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The COBRA subsidy, which originally was part of the $787 billion stimulus package created by the American Recovery and Reinvestment Act (ARRA), initially was available to any employee terminated involuntarily between September 1, 2008 and December 31, 2009, and their covered dependents, and provided only nine months of the reduced-rate COBRA coverage. The extension was part of the Department of Defense Appropriations Act, 2010, and was passed and signed into law on December 19, 2009. (Download free Employer’s Quick Guide to COBRA: http://www.ppspublishers.com/cobra-guide.htm.)
Find out below how these changes affect your organization. In addition, you will find an analysis of the costs associated with the subsidy.
Changes to the Original COBRA Subsidy
Under the ARRA provisions that took effect February, 17, 2009, the COBRA subsidy provisions provided the 65 percent premium reduction for up to nine months and only applied to certain “assistance eligible individuals.” The original COBRA subsidy defined assistance eligible individuals as covered employees and their dependents who lost coverage as a result of an involuntary termination of the covered employee between September 1, 2008, and December 31, 2009.
The COBRA subsidy extension eliminates the requirement that the loss of coverage occur before the subsidy’s eligibility expiration date and instead requires only that the covered employee and dependents experience a qualifying event because the covered employee’s employment ended as a result of an involuntary termination between September 1, 2008, and February 28, 2010. In addition, the extension provides an additional six months of premium reductions, for a total of 15 months.
The subsidy extension also includes new notice requirements to alert assistance eligible individuals about the extensions. Further, it contains a provision allowing assistance eligible individuals to reinstate their COBRA coverage at the continued subsidized rates and to reinstate the coverage retroactively if their original nine-month subsidy had expired and they dropped COBRA coverage instead of paying the full COBRA premium. And, individuals who received the nine months of premium reduction provided originally and then paid the full COBRA premium can receive refunds and/or premium credits for the extra amount paid.
The Effect of the COBRA Subsidy on Employers
The COBRA premium subsidy has been a great success from the perspective of increasing COBRA use and providing a safety net for out-of-work individuals and families. Ordinarily (i.e., without the subsidy), only about 10 percent to 20 percent of eligible people elect COBRA coverage, primarily because of the expense of the premiums. According to a recent survey by Hewitt Associates, elections increased to 38 percent after the subsidy became available. The Hewitt survey estimates that the average employee would pay $8,800 a year for COBRA coverage, so the 65 percent subsidy reduces that cost significantly to about $3,000. The extension of the subsidy likely will encourage even more people to elect coverage.
But, reviews from employers are mixed. While most employers are happy their former employees and their dependents are getting assistance with health insurance, they also may find that their insurance costs will rise. A 2009 survey by Spencer’s Benefits Reports found that claims from COBRA recipients were about 54 percent more expensive than claims by regular current employees. This added expense most likely is the result of adverse selection – beneficiaries with chronic health conditions are more likely to elect COBRA coverage to ensure continuity of coverage. In addition, the COBRA subsidy has created new regulatory obligations for employers, including extra paperwork and tax responsibilities.
And, the ultimate cost of the subsidy program is still unknown. The Congressional Budget Office estimated the subsidy would cost about $26 billion initially, and any extensions would add $7 billion in 2010 and $13 billion in 2011. But, these numbers may not accurately project the number of individuals eligible for the subsidy since it is unclear what factors were used to project the costs. With the national unemployment rate at 10 percent and higher in states like California, Michigan, and Ohio, those costs could be significantly higher.
Robin Thomas, J.D.
Personnel Policy Service, Inc.
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