Recent Publications
February 18, 2009
Frost Brown Todd LLC Employee Benefits Alert: Stimulus Includes 65% COBRA Subsidy
Alison
M.
Stemler
This week's economic stimulus bill requires employers to pay 65% of involuntarily terminated (e.g., laid-off) workers' COBRA premiums. Employers will be reimbursed through a credit against federal payroll taxes (income and FICA withholding). Coverage extends back to terminations from September 1, 2008 and forward to December 31, 2009. Here are some details.
On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act (the "Act"). This Act includes a temporary 65% subsidy of COBRA premiums for involuntarily terminated employees. The subsidy is available effective March 1, 2009 to qualified individuals and applies for up to nine months. The subsidy applies both to coverage under federal COBRA law and to coverage under state continuation coverage laws applicable to employers with fewer than 20 employees. The subsidy does not apply to COBRA premiums for health care flexible spending accounts, but it appears to apply to other health benefits subject to COBRA, like dental and vision.
Eligibility: An employee or dependent who loses coverage under a group health plan due to the employee's involuntary termination between September 1, 2008 and December 31, 2009 is eligible for the subsidy. The subsidy is not available to employees who voluntarily resign.
While all involuntarily terminated employees are eligible for the subsidy, "high-income individuals" who receive the subsidy must report and repay part or all of the subsidy with their individual tax returns. A "high-income individual" is a taxpayer with a modified adjusted gross income of more than $125,000 (or $250,000 if married and filing a joint return). Employers must allow these individuals to waive the subsidy and pay the full COBRA premium.
Funding the Subsidy: In order to qualify for the 65% federal subsidy, the terminated employee must pay the remaining 35% of the COBRA premium. Once the former employee pays the 35%, the employer must fund the remaining 65% of the premium, and the employer then claims a credit on its next deposit of federal income and employment taxes. If the employer's tax obligations are less than the subsidy, then the employer will receive a direct payment from the government for the difference. The employer must actually collect the employee's 35% payment before requesting reimbursement of its share of COBRA premiums.
If the employer allows the employee to pay less than 35% of the total COBRA premium cost, the employer can only claim a subsidy credit of 65% of what the employee is otherwise required to pay. For example, if the employee is only required to pay $150 of a $600 monthly premium, the employer can only claim a credit of $279 ($150/35% = 429 x 65% = $279) rather than $390 (65% of $600).
Subsidy Period: The subsidy is effective for periods of coverage beginning on or after March 1, 2009 and is available for up to nine months for any individual former employee. Eligibility for the subsidy ends when the employee becomes eligible for either another employer's health plan or Medicare. This standard differs from the one under which COBRA coverage itself may be terminated (actually obtaining coverage under another employer's plan or becoming entitled to Medicare). In other words, an eligible employee who is offered coverage under another plan but refuses it is ineligible for the subsidy but remains eligible for COBRA coverage. An ineligible employee who fails to notify the employer of his or her ineligibility is liable for 110% of the improperly paid subsidy amount.
Transition Period for Employers: Because employers will need to establish new administrative procedures to implement the subsidy, employers may require eligible employees to pay the full COBRA premium amount for March and April 2009. The employer then must reimburse the employee for the 65% overpayment within 60 days of receiving the full premium amount or credit the overpayment toward future premium payments (overpayment must be fully applied within 180 days of receiving the full premium amount).
New Election Period: All COBRA-eligible employees who involuntarily terminated employment on or after September 1, 2008, must be provided with a notice of their rights, including a new COBRA election notice and 60-day election period for those not currently on COBRA. Employers have until April 20, 2009 to provide these notices. Model notices are supposed to be issued by March 19, 2009, but Frost Brown Todd will have sample notices available in the next week. An eligible former employee has 60 days from the date of the notice to elect COBRA coverage.
Coverage elected during this new election period must begin March 1, 2009, and employees do not have the right to elect retroactive coverage in the event they did not elect COBRA when originally offered. The employee's period for COBRA continuation coverage runs from the original qualifying event (i.e., the involuntary termination). These new rules do not extend the COBRA coverage period.
Break In Coverage: Normally, group health plans can refuse to cover pre-existing conditions after a 63-day break in coverage. For any eligible employee who elects COBRA coverage during the new election period, the time between the qualifying event and the effective date of the newly elected COBRA coverage must be disregarded for purposes of the 63-day rule.
Filing Requirement: Employers will have three reports to file with respect to the subsidy: (1) a report attesting to the involuntary termination of each employee receiving the subsidy; (2) an accounting report covering the payroll tax credit taken for that reporting period and an estimate for the next period; and (3) a report listing covered employees and the subsidy amounts connected to each person. The Treasury Department will issue clarifying regulations on these reports in the future.
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