As part of his response to the recession, President Obama signed the American Recovery and Reinvestment Act of 2009 (often called “the Stimulus Bill”) in February. Among other things, the Stimulus Bill includes major changes to the Consolidated Omnibus Budget Reconciliation Act (COBRA). The purpose of the changes are to help workers who lose their jobs obtain COBRA health insurance coverage.

Ordinarily, a former employee is entitled to COBRA insurance if they are prepared to pay the entire cost of the health insurance coverage plus an administrative fee. The changes to COBRA provide an employee with a subsidy from the government that covers 65% of the cost of the COBRA coverage.

The subsidy applies to any employee who suffers an “involuntary termination” between Sept. 1, 2008, and Dec. 31, 2009. Perhaps thinking that employers might attempt to dance around involuntary terminations, the Internal Revenue Service has issued an expansive definition of who qualifies. The formal definition is: “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.”


The subsidy provides the 65% premium assistance for a period of up to nine months. Unfortunately, the government is putting a portion of the subsidy cost on employers. The employee is required to pay his or her 35% of the premium directly to the employer. Once that payment is made, they are considered covered under COBRA. The remaining 65% comes from the government — eventually.

The company is required to pay the remaining 65% premium up-front. The government will reimburse the company by means of a tax credit that is applied to an employer’s income tax withholding and FICA taxes. If the credit amount is greater than the employer’s entire tax obligation in any given quarter, the government will issue the employer a check for the difference.

Another big change pertains to the type of coverage the former employee may select. Under the old version of COBRA, the separated employee could only elect the same health coverage he or she had been receiving from the employer at the time of separation. After changes from the Stimulus Bill, an employee has 90 days to opt for a different, lower-cost health insurance plan than the one they had at the time of separation. The coverage plan the former employee seeks to opt in to also has to be a plan that the employer offers. Therefore, if the employer only has one plan, this change is a nonissue.

Employers are required to post notification of the changes to COBRA. The date for notices to be issued was April 18, 2009. The Department of Labor has “model” notices available for download on its Web site . Employers that have not already posted their notices would be wise to mail copies directly to their former employees who may qualify.

The government also puts the burden for keeping track of the employee’s COBRA status on the employer. To qualify for the tax credit, the employer must retain and submit documentation that the employee paid his/her 35% share of the premium to receive reimbursement.


For employers who haven’t already started, there is a lot to do. First, employers need to understand which former employees are entitled to the subsidy; they need to send out notice to all former employees so that the 60-day opt-in period can begin; and they need to establish recordkeeping procedures for documenting which former employees pay the 35% premium.

Companies also need to determine how they intend to pay the 65% outlay up-front. They shouldn’t expect reimbursement until the end of the quarter, so they need to have sufficient cash reserves on hand to pay their portion of the premium. This is particularly onerous for companies with tight cash flows or that have had to lay off large numbers of employees.

Companies should carefully review their termination policies and layoff plans in light of the new regulations to ensure that employees are properly classified when they are let go. Remember, a lot of employees who don’t fit the standard definition of “laid off ” will be entitled to the subsidy. 

Richard D. Alaniz is senior partner at Alaniz and Schraeder, a Houston, TXbased national labor and employment firm. He has been at the forefront of labor and employment law for more than 30 years, including stints with the US Department of Labor and the National Labor Relations Board. Questions about this article can be addressed to Rick at (281) 833-2200 or