Economic crisis? Meet the cure: COBRA premiums

If your company was one of those that laid off a combined half million employees in the past six months, you’ve already sent out a bunch of COBRA notices. Thanks to the Obama Administration and Congress, now you have to do it again.

Last week, President Obama signed into law the American Recovery and Reinvestment Act of 2009, commonly called the Stimulus Act. The new law weighed in at 407 pages and roughly $800 billion. Hidden in the thicket of “shovel-ready” projects is a provision that dramatically changes employers’ COBRA responsibilities.

COBRA continuation coverage applies to workers at companies employing 20 or more employees. When an eligible worker loses health-insurance benefits after leaving a job, COBRA provides the employee the opportunity to receive the same benefits for up to 18 months. Until now, the employee was solely responsible for the premiums.

But under the Stimulus Act, employers now have to pay 65% of the worker’s premiums for nine months. The federal government will then reimburse the employer by allowing it to take a credit on payroll taxes. In effect, though, the employers are lending this money to the federal government to help finance the economic recovery. Because in the lull between the recent Lilly Ledbetter Fair Pay Act and the upcoming, ironically named Employee Free Choice Act, it must have seemed like a good idea to pile on employers some more.

(The stock market seems to disagree, with the S&P 500 down 13% since the Inauguration and more than 20% since New Year's Day.)

The new COBRA subsidy does not cover every employee equally. The law phases out the subsidy for so-called “high-income individuals” — people making more than $125,000 a year (or $250,000 a year for married joint filers) — in a complicated scheme involving taxable premium reductions. And while the subsidy applies to workers who are “involuntarily terminated,” the Act does not define that term. The Conference Committee report suggested that people fired for gross misconduct would not be eligible.

What’s particularly tricky is that the Act reaches back in time to cover employees laid off since September 1, 2008 (and goes forward through December 31, 2009). That means that employers who sent out COBRA notices to laid-off employees over the past six months now have to contact them to give the workers another chance to elect COBRA coverage. A new and improved COBRA notice form is expected from the Department of Labor by March 17. What’s not clear is how to treat employees who got their COBRA coverage paid for as part of a severance agreement. Like the recovery process itself, this issue is a work in progress.

What you can do

• Read the text of the Stimulus Act of 2009 (but not while driving or operating heavy machinery)
• Immediately reexamine COBRA eligibility over past six months
• Talk to your employment counsel about how to handle employees already laid off
• Contemplate the seeming prescience in this quote from the end of the 1986 Stallone classic, Cobra:
  

         DETECTIVE MONTE
I personally would have looked for a more subtle solution, but that's not your style.
    (offers his hand)
No hard feelings.

         COBRETTI (after punching Monte)
No hard feelings.

Comments

[Michaela May]

In theory, employees terminated for “gross misconduct” are not entitled to COBRA benefits at all. But that exception sets the bar pretty low, since:
(1) The conduct must be pretty egregious to be “gross misconduct”. See Nero v. Univ. Hosp. Mgmt. Servs. Org., 23 F. Supp. 2d 652, 655 (S.D.W.Va. 1998) (“conduct is gross misconduct if it is so outrageous that it shocks the conscience”); Richard v. Ind. Commercial Elec. Corp., 337 F. Supp. 2d 279, 282 (D. Mass. 2004) (indicating gross misconduct is something “flagrant and extreme” and “out of all measure; beyond allowance; not to be excused; flagrant; shameful”).
(2) Some courts have held that an employer must give COBRA benefits to an employee whom the employer honestly believed was engaged in gross misconduct but whose behavior actually fell short of the standard. See Kariotis v. Navistar Int’l Transp. Corp., 131 F. 3d 672, 679 (7th Cir. 1997) (holding that COBRA requires “fact (not the suspicion) of gross misconduct”); Richard, 337 F. Supp. 2d at 281 (“an employer must have more than an honest, actual belief that an employee engaged in such misconduct”) (emphasis added); and
(3) The potential cost to the employer for not giving COBRA notice and benefits, even in good faith, is high. See, e.g., 26 U.S.C. § 4980B(b)(1), (c)(3) (imposing $100-per-day excise tax for failure to comply with COBRA requirements).

[Jay Shepherd]

Kudos to Michaela May, a third-year student at Boston University School of Law, on the incredibly scholarly comment immediately above. That's solid work. If you're a law firm and are looking for a new associate in August/September, email me and I'll send Michaela to you.