On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act ("the Act"), in an attempt to provide economic stimulus to the nation's economy.  Among the provisions of the Act are important changes to the continuation coverage of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA").  The Act revises COBRA to alleviate nearly two-thirds of the cost to employees from continuing their medical benefits following an involuntary termination for eligible taxpayers earning below a maximum threshold.  For eligible individuals, the Act provides for a 65 percent subsidy of the required COBRA premium for a maximum period of nine months.  Eligible employees will only be required to pay 35 percent of the COBRA premium that he or she would otherwise be required to pay for employee and family coverage.  This new COBRA benefit under the Act applies to persons who became eligible for COBRA between September 1, 2008 and December 31, 2009, due to an employee's involuntary termination of employment.  The Act requires employers to change some COBRA notices and practices, and also affects payroll tax obligations.

Attorney Leila Narvid in Payne & Fears LLP's San Francisco Office gives the following advice to employers with regard to new obligations arising under the Act:

• All employees eligible for COBRA on or after September 1, 2008, must receive a notice of the availability of premium assistance.  This notice can be incorporated into an existing COBRA notice, or added as a supplemental notice.
• Assistance-eligible employees who are currently covered by COBRA must be notified that they are only required to pay 35 percent of the COBRA premium during the period of premium assistance.  Assistance-eligible employees who are not currently covered under COBRA must be notified that they now have a second opportunity to elect COBRA. 
• Employers and/or plan administrators must notify assistance-eligible employees of provisions relating to COBRA coverage and the federal subsidy no later than April 18, 2009.  They must also include with that notice the forms necessary for establishing eligibility under the program.  Failure to comply with notice requirements will be a COBRA violation, subject to penalties. 
• Employers wishing to be eligible for reimbursement of the 65 percent of premium assistance will need to provide a list of their assistance-eligible employees and the amount of premium assistance paid by the employer as part of its payroll reporting obligations. 
• Revise payroll systems to identify eligible individuals in order to report the tax credit to the government and receive the subsidy.
• On March 23, 2009, the DOL issued Act-compliant model COBRA notices.  Each model notice is designed for a particular group of qualified beneficiaries and contains information to help satisfy the Act's notice provisions. 

The COBRA subsidy will have a substantial impact on almost all employers.  Employers have little time to implement the new administrative procedures and meet the new notice requirements.  Despite the time pressure, employers should take the time to work with HR, payroll, finance, and third-party providers to ensure understanding of the new provisions.  Employers should expect a higher level of use of COBRA than there has been in the past, and should be prepared for that development.  Employers should also take careful consideration of the new rules when planning any workplace reductions.