The new economic stimulus package includes valuable COBRA assistance for those who have recently lost their jobs: some help paying the premiums to continue their health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The stimulus legislation -- known as the American Recovery and Reinvestment Act of 2009 (ARRA) -- provides that the federal government will pay for almost two-thirds of the full premium amount for up to nine months for certain former employees and their dependents.

The new provisions went into effect on March 1, 2009.

COBRA Basics

Before the ARRA, employees and their families could continue their coverage under an employer's group health insurance plan for 18 to 36 months after an event -- such as a layoff, voluntary quit, or reduction in hours -- that would otherwise end their coverage. However, employees had to pay the full premium for the continued coverage. Although they had to pay only the employer-negotiated group rate (which is sometimes less expensive than an individual policy would be), employees had to foot the whole bill.

New COBRA Rules

Under the ARRA, the federal government will pay 65% of the cost of continued coverage under COBRA for certain employees and their families. This subsidy is available for up to nine months, for those who have lost their jobs for reasons other than gross misconduct. Here are the specifics.

Who Is Eligible for the Subsidy?

Not everyone eligible for COBRA coverage is eligible for the 65% subsidy. To qualify for the subsidy, employees or their family members must be eligible for COBRA because the employee's job was terminated involuntarily, for reasons other than gross misconduct. Employees whose hours are cut or who quit their jobs can't get the subsidy, although they're still eligible to continue coverage through COBRA. (The gross misconduct exception also applies to regular COBRA coverage.)

The subsidy is available to employees who lose their jobs from September 1, 2008, through December 31, 2009. Even employees or family members who initially declined COBRA coverage are eligible for the subsidy: Employers must give them a second chance to elect COBRA coverage by sending them notice of the new rules. Those who might otherwise be subject to a pre-existing condition exclusion may also be able to enroll, because the new law provides that the period of time between the original job loss that entitled the person to COBRA and the first COBRA coverage period after the ARRA was enacted doesn't count as a break in coverage.

Those with higher incomes are subject to a phase-out of the subsidy. The full 65% subsidy is available to single taxpayers with an adjusted gross income (AGI) of up to $125,000 and married taxpayers with an AGI of up to $250,000. The subsidy phases out for those with higher incomes, until it is completely gone for single taxpayers with an AGI of more than $145,000 and married taxpayers with an AGI of more than $290,000.

How Long Does the Subsidy Last?

The subsidy is available for up to nine months. However, the subsidy may end sooner if :

• The covered person becomes eligible for coverage under another group health care plan. Flexible spending plans, health reimbursement plans, or plans that cover only counseling, referral, dental, or vision care don't count; someone who becomes eligible for these other types of plans can still continue the subsidy. The covered person doesn't have to actually accept the available coverage; he or she need only be eligible to do so. And, the covered person is responsible for notifying the plan, in writing, upon becoming eligible for coverage under another group plan.
• The maximum period for COBRA coverage ends. This period, which typically lasts from 18 to 36 months, depending on why the person is eligible for COBRA, starts on the date the person is first eligible to elect COBRA coverage, whether or not the person actually does so. The subsidy doesn't extend the total period of time for which someone is eligible for COBRA.

How Does the Subsidy Work?

Those eligible for the subsidy may be required to pay only 35% of the full COBRA premium. The employer must pay the remaining 65%, for which it may claim a credit against its payroll taxes on IRS Form 941, Employer's Quarterly Federal Tax Return.

Because the new law went into effect so quickly, some former employees who are currently using COBRA may have paid the full premium even after the subsidy became available. Employers may reimburse them by either crediting the subsidy amount (65% of the premium payment) toward the person's future COBRA payments or refunding that portion.

More generous employers get a smaller break under the new law. Some employers pick up all or part of the tab for COBRA coverage. If a covered person pays less than 35% of the full premium for COBRA and the employer pays the rest, the employer's tax credit is reduced. The employer must treat the amount the employee actually pays as if it were 35% of a full premium payment, calculate what that full payment would be, then claim 65% of that amount as a credit.

Example: An employer pays 75% of COBRA coverage for employees who've been laid off. A former employee's coverage costs $600 a month, of which the employer pays $450 and the employee pays $150. The employer can't claim a credit for the full $450 it pays, nor can it claim a credit for 65% of the full premium ($390). Instead, the employer must treat $150 as 35% of a full payment, calculate what that full payment would be, then claim 65% of that amount as a credit. For anyone whose math is a bit rusty, $150 is 35% of about $428, so the employer may claim a credit of about $278.

The most generous employers -- those who pay the full COBRA premium--get no credit at all.

Different Coverage Provision

Those covered under COBRA usually have the right to continue only the coverage they had while employed. The new law allows -- but doesn't require -- employers to also offer different coverage, as long as:

• the COBRA premium for the different coverage is no more than the premium for the coverage the employee had while employed
• the employer is also offering the different coverage to current employees when the option is offered, and
• the different coverage isn't for a flexible spending account, an onsite facility that provides primarily first aid or wellness care, or dental, vision, counseling, or referral services only.

What to Do Now

Employees: If you lost your job since September 1, 2008, contact your former employer and ask about the subsidy. If you elected to continue coverage under COBRA, the amount you have to pay will be reduced by 65% -- and the subsidized amount won't be treated as taxable income to you. If you decided not to continue COBRA coverage because it was too expensive (and you haven't got other coverage), find out how much the reduced amount will be and, if you want to get coverage through COBRA, ask when you will receive the election forms.

Employers: If your company has terminated anyone's employment since September 1, 2008, you have to send them a revised COBRA election notice letting them know about the subsidy, the extended election period for choosing COBRA coverage (if they haven't already), contact information, and more. You have 60 days from the date the ARRA passed (February 17, 2009) to send this notice. You must also provide the notice to anyone who is involuntarily terminated through the end of 2009. The Department of Labor is expected to provide a model notice form soon; check its special page on the COBRA extension for more information.

You'll also need to make sure your company keeps all required records to support its claim for a tax credit on IRS Form 941; the IRS has posted a list of documents you'll need to retain, along with other information on the tax credit, at the COBRA subsidy area of its website.

For more detailed information on COBRA coverage, consult The Essential Guide to Federal Employment Laws, by Lisa Guerin and Amy DelPo (Nolo).