Health Insurance after Lay-offs

October 2009

Health Insurance After Lay-Offs: Has COBRA Changed?

by Susan Sorrells, Esq., SPHR
EPS Senior Consultant/Co-Owner • Dallas/Fort Worth, Texas
ssorrells@EPSpros.com

It is a rainy, dreary Monday morning, and you arrive late at your desk in the Human Resources Department. You hope that the rain smothered any surprise fires from the weekend, but to your dismay, the administrative assistant for the company’s president left you a message that numerous individuals must soon be laid off. The president has elected you to be the grim reaper; you have four weeks to prepare for the reduction in force. He also left you a voice mail inquiring into the specifics of the company’s health insurance coverage, saying, “These good people must keep their insurance. With the health-care debate going on, I didn’t know if things had changed.”

You quickly open your COBRA (“Consolidated Omnibus Budget Reconciliation Act”) file to begin preparing paperwork for the arduous process. Although you have worked competently in the HR Department for years, a nagging doubt continues to trouble you. No employees in the company have left in over six months, so maybe the laws have changed. As you efficiently search your trusted web sites, you determine that your concern is valid: the COBRA rules have indeed changed.

The American Recovery and Reinvestment Act of 2009 (ARRA)

The American Recovery and Reinvestment Act of 2009 (“ARRA”), also commonly referred to as the “stimulus package,” was enacted on Feb. 17, 2009.[1] Prior to this date, employees’ eligible for COBRA, who elected to continue health insurance coverage under their employers’ policies after termination, were required to pay the health care premiums for their continued coverage without the benefit of the employer’s contribution. . While an important step in securing uninterrupted health care coverage for the departed employee, the premiums were often cost prohibitive. In an effort to ease the financial strain and burden on laid-off employees, ARRA provides that certain individuals who are eligible for COBRA continuation health coverage may receive a subsidy for 65 percent of the premium if they were terminated involuntarily from Sept. 1, 2008, through Dec. 31, 2009.[2]

Who pays the premium?

Your first question concerns the company’s bottom line. How much is ARRA going to cost the company?

Individual? The individuals are required to pay only 35 percent of the premium to their former employers.
Employer? If you are an employer with a group health plan, even a self-insured plan, subject to the federal COBRA continuation coverage requirements or to similar requirements under state law, and you receive a 35 percent payment from an assistance-eligible individual, you are required to pay the remaining 65 percent of the premium.
Federal government? The employer may recover the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on its quarterly employment tax return. The employer may provide the subsidy — and take the credit on its employment tax return — only after it has received the 35 percent premium payment from the individual.

What is considered an “involuntary termination?”

You soon wonder if ,under the company’s circumstances, a reduction in force will be deemed an “involuntary termination.”

For COBRA continuation coverage, an involuntary termination is a severance from employment occurring between September 1, 2008 and December 31, 2009 due to the independent exercise of the authority of the employer to terminate the employment where the employee was willing and able to continue performing services. An involuntary termination includes:

An employer-initiated layoff;
The employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract similar to the expiring contract and to continue providing the services;
A call to active duty of a member of a military Reserve unit or the National Guard who is employed by a civilian employer; and
A termination of an employee for “good reason.”

Further, workers who lost their jobs between Sept. 1, 2008, and Feb. 16, 2009, but did not initially choose COBRA coverage or initially chose COBRA coverage and dropped it before Feb. 17, 2009, get an additional 60 days to elect COBRA and receive the subsidy.[3]

Does the employee’s income matter?

Your next question: Does it matter how much money the affected employee makes?

Yes. This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.[4]

How long must the employer subsidize the premium?

Must you continue subsidizing the employee’s premium indefinitely?

No. The premium reduction applies until the earliest of:

the first date the assistance eligible individual becomes eligible for other group health plan coverage or Medicare coverage;
the date that is nine months after the first day of the first month for which the ARRA premium reduction provisions apply to the individual; or
the date the individual ceases to be eligible for COBRA continuation coverage.

The employer must subsidize the premium payment for a maximum of nine months.

What must the employer do to receive a tax credit for the amount subsidized?

The most obvious question to you: How can my company receive reimbursement for its portion of the former employees’ premium payments?

The COBRA subsidy amount is reimbursed by being claimed as a credit on Form 941, Employer’s QUARTERLY Federal Tax Return. Form 941 has been revised to allow for this credit. The credit is claimed on Line 12a of the January 2009 revision of Form 941. In addition, the Form 941 filer also needs to include the number of individuals provided COBRA premium assistance on Line 12b.

What is the future for post-employment health insurance coverage?

Because ARRA only provides assistance for individuals whose employment will be involuntarily terminated through December 31, 2009, the continuation of COBRA premium subsidies is tenuous at best. If a health-care reform bill of any sort becomes law, review it carefully to determine the consequences of involuntary termination to an employee’s health insurance.

DISCLAIMER: This article is provided for information purposes only and is not to be construed in any way as legal advice. Please seek the guidance of legal counsel if implementing COBRA continuation under ARRA.

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[1] See Public Law No: 111-5 at http://thomas.loc.gov/cgi-bin/bdquery/D?d111:4:./temp/~bd9KKp::|/bss/111search.html

[2]See http://www.irs.gov/newsroom/article/0,,id=204505,00.html

[3] http://www.irs.gov/newsroom/article/0,,id=206038,00.html

[4] http://www.irs.gov/newsroom/article/0,,id=212637,00.html

About the Author

Susan Hance Sorrells, Esq., SPHR practiced law for four years with the firm Kelly, Hart & Hallman in Fort Worth, Texas, prior to joining EPS in 1997. She has a training background as an instructor in the legal assistant certification program at the University of Texas at Arlington and as an Adjunct Professor at Texas Wesleyan School of Law. Susan obtained her Bachelor of Science degree in International Trade from Texas Tech University, magna cum laude. Her law degree is from the Texas Tech University School of Law.

From 1997 until the present, Susan has worked with EPS to aid companies in proactively addressing employee relations issues. Susan is a frequent author and speaker on the topic of preventing harassment as well as other human resource topics. She regularly provides training for employers on these topics, including how to properly conduct harassment investigations. Susan has extensive experience conducting investigations into employee complaints. She has also successfully mediated harassment and discrimination lawsuits as a court-appointed mediator by a United States District Court in the Northern District of Texas. The National Mediation Academy certified Susan as a mediator and neutral in compliance with the Texas Civil Practices and Remedies Code. Susan is also a co-author of Prevent Workplace Harassment: Proven Polices that Keep Your Company Out of Court.