The Shifting Cost of COBRA Coverage: What Should Employers Do?

The Shifting Cost of COBRA Coverage: What Should Employers Do?

By Randall P. Sutton

On February 17, 2009, President Obama signed into law an economic stimulus package known as the American Recovery and Reinvestment Act of 2009 (“ARRA”). Among its numerous provisions, ARRA includes new COBRA notice and subsidy requirements that will result in additional paperwork and out-of-pocket expense for many employers.


Under current COBRA continuation of coverage regulations, employees and their dependents who are covered under an employer-sponsored group health insurance plan must be allowed to elect to continue their coverage at their own expense after they lose coverage under the plan.

ARRA significantly changes current COBRA regulations by requiring that employers pay 65% of the cost of continuing health care coverage for eligible individuals. Eligible individuals under ARRA are all employees or their dependents who involuntarily lose coverage under a group health plan between September 1, 2008 and December 31, 2009. The employer-paid COBRA premiums can then be recovered from the federal government through a credit against payroll taxes. If the tax credit is insufficient to cover entire amount of employer-paid COBRA premiums, then the remainder will be reimbursed from the Treasury Department.

Individuals who qualify for the COBRA subsidy will still be required to pay for 35% of their COBRA premium. An individual’s eligibility for the subsidy ends on the earlier of: (1) the date the individual becomes eligible for coverage for another group health plan; or (2) the end of the 9-month period of subsidy payments. ARRA does not extend the term of an individual’s COBRA eligibility beyond what that person would otherwise be entitled to under current COBRA provisions.


Under ARRA, eligible individuals must be given a special 60-day period to elect subsidized COBRA continuation coverage. Employers must send notices explaining the election no later than April 18, 2009. Even eligible individuals who have previously declined COBRA coverage are entitled to a notice and a special 60-day election period to continue their coverage. The 60-day period starts the day the eligible individual is provided with the notice regarding the availability of the COBRA subsidy. If an eligible individual was involuntarily terminated prior to March 1, 2009, and that person elects COBRA coverage after receiving the 60-day election notice, then coverage begins on March 1, 2009, not on the day of the individual’s termination from employment.


  1. Compile a list of potentially eligible individuals who will need to be notified about the COBRA subsidy. The list must include every employee (former or current) and dependent who has had a “qualifying event” that resulted in a loss of health insurance coverage after September 1, 2008. Examples of qualifying events include termination of employment, reduction in hours, divorce, death, or aging out of coverage.
  2. Revise your payroll system so that you can report the amount of COBRA premiums paid for purposes of obtaining reimbursement from the federal government.
  3. Modify applicable COBRA premium billings as of March 1, 2009 to take the 65% subsidy into account.
  4. Confirm that your plan administrator, insurance company, benefits broker or COBRA administrator will be responsible for sending out the newly required notices to all eligible individuals.
  5. Estimate your company’s out-of-pocket costs of complying with the new law by determining what your plan charges for COBRA premiums.
  6. Periodically review your plan’s rates for COBRA premiums in order to evaluate the fiscal impact of future workforce reductions.

If you have any questions regarding COBRA subsidies or the new notice requirements under ARRA, please contact a member of our Employment Practice Group.