COBRA: Expansion and Subsidization Under the Stimulus

The recently passed American Recovery and Reinvestment Act of 2009 provides $87 billion to help the unemployed pay health insurance premiums under the Consolidated Omnibus Budget Reconciliation Act, more commonly known as the COBRA program.

This money will be used as a subsidy, requiring recently discharged employees to only cover 65% of the COBRA costs. The structure of COBRA will remain the same, but federal funds will be used to offset the cost and ideally make the program more accessible. Employees will still have the option of remaining in COBRA for the full 18 month allowance, even after the 9-month subsidy is complete. The language of the package includes funds to help the unemployed pay health insurance premiums under the COBRA program. As part of the stimulus law, lawmakers also enacted a provision allowing laid-off workers to switch to cheaper health-care plans in COBRA, if their employers offer them, without having to wait for an open-enrollment period.

The new subsidy applies to workers involuntarily terminated between September 1, 2008, and December 31, 2009, and phases out for individuals with an adjusted gross income of $125,000, and $250,000 for married couples filing jointly. COBRA generally is not available to people terminated from small companies, since the federal law exempts businesses with fewer than 20 employees from participating. It is also not available if the former employer never offered health insurance, has terminated its plan or has liquidated.

Eligible workers who originally opted not to take COBRA but who now want the subsidized version have 60 days after they receive termination notice from their employers to sign up. Less than one in 10 eligible workers opted for continuing insurance coverage under COBRA in 2007. Many feel they cannot afford to participate in the program. Under the law, workers must pay the entire premium -- plus a 2% administrative fee – regardless of how much employers may have picked up during employment. In 2008, the full annual cost of employer-sponsored health insurance averaged $4,704 for an individual policy and $12,680 for a family policy. With the subsidy the average policy would be $377 a month for a family and $140 for an individual. Following the nine-month subsidy, coverage cost would rise to $1,078 per month for a family and $400 per month for an individual.

This is not the first law assisting with the cost of COBRA. For individuals out of work because of competition from exports or overseas outsourcing, the government will pay up to 80 percent of COBRA premiums through the Trade Adjustment Assistance Reform Act. Under this law, individuals can receive monthly payments or a year-end tax credit to offset COBRA premiums for up to three years. The subsidy already was available before the stimulus bill passed, but the new law boosts the subsidy rate from 65 percent to 80 percent.

There has been some opposition to the expansion and subsidy: "The new law will impose very large costs on employers. It will make it more expensive for employers to provide health insurance. And, for those who do, it will make it more expensive to hire new workers." (John Goodman, President of the National Center for Policy Analysis, Dallas). Also, a number of former employees terminated before September 1, 2008 are presenting opposition to this restriction for the subsidy.