News + Events
Stimulus Bill Provides Government Subsidy for COBRA Premiums
February 20, 2009
Jonathan A. Kenter
Under the American Recovery and Reinvestment Act of 2009, the federal government will temporarily subsidize 65% of the COBRA premiums of “assistance eligible individuals” – employees and their eligible dependents who lose their employer provided health coverage due to the employee’s involuntary termination from employment during the period September 1, 2008 to December 31, 2009. Each plan sponsor will have ultimate responsibility to comply with the Act. Implementation will involve the coordination of employers’ Legal, Human Resources, Payroll, Accounting and COBRA administrator functions. Below is a synopsis of the subsidy and planning pointers to consider in its implementation.
Effective Date
The new law is generally effective as of March 1, 2009 for periods of coverage billed on a monthly basis. Periods of coverage billed on a weekly, bi-weekly or semi-monthly basis may have an effective date as early as February 17, 2009, the date of enactment.
Amount of the Subsidy
Once assistance eligible individuals pay 35% of their regular COBRA premium (or a parent, guardian, State agency or charity pays the premium on their behalf ), the government will reimburse the plan sponsor the remaining 65% of the premium. The subsidy phases out for taxpayers with modified adjusted gross incomes in the year in which the subsidy is received (either 2009 or 2010) exceeding $145,000 (or $290,000 for joint filers) and is reduced proportionately for taxpayers with adjusted gross incomes between $125,000 and $145,000 ($250,000 and $290,000 for joint filers). Ineligible individuals who receive subsidies are obligated to repay the government by way of a dollar-for-dollar increase in their income tax liability. Even if a subsidy is phased out during 2009, an assistance eligible individual may still qualify for the subsidy for the remainder of the coverage period in 2010, provided the adjusted gross income phase out thresholds have not been exceeded in 2010.
Duration of Subsidized COBRA Coverage
The government will provide the subsidy for up to nine months or, if sooner, until the individual becomes eligible for coverage under another group health plan or Medicare. In no event will the subsidy be provided beyond the end of the individual’s maximum 18-month period of COBRA continuation coverage.
Payroll Tax Credit
Employers may obtain reimbursement by claiming a tax credit against periodic deposits for wage withholdings and FICA payroll taxes for the 65% of the COBRA premium not paid by the individual. If the employer’s claims for COBRA subsidy payments exceed the amount of wage withholdings or FICA payroll taxes reported by the employer, Treasury is directed to reimburse the employer directly for the excess amount.
Special Election Period
Plan sponsors must offer a special 60-day election period for assistance eligible individuals who had not previously elected COBRA and for those who elected COBRA coverage but are no longer enrolled on the date of enactment. The special election period begins on the date of enactment and ends 60-days after notice of the special election is given to the eligible individual. See Notification Requirements For Plan Sponsors below. This will not extend the period of COBRA continuation coverage beyond the original 18 month period required by COBRA measured from the date of an individual’s termination of employment. Once an individual elects COBRA coverage, the coverage begins on or after the date of enactment of the Act and does not include any prior period. For those who elect COBRA coverage under this special election period, the period from the involuntary termination of the covered employee on or after September 1, 2008 to the date of enactment will not be counted as a break in coverage in determining pre-existing condition exclusions.
Option to Change Coverage to Lateral or Lower Cost Option Regular COBRA rules require that the qualified beneficiary elect the same coverage that was in effect on the date of the qualifying event. Under the Act, however, the plan sponsor may at its option, allow assistance eligible individuals to apply the COBRA subsidy to any health plan option offered by their employer to active employees, provided that the coverage has the same or lower premium as the individual’s continuation coverage as of the date of involuntary termination.
Notification Requirements For Plan Sponsors
Plan Sponsors must notify all qualified beneficiaries who become eligible for COBRA between September 1, 2008 and December 31, 2009, as applicable, of:
- the availability of the subsidy;
- the special election;
- the right to change coverage options;
- the obligation of the qualified beneficiary to notify the plan of eligibility for other group health coverage or Medicare, and related penalties.
This notification must be provided no later than April 18, 2009 to employees and their eligible dependents who lose their employer provided health coverage due to the employee’s involuntary termination from employment during the period September 1, 2008 to the date of enactment. The notice may be designed as a separate appendix to or replacement of an existing COBRA notice. The Department of Labor will be issuing model notices in the coming weeks.
New Reporting Requirements For Plan Sponsors
Entities receiving reimbursements will be obligated to (1) file modified quarterly payroll tax returns (Form 941), (2) issue W-2 forms with special coding to affected former employees, (3) obtain attestations of involuntary termination for each affected employee, and (4) determine the aggregate amount of the payroll tax offset for the reporting period and estimated offset for the subsequent reporting period.
Notification Requirements Applicable to Subsidy Recipients Subsidy recipients who become eligible for coverage under another group health plan or Medicare (whether or not they elect that coverage) must notify the group health plan providing the subsidized COBRA coverage in writing. Failure to notify the group health plan may subject the individual to a tax penalty of 110% of the subsidy received after ineligibility.
Planning Pointers
1. Coordinate Legal, Human Resources, Payroll, Accounting and COBRA administrator functions to ensure compliance with the new requirements.
- Decide whether lateral or lower cost option will be offered.
- Ensure that the Legal and Human Resources Departments uniformly determine whether an involuntary termination has occurred.
- Ensure that the COBRA administrator provides timely notices to qualified beneficiaries.
- Determine what payroll and HRIS data needs to be captured for use in obtaining reimbursement.
- Ensure that Payroll Department obtains reimbursement through payroll tax credit.
- Develop internal accounting mechanism for receipt of reimbursement through payroll tax credit versus check payment from qualified beneficiary.
2. Identify employees who were “involuntarily terminated” other than for gross misconduct since September 1, 2008. Third Party COBRA administrators cannot determine who was involuntarily terminated. Existing termination codes under payroll systems may not capture information accurately for this purpose.
3. Revise COBRA notices to provide eligibility rules for the subsidy, a description of the individual’s obligation to notify the group health plan of eligibility under another group health plan or for Medicare benefits and the penalty if the beneficiary fails to provide this notification.
4. Provide written notices to all COBRA beneficiaries – this is technically required by the Act.
5. Employers planning Reductions in Force (“RIFs”) during the remainder of 2009 may wish to take advantage of the government’s 65% COBRA premium subsidy in structuring their severance programs.
6. Amend affected severance and health plans and summary plan descriptions.