On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (Act) into law. This massive economic stimulus package includes important new COBRA compliance obligations including premium assistance for employees (and their families) who are involuntarily terminated between September 1, 2008 and December 31, 2009 with as much as a nine month subsidy to help them continue receiving their employer’s health benefits.

The following is a basic overview of the law and what employers need to initially know to comply with the legislation in a timely manner:

COBRA Premium Assistance. The Act provides for COBRA premium assistance for certain assistance eligible individuals (AEIs) for periods of coverage beginning on or after February 17, 2009 (generally March 1). An AEI is any worker (and their dependents) who loses health coverage because of an involuntary termination of employment. Those who retire or otherwise terminate their employment voluntarily, and those who become eligible for COBRA coverage as a result of gross misconduct, reduced hours, divorce, loss of dependent status or other qualifying event are not eligible for the subsidized coverage. (Under the Act, COBRA includes a state program that provides continuation coverage comparable to COBRA – but the Act's COBRA provisions do not apply to Health FSAs).

The premium assistance is available for up to nine months of the AEI's maximum coverage period. The way it works is that the AEI pays 35% of the COBRA premium and the employer pays the remaining 65%. The employer is then reimbursed by the federal government for their subsidy through a credit or refund of payroll taxes.

Extended Election Period. The Act applies to AEIs who were terminated back to September 1, 2008 even if they did not previously elect the COBRA coverage offered through the Employer. Individuals who declined COBRA coverage will have another opportunity to enroll (special election period) although the subsidy and the coverage will not be retroactive. If they chose to enroll, their coverage will begin on February 17 but their maximum COBRA period still runs from the date the individual first became eligible for coverage (i.e. the original termination date) In other words, the maximum COBRA time period is not extended for these new enrollees. The special election period ends 60 days after the date on which notification is provided to the individual.

Plan Enrollment Option. The Act also creates a "plan enrollment option," under which a worker may switch to a lower-cost health plan if available through the Employer. The premium for the different coverage cannot exceed the premium for the coverage in which the individual was enrolled, and the different coverage must be coverage also offered to active employees.

Notices. The Act provides that the COBRA election notice for all individuals who become entitled to elect COBRA between September 1,2008 and December 31, 2009, must include additional notification of the availability of the premium assistance and the option to enroll in different coverage (if permitted by the plan). The notice obligation can be met by amending existing notices or by providing the required notices in a separate document. Also, for any AEI who became entitled to COBRA before February 17, 2009, the plan administrator must provide a notice of the assistance and the extended period to elect COBRA, within 60 days after February 17, 2009.

The departments of Labor, Treasury, and Health and Human Services are expected to issue additional guidance and model notices in the next few weeks to help employers comply with the new regulations.