Minimizing COBRA-Related Risks in Connection with a Reduction in Force


The American Recovery and Reinvestment Act provides an opportunity for employers to reconsider how they make COBRA continuation coverage available in connection with a reduction in force (“RIF”). The Act includes a subsidy of 65% of the COBRA premiums for individuals who were involuntarily terminated between 9/1/2008 and 12/31/2009. While many individuals affected by a RIF will be eligible for the subsidy, not all of them will. There are a variety of ways that an employer may structure a RIF and for each the COBRA implications will likely be different.

Risks to the Employer

During this challenging economy, implementing a RIF may be necessary to lessen financial risks to the company. Equally important is proactively taking steps to mitigate legal risks that arise from a RIF. Most employees rate health coverage as one of their most valuable employee benefits, and because loss of employment triggers loss of coverage, one of the first questions employees often ask is how they will maintain access to the health plan. COBRA provides them with that answer, but with some significant compliance strings attached, particularly for employers. For example:

  • There are a variety of ways that an employer may structure a RIF, and COBRA implications for each may be different.
  • There are a variety of ways that an employer may structure a severance package, and the availability of the COBRA subsidy (and cost for both the employer and employees) will likely be different for each.
  • The COBRA notice requirements, which were already fairly burdensome, just became more complicated, and compliance failures could result in participant lawsuits and/or employer fines of $110 per day per violation up to a maximum of $500,000.
  • The employer is entitled to reimbursement of the subsidy in the form of a credit against payroll taxes. However, the process to claim the credit requires extensive reporting and, for most employers, reprogramming their payroll systems.
  • Many employers outsource COBRA administration to a third party. However, there are often gaps in understanding regarding who is responsible for which tasks, and gaps in processing regarding how information flows between the entities. These issues will likely be exacerbated by the additional exchange of information required by the new COBRA subsidy. Furthermore, it is important to remember that compliance for the subsidy cannot be outsourced administering the subsidy is fundamentally an employer responsibility.

The good news is that it is possible to reduce your COBRA-related risks by knowing your obligations, incorporating the COBRA opportunities and limitations into your RIF planning strategy, effectively managing your vendors, and maintaining comprehensive documentation.

Compliance Check-Up and Check-List

Since the stimulus legislation was introduced, Miller & Chevalier’s lawyers have worked closely with Congress and the Department of Treasury on the issues and open questions associated with the COBRA subsidy. We have helped to educate over a thousand employers and insurance companies, and have worked with numerous clients to answer questions of legal interpretation, provide suggestions to strategically redesign their COBRA and severance offerings in connection with a RIF, and to design risk mitigation strategies to help prevent legal challenges or to be well positioned to defend their actions if a legal action is brought.

We have developed a Compliance Check-Up to help identify possible issues with the design or administration of COBRA and the new COBRA subsidy. Miller & Chevalier will undertake a limited scope review of an employer’s COBRA administration, which consists of reviewing the health plan documents and Summary Plan Descriptions, COBRA notices, vendor contracts, sample severance agreements, and vendor operations (explored via interviews). The purpose of the review is to identify compliance issues or possible concerns, confirm consistency between the employees communications and plan operations, and highlight common errors based on our experience. We will also help the company develop a Compliance Checklist that overlays the timelines specific to the company’s various COBRA and severance offerings.


We will perform the limited scope Compliance Check-Up and create a company-specific Compliance Checklist for a fixed fee of $5,000, plus any travel expenses as agreed upon. For this limited investment, employers can help mitigate their risk of noncompliance with applicable federal COBRA rules in connection with a RIF that, if left unchecked, could result in significant financial consequences for the company.

For more information, please contact any of the following:

Susan Relland
Michael Lloyd,, 202-626-1589
Marianna Dyson,, 202-626-5867

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