRA Premium Subsidy Rules

For the second time, Congress has extended and modified the COBRA premium subsidy program created under the American Recovery and Reinvestment Act of 2009. On March 2, 2010, President Obama signed the Temporary Extension Act of 2010 ("TEA") into law. For background information regarding the COBRA premium subsidy, see our earlier Client Advisories regarding this topic.

In particular, TEA extended the deadline for COBRA premium subsidy program from February 28, 2010 to March 31, 2010. The COBRA premium subsidy program now will be available to individuals whose employment was terminated involuntarily on or before March 31, 2010.

In addition, TEA expanded the definition of assistance eligible individuals. Under TEA, if an employee’s hours were reduced from September 1, 2008, through March 31, 2010, so that the employee and his or her dependents became entitled to COBRA continuation coverage, and the employee then experienced an involuntary termination of employment on or after March 2, 2010 and before March 31, 2010, the employer is required to treat the subsequent involuntary termination of employment as a qualifying event, and provide an updated COBRA election notice explaining the extension and special treatment, within 60 days of the date of the individual’s involuntary termination. Model notices regarding these rules have been issued by the DOL. This new COBRA election requirement applies even if the individual failed to elect COBRA due to the reduction in hours or was not covered by the plan at the subsequent involuntary termination of employment. Under TEA, if the individual elects COBRA due to the involuntary termination of employment, the employer cannot apply a preexisting condition exclusion for the period between the reduction in hours and involuntary termination (the “gap period”). Coverage during the gap period is not and cannot be required in order for an individual to take advantage of this second election right (the model notice issued by the DOL implies that coverage will begin based upon the involuntary termination, and not the reduction in hours). The maximum COBRA coverage will be measured from the reduction in hours qualifying event (not from the involuntary termination), but the maximum COBRA premium subsidy period will be measured from the date of the involuntary termination.

TEA does provide some welcome protection to employers regarding determinations of involuntary terminations. Under the new law, a qualifying event will be deemed to be an involuntary termination entitling an individual to the COBRA premium subsidy if (i) the employer made its determination based on a reasonable interpretation of the law and the administrative guidance issued, and (ii) the employer maintains specific documentation supporting its determination, including an attestation by the employer that the termination was involuntary. Employers should review their files and make sure that proper documentation is on file regarding involuntary terminations in case the Department of Labor, Department of Health and Human Services, or Internal Revenue Service requests this information.

TEA also clarified that, for individuals whose nine-month COBRA subsidy period expired before it was extended to fifteen months by the prior COBRA subsidy extension, any retroactive premiums were due by the latest of (a) February 17, 2010, (b) 30 days after the individual received the notice required by the previous COBRA subsidy extension, or (c) the end of the 30-day grace period for COBRA premium payments.

TEA also included expanded enforcement provisions, allowing the Department of Labor, the Department of Health and Human Services, or an individual, to bring a civil action for a violation of the COBRA premium subsidy requirements. TEA also permits the Department of Labor or the Department of Health and Human Services to assess a $110 per day per person penalty against a plan sponsor for a violation of the COBRA premium subsidy requirements.

While we would like to be able to say that TEA will be the last extension of the COBRA premium subsidy, reports indicate that additional extensions may be forthcoming. Specifically, an extension of the COBRA premium subsidy for involuntary terminations through December 31, 2010, is part of proposed legislation currently being debated in Congress. Please contact any member of our Employee Benefits Team for more information or updates regarding these requirements.