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 Sept. 1, 2008 and Dec. 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 Dec. 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.
___________________________________
[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 |