Labor and Employment Law Alert, March 2009

Stimulus Package Requires Employers to Subsidize COBRA Premiums

The recent signing of the American Recovery and Reinvestment Act of 2009 has a substantial impact on employers who have involuntarily terminated, or who are planning to involuntarily terminate any employees. Under the new law which is effective immediately, qualifying employees will only pay 35% of their COBRA premium. The rest of the premium will be paid by employers, even though they will eventually be reimbursed by the federal government in the form of a tax credit. Employees can potentially receive the subsidy for up to nine months.

In order to qualify, the employee must have been involuntarily terminated between September 1, 2008, and December 31, 2009. Therefore, the subsidy is available to some former employees, regardless if they already rejected COBRA coverage. By April 18, 2009, employers are required to notify these former employees that they have sixty days to change their mind and enroll into COBRA.

For employers planning to involuntarily terminate an employee, the new law changes the type of COBRA notice that must be distributed. Although the Department of Labor is required to issue model notices soon, employers should make sure that their notices are adequate so they avoid the standard COBRA and IRS penalties.

Employers are advised to immediately familiarize themselves with the new law and determine which former employees need to be informed of their new opt-in right. General COBRA notices which will be issued in the future also need to be changed to comply with the law’s new notice requirements. Furthermore, employers should begin developing a payroll system to track subsidy payments so they can file for the federal tax credit.

These changes, like COBRA itself, can be complex and confusing. If you have further questions, please contact any member of Murphy Austin Adams Schoenfeld's Labor & Employment Law Team at (916) 446-2300.

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