COBRA Premium Subsidies

Guidance on how the new Stimulus Act has changed health benefit provisions under COBRA.

May 18, 2009
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Guidance on New Law
The American Recovery and Reinvestment Act of 2009 (Stimulus Act) changed the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Before covering IRS and Department of Labor (DOL) guidance, here’s some basic COBRA information and highlights of the new rules.

Background. COBRA is a federal law giving employees and dependents the right to continue health insurance coverage under certain circumstances. The cost of the continuing group coverage, plus 2 percent to cover the employer’s administration costs, is paid by the employee or dependent. Continuing coverage rules do not apply to small employers who had fewer than 20 employees on a typical business day during the preceding calendar year, or to government agencies or churches.

Caution: The new COBRA subsidy rules (discussed below) require smaller employers to offer a subsidy if state law requires them to provide continuation coverage comparable to federal COBRA. The DOL is developing guidance on which state coverage is subject to the new rules.

Continuing coverage may be extended from 18 to 36 months, depending on the reason for needing it. Situations that may qualify for extended coverage include the death of a covered employee or divorce.

A primary purpose of the COBRA requirements is to ensure that employees can maintain their health insurance when changing jobs — voluntarily or otherwise. Although former employers can pay for the COBRA coverage, they aren’t required to do so and typically don’t. So, except for laid-off employees covered by a severance package that includes health coverage, most former employees have to pick up the full bill (plus the two percent fee) — a sharp cost increase from paying only the employee’s share of premiums in the typical employer-subsidized health plan from which they benefited while employed.

Stimulus Act COBRA relief. An assistance eligible individual (AEI) who elects COBRA coverage under an employer’s group health plan is required to pay no more than 35 percent of the applicable premium. The IRS provides a subsidy for the remaining 65 percent. This relief is available for up to nine months for periods of coverage beginning after February 16, 2009.

  • Any premium reduction subsidy is excluded from the AEI’s gross income.
  • A taxpayer receiving the subsidy is not eligible for the Health Coverage Tax Credit or advance payment of the credit.
  • If a subsidy is provided to a taxpayer with modified AGI over $125,000 ($250,000 MFJ), the taxpayer's income tax liability is in-creased by some or all of the premium assistance.
  • The entity (plan, employer or insurer) to which the COBRA premiums are payable will be reimbursed for the premium reduction subsidy, generally by being allowed a credit against its payroll taxes.

Note: Generally, an AEI is a person eligible for COBRA coverage between September 1, 2008 and December 31, 2009, who elects coverage and whose employment was involuntarily terminated during this period. AEIs also include eligible family members who elect COBRA coverage.

Mechanics. The government won’t directly pay 65 percent. The entity that receives the former employee’s premium (typically the former employer) does so, as follows:

  • The AEI pays to the former employer 35 percent of the COBRA premium.
  • The former employer pays the full premium (35% received from the AEI plus 65% subsidy) to the insurance company, or, for a self-insured plan, it accepts the 35 percent payment as the full payment.
  • The former employer is treated as having paid (deposited) payroll taxes equal to the portion of the premium it pays (the 65% subsidy) for each AEI. If this amount exceeds its payroll tax liability, the excess is credited as an overpayment to the next quarter or re-funded.

IRS guidance:

Caution: An IRS official recently said that it has a program to examine whether COBRA subsidy credits claimed on Form 941 meet the required reporting criteria. A refund or offset could be frozen pending an examiner’s review and submission of additional information. The IRS will issue a new Notice CP 269C, which tells employers of the condition and explains the next steps. An examiner will follow up with the employer within 30 days.

Practice Tip: The Employee Benefits Security Administration, a DOL agency, provides guidance on the COBRA subsidy rules at www.dol.gov/ebsa/COBRA.html

From the Quickfinder Tax Tips newsletter from the Tax & Accounting business of Thomson Reuters, May 2009. To subscribe to this informative monthly newsletter, visit quickfinder.thomson.com or click here.