The new COBRA subsidy Featured

8:00pm EDT March 26, 2009

The rising number of unemployedAmericans due to the recession isresulting in more individuals beingeligible for Consolidated Omnibus BudgetReconciliation Act (COBRA) insurance.

COBRA allows those who leave employment to continue to receive health coverage for generally up to 18 months or untilthey become entitled to other coverage.COBRA participants are required to paythe premium cost that the employer wasproviding for them during their employment, which usually is higher than whatthey were paying when employed.

“The problem is, you are without a joband income — maybe you are receivingunemployment — and now you’re beingasked to pay a substantial premium just tokeep health insurance for yourself andyour family,” says Dale R. Vlasek, memberof the business department and chair ofthe employee benefits practice for McDonald Hopkins LLC.

Smart Business spoke with Vlasek andAdrienne Stemen, an associate in the business department at McDonald HopkinsLLC, about how the American Recoveryand Reinvestment Act is affecting COBRAand how you can prepare for thesechanges.

How has the American Recovery andReinvestment Act affected COBRA?

It will help people who were laid offbetween Sept. 1, 2008, and Dec. 31, 2009,by subsidizing the premium payments theindividual makes for COBRA. The subsidyis up to 65 percent, so the employee willonly pay 35 percent. Before, they mayhave paid up to 102 percent of the premium. The subsidy will last up to ninemonths, and it’s only available for thosemaking less than $145,000 a year for anindividual or $290,000 as a couple.

Previously, when a person left employment, they had 60 days to sign up forCOBRA. The Act makes COBRA availableto anyone laid off from September 2008going forward, so you may have people inthat period who elected not to getCOBRA, as well as those who startedCOBRA but stopped paying because thepremiums were too high. The Act states that those people get a second chance toelect COBRA with the subsidy. TheCOBRA period is still measured from thedate it would have started had the personelected it when their employment ended.

How can someone find out if he or she is eligible for COBRA?

Employers must notify all formeremployees, not just the ones who mightbe eligible. This is only for involuntary terminations, so people who resigned voluntarily are not eligible. The notice informing former employees that they might beeligible is due to be sent by mid-April.

How do you determine if an employee wasinvoluntarily terminated?

The act doesn’t define involuntary termination. The intent of the act is for the layoffs that have occurred or will be occurring during the recession. There are some‘gray’ areas concerning whether a formeremployee qualifies as an involuntary termination, such as a person who has negotiated his or her termination and as part ofa severance arrangement agreed to quit sohis or her record looks better.

How can you prepare for these changes?

You need to identify former employeeswho were let go, because they must benotified. Work with your payroll providersto figure out what kind of records you needto keep. Technically, the government isproviding the subsidy but they are not writing the first checks. Instead, the employeepays 35 percent of the premiums, theemployer pays the remainder of the premium, and then the government reimbursesthe employer through a payroll tax credit.

What are some problems with thesechanges?

Employees who were terminated andelected COBRA from September throughJanuary might think they will receive acheck for those premium payments, butthey will not. It is important to point outthat the subsidy is only applied for COBRApremiums for March 2009 and later.

The former employee is only eligible forthe subsidy for nine months or until he orshe becomes eligible for another healthplan or Medicare. Simply being eligibledoesn’t mean you are actually covered, itjust means it is available. People could losethe subsidy legally, and if they are not entitled to the subsidy because they haveobtained other coverage, or their income istoo high, they may pay a penalty when theyfile their tax returns. The penalty is 110 percent of the subsidy received while eligiblefor other coverage and 100 percent of theamount if they find out at tax time that theymade too much money to participate.

What are the benefits of these changes?

More affordable health care is the bestbenefit of this change in COBRA. In somesituations, given the level of subsidy thatmay be provided, individuals might payless for health care after losing their jobsthan they did while they were working.

DALE R. VLASEK is a member of the business department and chair of the employee benefits practice at McDonald Hopkins LLC.Reach him at (216) 348-5452 or ADRIENNE STEMEN is an associate in the business department atMcDonald Hopkins LLC. Reach her at (216) 348-5760 or