COBRA Premium Subsidy



The American Recovery and Reinvestment Act of 2009 provides a temporary subsidy of COBRA premiums to any qualified beneficiary who elects COBRA coverage and whose qualifying event is related to involuntary termination of employment that occurs between September 1, 2008 and December 31, 2009.  The subsidy has been extended and expanded several times, most recently by the Continuing Extension Act of 2010, to cover involuntary terminations that are COBRA qualifying events, as long as the involuntary termination occurs on or before May 31, 2010.

Appropriations Bill

Subsidy Expansion

Eligibility for the 65% premium subsidy applicable to COBRA continuation coverage provided by group health plans was expanded as part of the Defense Appropriations Bill of Fiscal Year 2010.

The COBRA premium subsidy was originally enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”).  The purpose of the subsidy was to provide financial assistance to “Assistance Eligible Individuals” (“AEIs”), a special class of group health plan participants who lost coverage between September 1, 2008 and December 31, 2009 due to an involuntary termination of employment, and who elected to continue coverage pursuant to COBRA or a comparable state law.

The Appropriations Bill made the following important change to the ARRA:

Extension of Maximum Subsidy Period: Extended the maximum COBRA subsidy period from 9 months to 15 months for all AEIs.  The extension does not mean that AEIs who have already been receiving subsidized coverage receive an additional 15 months of subsidy; but rather that the subsidy is available for a total of 15 months.  AEIs who have already received 9 months of subsidy are now entitled to another 6 months.

Notice Requirement: No later than February 19, 2010 (60 days form the enactment of the legislation), plan sponsors had to notify all individuals who were AEIs on or after October 31, 2009, and all plan participants whose employment was involuntarily terminated after October 31, 2009, of the availability of the extended 15 month subsidy period.  Plan sponsor were required to revise their initial general COBRA notice to provide the revised subsidy information to all qualified beneficiaries within the generally applicable statutory time period for providing the initial COBRA notice information.

Retroactive Election: Required that the 15 month subsidy period be provided to AEIs whose initial 9 month subsidy period has already expired, and required reinstatement of coverage that may have lapsed due to nonpayment of premium after expiration of the initial subsidy period (with no gap in coverage). AEIs whose coverage terminated due to nonpayment after expiration of the initial subsidy period have a minimum of 60 days from enactment of the statute to pay retroactive premiums to reinstate coverage.   Retroactive premiums had to be paid no later than February 17, 2010, or 30 days from the date that the notice of subsidy extension is provided.

Reimbursement of Premium: If an AEI overpaid premium due to the expiration of the initial 9 month subsidy period, the plan sponsor must either offset future premiums in the amount of the overpayment, or provide refunds.

Plans Covered

The Act applies to any plans currently subject to COBRA and plans that are exempt from COBRA, but subject to comparable requirements for health coverage continuation under state law.  It is also applicable to the Federal Employees Health Benefit Program.

Health flexible spending arrangements provided through a cafeteria plan are exempt from the requirements.

COBRA Subsidy

Under the Act, the government will subsidize 65% of the COBRA premium for up to 15 months.  The Act calculates the subsidized payment based on the COBRA premium that would otherwise have been paid by the qualified beneficiary.

For example, if an employer voluntarily agrees to pay a portion of the COBRA coverage, the employee would only pay 35% of the portion of the premium not paid by the employer.  In light of this fact, employers may wish to review and restructure their severance plan in order to maximize the impact of the subsidy on their organizations.

Any modification of existing severance agreements should be reviewed with employment law counsel to ensure that legal issues aren’t created by changes to existing arrangements.  The subsidy may not be applied to payments for health flexible spending accounts.


To be eligible for the subsidy, an employee must be terminated, or have been terminated, from his or her employer during the period starting September 1, 2008, and ending May 31, 2010, and must be otherwise eligible for COBRA.

The subsidy also applies to covered dependents who independently elect COBRA due to the involuntary termination of employment of an assistance eligible individual or continue COBRA coverage after a subsequent qualifying event, such as the death of the assistance eligible individual.

The new COBRA provisions do not apply if COBRA rights initially arose for any reason other than an involuntary termination of employment, such as a reduction in hours, voluntary termination of employment, death, divorce or attainment of majority.

Income Limitation

A qualified beneficiary is not entitled to a COBRA subsidy during a year in which he or she is a taxpayer, or spouse or dependent of a taxpayer, whose federal modified adjusted gross income exceeds $145,000 (or $290,000 for a taxpayer filing a joint return).  The COBRA subsidy is reduced for years in which gross income exceeds $125,000 (or $250,000 for joint returns).

This subsidy reduction is applied by increasing the taxpayer’s income tax by the amount of the subsidy that the taxpayer received.  Therefore, the employer does not have to consider this limitation when applying the subsidy or taking payroll credits.  The taxpayer is responsible for application of the income limits.

