On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Among the provisions are changes to the way COBRA assistance is funded.
Under the new law, involuntarily terminated employees who are eligible for COBRA health insurance under their former employer’s plan pay only 35 percent of the full premium for the first nine months of coverage and the employer will pay the remaining 65 percent of the premium. Employers will then receive a tax credit or apply for reimbursement from the government for their portion of COBRA paid. Note that the terminated employee, or someone other than the employer, must pay the remaining 35 percent of the premium in order for the employer to qualify for the tax credit.
Note also that there is some administrative cost that is not reimbursed by the government under this mandate.
Following are some key points to be aware of related to this legislation:
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Companies with fewer than 20 employees do not have to offer COBRA coverage under federal law, so the new provisions would not affect those companies.
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The plan applies to workers involuntarily terminated (for reasons other than gross misconduct) between September 1, 2008 and December 31, 2009.
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Coverage lasts for nine months effective February 17, 2009.
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Employer reimbursement from the government will be in the form of a tax credit reported on quarterly payroll tax form, Form 941, and may not be used to reduce the amount of tax liability used to determine the due date of deposit.
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Employers should immediately notify employees involuntarily terminated after August 31, 2008 and before the new law was enacted (February 17, 2009) of the additional COBRA election and premium reduction information. This notification applies to any employee who was involuntarily terminated and who did not elect COBRA coverage or elected it but has since discontinued COBRA.
Because this subsidy takes effect as of March 1, 2009, notices of COBRA continuation coverage should be promptly revised to include an additional notification about the availability of the premium reduction subsidy. The additional notification requirement may be met either by amending existing notice forms, or by including a separate document with the notice otherwise required. Each additional notification should include:
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The forms needed for establishing eligibility for the subsidy;
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A description of the extended election period for individuals involuntarily terminated on or after September 1, 2008 who had not elected COBRA;
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Information regarding the individual’s obligation to notify the plan upon becoming eligible for another group health plan or Medicare;
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A description of the option to enroll in different coverage, if available.
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We strongly suggest the preparation of a separate sworn statement to be returned to the employer from the terminated employee that indicates the employee received the notification and their acceptance or rejection of the offer.
If you receive COBRA payments from a terminated employee under the ARRA provisions, you must provide your payroll service provider with the amount paid by each terminated employee so that the premium payments can be properly reported and so that you will receive the appropriate tax credit or reimbursement. This is true even if you outsource your COBRA administration. If Bond & Company, PLC prepares your payroll, please provide that information to us.
For additional information about the new tax law, please contact your Bond & Company, PLC engagement team member.
