On March 2, 2010, President Obama signed the "Temporary Extension Act of 2010" (the "Act") which, among other things, extends the 65 percent COBRA continuation premium subsidy/payroll tax credit through March 31, 2010, expands the class of Assistance Eligible Individuals ("AEIs") to include those were terminated from employment after a reduction in hours, establishes new employer penalties for COBRA subsidy violations, and makes it easier for employers to prove that an employee was eligible for the subsidy and that the employer was eligible for the corresponding tax credit.   (See our prior reports from February 19, 2009, March 19, 2009, April 8, 2009, December 23, 2009, and January 15, 2010.)

Eligibility Period

The 65 percent COBRA subsidy/payroll tax credit now applies to employees involuntarily terminated through March 31, 2010.  Previously, the eligibility period expired on February 28, 2010.  

New Class for AEI's

Under the Act, individuals who loose medical coverage due to a reduction of hours that occurs between September 1, 2008 and March 31, 2010, and who are involuntarily terminated on or after March 2, 2010, now will be considered AEIs who are eligible for the 65 percent COBRA subsidy.  Previously, such individuals were not eligible for the 65 percent COBRA subsidy because their qualifying event was the loss of coverage due to a reduction in hours, rather than a loss of coverage due to the termination of employment.  

Plan Administrators will be required to notify individuals who fall within this classification of their rights to elect or re-elect COBRA coverage, with the 65 percent subsidy, within 60 days of their involuntary termination.  Nonetheless, the Act does not extend the period of COBRA coverage for these individuals, which continues to run from the initial reduction in hours that qualified the employee for COBRA coverage.

Employer Penalty Provisions

The Act now provides that if an individual appeals an employer's denial of the 65 percent COBRA subsidy to the Department of Labor ("DOL") and the DOL determines that the individual is eligible for the COBRA continuation subsidy, the employer has 10 days from receipt of the DOL's determination to comply.  If the employer does not comply with the DOL's determination within 10 days, the employer may face penalties of up to $110 per day per violation.

Employer Determination of Involuntary Termination

To be an AEI, the individual must, among other things, have been involuntarily terminated. The IRS and the DOL have issued various guidance statements in an effort to assist employees and employers understand what constitutes an involuntary termination.  The Act now makes it clear that the DOL and the IRS must accept the employer's determination that an event constitutes an involuntary termination so long as: (1) it is based on a reasonable interpretation of the statute and the administrative guidance materials, and (2) the employer maintains supporting documentation, including an attestation by the employer that the termination was involuntary.  In short, it appears that, in close cases, the DOL and the IRS must accept an employer's reasonable determination that the termination was involuntary, and that as a result, the employee was eligible for the subsidy and the employer was eligible for the corresponding tax credit.