Wednesday, May 6, 2009

New COBRA Requirements Under The American Recovery And Reinvestment Act

The recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) contains amendments to COBRA which affect every employer that sponsors an employee group health plan and that has terminated or laid off an employee retroactive to September 1, 2008 through December 31, 2009. Among other things, the new amendments create additional COBRA notice requirements and affect payroll tax administration for purposes of implementing a temporary Federal subsidy with respect to COBRA premiums.

Under ARRA, most employees eligible for COBRA and who elect it must pay 35% of the applicable COBRA premium. Employers that provide group health coverage through insurance must pay the remaining 65% of the premiums, and will be reimbursed for that payment in the form of a credit subsidy against their quarterly federal employment taxes. Generally, the subsidy is available for up to 9 months. While the amendments apply only to those who are terminated involuntarily or laid off, the language of the statute appears to include an involuntary termination for cause, except for gross misconduct. In other words, terminating employment for most types of insubordination could trigger employer compliance with the new COBRA requirements. And, to add insult to injury, ARRA requires employers to locate former employees who previously declined COBRA coverage and to notify them in writing of their right to that coverage with the government subsidy.

The practical effects of all this are likely to be additional costs in business operation (notwithstanding the tax credit), a significant and adverse impact on cash flow, additional expenses in administering the notice provisions, and a reluctance to terminate employment to avoid such additional expenditures. Interestingly, it is possible that ARRA could have an unintended consequence as well: given the poor economy, employers may implement hiring freezes so that they don't have to contend with the additional costs imposed by ARRA should further layoffs be required. How's that for stimulus! Isn’t this fun, folks?

1 comment:

Anonymous said...

Oh My, the government passed new COBRA legislation to "protect" the recently terminated form losing their health insurance. BIG DEAL !!!! As is evidenced in the real world, today, corporations can save even more money and pass those savings on to their owners by just refusing to offer COBRA Insurance to those who lose their jobs. Big Business no longer has to fear the federal goverment as the policy of both the Department of Labor, and the IRS, is to NOT enforce the penalty statutes of the COBRA Act. The stated reason is that they do not have the resources to enforce the act. The $21 billion that congress recently authorized is just to subsidize the payments, not enforce the law. AND to make it easier to avoid the COBRA Act, lawyers and lawfirms will not take cases to enforce the act in civil courts because the payment of legal fees is limited to what the court says that they can recover on a case by case basis.
So, if you're a company looking to increase profits and to reduce Insurance costs, just fire those who have health issues and deny them the right to continue their health insurance through federal law. It's a law with no teeth.

David A. Schwartz