Employee benefits Alert

    View Author March 2010

    The COBRA health care subsidy that was originally enacted in the American Recovery and Reinvestment Act of 2009 (ARRA) and extended in the Department of Defense Appropriations Act, 2010 (DOD Act) has been further extended by the Temporary Extension Act of 2010 (TEA).

    ARRA Subsidy and DOD Act Extension

    With the original ARRA subsidy, “assistance-eligible individuals” were entitled to elect COBRA coverage by paying only 35 percent of any COBRA premium for up to nine months of COBRA coverage. The ARRA COBRA subsidy was originally set to expire December 31, 2009, so that covered employees who were involuntarily terminated (and their eligible dependents) after that date would not have been eligible for the subsidy. The subsidy was extended by the DOD Act for covered employees who were involuntarily terminated (other than for gross misconduct) on or before February 28, 2010. In addition, the DOD Act extended the subsidy period from nine months to 15 months.

    TEA Subsidy Extension

    The most recent COBRA subsidy extension now applies to covered employees involuntarily terminated (other than for gross misconduct) on or before March 31, 2010. The subsidy period remains at 15 months. The employer sponsoring the health plan can continue to claim an offsetting credit against its payroll taxes for the reduction in the amount of premium that must be paid by an assistance-eligible individual. The new law applies to both private sector and public sector employers.

    Reduction in Hours Followed by Involuntary Termination

    The new law creates a special rule for an employee who loses group health plan coverage due to a reduction of hours but continues to be employed. If the employee is later terminated involuntarily on or after March 2, 2010, the involuntary termination is treated as the COBRA qualifying event for election and subsidy purposes. Therefore, the employee is entitled to elect COBRA coverage and to apply for the subsidy after the involuntary termination. This special rule applies even if the employee had already lost coverage due to the earlier reduction in hours (which would have been the usual COBRA qualifying event), and even if the employee had not already elected COBRA coverage after the reduction in hours or had elected COBRA coverage and later dropped it. However, the employee’s total COBRA coverage period, as well as the subsidy period, is calculated from the date of the earlier reduction in hours (the usual COBRA qualifying event).

    For example, an employee whose work is reduced to a part-time level below the minimum hours required for plan coverage, and whose employment is later terminated completely, would be eligible to elect COBRA and apply for the subsidy after the later termination. However, the employee’s maximum period of COBRA coverage and the subsidy period would be dated from the original reduction to part-time work.

    The plan administrator is required to notify employees who are affected by the special rule - i.e., those who previously lost group health plan coverage due to a reduction in hours and who are involuntarily terminated on or after March 2, 2010. We would expect that for most employers, the required notice may be sent out by their insurers or third-party administrators. However, employers will have to contact their insurers and third-party administrators to identify the individuals who are affected by the special rule and make certain that an appropriate notice is sent in a timely manner.


    Under the TEA, an employer’s reasonable determination that an employee was involuntarily terminated is determinative, as long as the employer maintains supporting documentation, including an attestation by the employer of involuntary termination.

    If the supporting documentation is not maintained, then the Department of Labor can override the employer’s determination. The TEA also allows the Department of Labor to seek penalties of up to US$110 per day from an employer or insurer that fails to follow an overriding determination from the Department of Labor within 10 days.

    To determine whether a particular individual is subject to the special rule under the TEA for reduction in hours followed by involuntary termination, or for further information regarding changes to the COBRA health care continuation coverage laws that were enacted by the ARRA, the DOD Act and the TEA, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.