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The COBRA Premium Subsidy Law
On February 17, 2009, President Obama signed the American Recovery and
Reinvestment Act of 2009 (the "Act"). One of the Act's provisions provides for a
federal subsidy (as a credit to the employer described below) of up to 65% of
insurance premiums for certain terminated employees and their beneficiaries under
COBRA. Under COBRA, employers with 20 or more employees are, generally,
required to offer terminated employees and their beneficiaries the continuation of
group health coverage if they are not eligible for coverage elsewhere. The subsidy
provisions also apply to State continuation coverage requirements that are
comparable to COBRA. The federal subsidy is effective for premiums paid beginning
March 1, 2009. An employer may continue collecting full premiums from assistance
eligible individuals during the 60-day period beginning on March 1, 2009 provided that
the employer will either credit or reimburse the assistance eligible individual for the
overpayment of premiums.
Eligible Individuals
In order to be eligible for the subsidy, an individual must qualify as an "assistance
eligible individual". An assistance eligible individual is any qualified beneficiary who:
(i) at any time from September 1, 2008 through December 31, 2009, is eligible for
COBRA continuation coverage, (ii) elects COBRA continuation coverage, and (iii)
qualifies for COBRA due to involuntary termination of the covered employee's
employment during the above period. Employees who voluntarily resign during this
period are not eligible for the subsidy. Although all assistance eligible individuals are
eligible for reduced premium payments, the federal subsidy is effectively eliminated
for assistance eligible individuals whose modified adjusted gross income (MAGI) for
the tax year exceeds $145,000 (single filer) or $290,000 (joint filers). Any subsidy
received by an assistance eligible individual is fully recaptured from the individual
through an increase in their income tax liability for the tax year. Additionally, if MAGI
is greater than $125,000 (single filer) or $250,000 (joint filers), but less than $145,000
(single filer) or $290,000 (joint filers), a portion of the premium is recaptured under the
formula. An otherwise eligible individual may permanently elect to waive the right to
premium assistance.
The Subsidy, Reimbursement, and Reporting
Under the Act, if an assistance eligible individual pays 35% of the required premium
for COBRA continuation coverage, such individual is treated as having paid the full
premium. As a result, an assistance eligible individual is receiving a tax-free subsidy
in an amount equal to 65% of the premium. The employer is required to make the full
premium payment to the provider, but the employer will be reimbursed by the IRS in
the form of a credit against its liabilities for payroll taxes. If the liability for payroll
taxes is lower than the reimbursement amount, the IRS will credit or refund the
excess in the same manner as if it were an overpayment of payroll taxes. To be
eligible for reimbursement, the employer must receive the reduced premium payment
from an assistance eligible individual.
With respect to reporting, the Internal Revenue Service has issued a revised Form
941 and instructions for reporting and claiming the subsidy. The revised Form 941
has added lines 12a and 12b. On line 12a, employers should report the COBRA
premium assistance payments made. Only the premium assistance payments made
by the employer for the assistance eligible individuals who have paid their reduced
premiums should be reported. This amount should be 65% of the total COBRA
premiums for assistance eligible individuals without regard to the reduction. The
employer should not include any amounts paid to the employer by the COBRA
assistance eligible individuals. For COBRA coverage provided by a self-funded plan,
COBRA premium assistance payments are treated as having been made for each
assistance eligible individual who pays 35% of the COBRA premium. The employer
should report the total number of individuals provided COBRA premium assistance
payments on line 12b.
Impact on Employer-subsidized COBRA Programs
It is unclear how the subsidy will apply if under the terms of a severance agreement,
an otherwise assistance eligible individual is required to pay only a portion of the
applicable COBRA premium. However, employers who already fully subsidize
terminated employees' COBRA coverage will not benefit from the new law, since the
Act applies only to COBRA premiums paid by assistance eligible individuals or by
someone else on behalf of the assistance eligible individual. Thus, employers who
anticipate additional employee terminations during 2009 will want to review and
perhaps modify their COBRA subsidy programs in order to benefit from the Act's
subsidy.
Period of Subsidy and Penalties
The maximum period for the federal subsidy is nine months. The subsidy period
ends upon the earlier of: (i) the maximum required period of continuation coverage
under COBRA, or (ii) when an assistance eligible individual becomes eligible for
coverage under certain other group plans or Medicare. In the case of becoming
eligible for coverage under another group plan or Medicare, an assistance eligible
individual is required to notify the employer that he is no longer eligible for the
subsidized COBRA premium. Failure to do so will result in a penalty of 110% of the
subsidy after termination for eligibility. If an assistance eligible individual becomes
eligible for coverage under such other group plan, but stops paying the reduced
COBRA continuation premium, the penalty will not apply. Additionally, during any
month in which an assistance eligible individual is receiving the COBRA premium
reduction, he will not be treated as an "eligible individual" or a "qualifying family
member" for purposes of the Health Coverage Tax Credit.
Notice Requirements
The new law requires that the COBRA notice provided to an employee following the
termination of employment include additional notification about the availability of the
premium subsidy, a description of the option to enroll in different coverage if so
permitted by the employer, and certain other information. The Department of Labor is
to provide the model language for the required additional notification no later than 30
days after the date of enactment.
Special 60-Day Election Period
The Act provides a special 60-day election period for COBRA continuation coverage
for an assistance eligible individual who had not elected COBRA continuation
coverage as of February 17, 2009 (e.g., an assistance eligible individual who
terminated after September 1, 2008, but before February 17, 2009 and who had not
elected COBRA continuation coverage, or elected the coverage, but was no longer
enrolled on the date of enactment due to an inability to continue paying the
premiums). The 60-day election period begins on the date that the notice is
provided. The special election period does not extend the period of COBRA
continuation coverage beyond the original maximum period required under the law
and the coverage under COBRA is not retroactive prior to the enactment date. Within
60 days of enactment, the plan administrator must provide the additional notification
to any assistance eligible individual who had elected COBRA coverage as of the date
of enactment, and to any individual eligible to take advantage of the extended
election period.
Immediate Action Required
Employers and plan administrators will need to take immediate action. Plans
documents, summary plan descriptions and COBRA notices must be amended or
revised. New notices need to be drafted explaining the rights under the new law to
assistance eligible individuals. Further, employers and plan administrators must try
to contact individuals who were involuntarily terminated on or after September 1,
2008, to advise them of their new COBRA rights. Employers should contact their
medical plan provider or third party administrator to determine who will be responsible
for complying with these new rules, providing the new notices, contacting former
employees, and amending plan documents. |
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Any tax advice in this communication is not intended or written by KBL, LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this alert, KBL, LLP is not rendering any specific advice to the reader. |
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