COBRA Health Insurance Continuation Premium Subsidy
The American Recovery and Reinvestment Act of 2009 (the Stimulus Act), which became law February 17, includes 27 pages (by my count) of changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. The new law affects former employees and their families, employers, and others involved in providing COBRA coverage. The Act establishes an employer-provided subsidy for employees who involuntarily lose their jobs. This post deals with only a smidgen of these provisions.
COBRA provides certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. It does not apply to churches and certain religious organizations, although the new subsidy provisions do apply to insurers required to offer continuation coverage under state law similar to the federal COBRA.
Workers who have lost their jobs may qualify for a 65 percent subsidy for COBRA continuation premiums for themselves and their families for up to nine months. Eligible workers will have to pay 35 percent of the premium to their former employers. Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.
To qualify for the new subsidy, a worker must have been involuntarily separated (i.e., fired, downsized, or terminated, but not those employees who divorced, quit, or otherwise went West) between Sept. 1, 2008, and Dec. 31, 2009. Workers who lost their jobs between Sept. 1, 2008, and February 17, 2009, but failed to initially elect COBRA because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy. 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.
The Internal Revenue Service has now released new detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees. The new information about the COBRA changes on its website, www.irs.gov. You may also get additional information about COBRA payments and the new law from www.dol.gov.
The Service’s website includes an extensive set of questions and answers for employers. In addition, the site contains a revised version of the Employer’s Quarterly Federal Tax Return (Form 941) that employers will use to claim credit for the COBRA medical premiums they pay for their former employees. In mid-March, the Service will send this revised Form 941 to about 2 million employers. The new form will be used to claim the new COBRA premium assistance payments credit, beginning with the first quarter of 2009.
Employers claiming the credit must maintain supporting documentation including:
- Documentation of receipt of the employee’s 35 percent share of the premium.
- In the case of insured plans, a copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
- Declaration of the former employee’s involuntary termination.
I guess it is a nice idea, but this is going to impose a very heavy recordkeeping burden on employers. This is just one more reason I’m glad I practice solo! If you have questions, call or email me and I’ll pull up the Act itself and see if I can find an answer for you.
Ronnie
Copyright 2009 Ronnie C. McClure, PhD, CPA