However, qualified beneficiaries may make a one-time election to waive the COBRA subsidy by providing a signed and dated notification (including a reference to a “permanent waiver”) to the entity that is reimbursed for the premium subsidy. No separate, additional notification to any government agency is required. If an AEI makes a permanent election to waive the right to the premium subsidy, the individual may not later reverse the election and may not receive the premium subsidy for any future period of COBRA continuation coverage in 2010, regardless of changes in adjusted gross income in those years.


Individuals who believe they are eligible for the subsidy are required to complete forms establishing the fact.  These forms should be included with their COBRA election notice.  The DOL has published a model form for this purpose, called an “Request for Treatment as an Assistance Eligible Individual”.

The law does not specify a timeframe in which the plan administrator must make a determination regarding the individual’s eligibility.

The timeframe applicable to issuing notices of unavailability of COBRA coverage would apply here, meaning a written notice of the denial of subsidy eligibility would have to be provided within 14 days of receipt of the application.

Employees must have been terminated involuntarily (and not for reasons of gross misconduct that would render them ineligible for COBRA) in order to be eligible for the subsidy.  Involuntary terminations include, but are not limited to, layoffs or reductions in force, for-cause terminations, and any other employer-initiated action that results in termination of employment.  More information regarding what constitutes an “involuntary termination” may be found in IRS Notice 2009-27.

Appeals for Denials

Individuals who are denied treatment as assistance eligible individuals and thus are denied eligibility for the premium reduction or the second chance election (whether by their plan, employer or insurer) may request an expedited review of the denial by the U.S. Department of Labor.

The Department must make a determination within 15 business days of receipt of a completed request for review.

The appeal process allows applicants who are denied the subsidy to request a review by the Labor Department’s Employee Benefits Security Administration (EBSA). Individuals seeking a review must complete the department’s appeal form in order to begin the review process.

Steps Outlined

Applicants can submit the appeal application online, by mail or fax by following these steps:

Individuals requiring assistance may also contact EBSA at 1-866-444-3272 or visit its dedicated Web page.

Timing & Duration

The subsidy will apply to premiums paid for periods of coverage beginning on or after March 1, 2009, and will last for 15 months.

The subsidy period does not extend the period of COBRA coverage that would otherwise be available to the qualified beneficiary.

The subsidy will not apply for any months that begin after a qualified beneficiary becomes eligible for another group health plan or Medicare, even if the he or she declines the coverage.  (This is different from regular COBRA rules, which require COBRA continuation unless alternate health coverage is actually attained).

For this purpose, a group health plan does not include a plan that only provides:

A qualified beneficiary must provide notice once they become eligible for another group health plan or Medicare, and thus become ineligible for the subsidy.  Qualified beneficiaries who do not provide this notice will be liable for 110% of the improperly paid subsidy amount.

The subsidy will end and COBRA coverage will terminate if the assistance eligible individual fails to pay the required 35% share of the COBRA premium.

Pre-Existing Conditions

If an individual elects COBRA during their second chance election period, the time between an eligible individual’s initial COBRA qualifying event and March 1, 2009 will not count toward the 63-day period applicable to the Health Insurance Portability and Accountability Act (HIPAA) creditable coverage and preexisting condition restrictions.

Optional Buy Down

If an employer offers additional coverage options to active employees, the employer may (but is not required to) allow assistance eligible individuals to switch the coverage options they had when they became eligible for COBRA.

To retain eligibility for the COBRA premium reductionand subsidy, the different coverage must have the same or lower premiums as the individual’s original coverage.

The different coverage cannot be coverage that provides only dental, vision, a health flexible spending account, or coverage for treatment that is furnished in an on-site facility maintained by the employer.

If the buy down is allowed, an employee will have up to 90 days from the notice date to make that decision.  It is important to note that adoption of the optional buy-down extends the election timeframe by an additional 30 days, from 60 to 90 days.

COBRA Notices

Under the Act, employers must provide notice about the subsidy.

This new information should become part of the standard COBRA notice for the duration of the subsidy.

The employer should use the same notice procedures that are in place for regular COBRA notices.

Plans subject to the Federal COBRA provisions must provide the updated General Notice to all qualified beneficiaries (not just covered employees) who experienced a qualifying event at any time from September 1, 2008 through May 31, 2010, regardless of the type of qualifying event, and who have not yet been provided an election notice.

The Department of Labor has issued model notices that incorporate the provisions of ARRA, as amended by the Continuing Extension Act of 2010.

Subsidy Requirements

Reimbursement will take the form of a credit against payroll taxes (FICA and employees’ withholding tax) the employer would otherwise pay to the Treasury Department.

Employers will claim the COBRA subsidy amount by claiming it as a credit on the Form 941. The Form 941 has been revised to allow for this credit.

Form 941
Form 941 Instructions

Filing Requirements

Although the specific reports and deadlines will be determined in the future by the Treasury Department, the Act identifies three types of reports that employers should keep in mind as they prepare and document information related to this Act.

Additional Resources

DOL Web Site

DOL Model Notices

COBRA Premium Reduction Fact Sheet

Employee Flyer

Form 941

Instructions for Form 941

IRS Answers for Employers