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Change in COBRA Rules for Employees Who Left After September 1, 2008

The American Recovery and Reinvestment Act of 2009 (the Stimulus Act) provides that the federal government will subsidize 65% of COBRA health insurance payments for eligible individuals. What the headlines did not mention was how that subsidy will be funded. The fine print indicates that the employer will receive 35% of the COBRA premium due from the former employee, but must pay the full premium due upfront. The government will reimburse the employer by allowing a credit for the 65% difference against the employer's payroll tax liabilities. COBRA is generally effective for businesses that employed 20 or more people in the preceding year. These new provisions are generally effective on the day of enactment of the Stimulus Act, which was the date the bill was signed.

The IRS has issued basic information for businesses to follow in order to claim the 65% subsidy from the government. To claim the subsidy, businesses must claim the reimbursement as a credit on their payroll tax returns. Form 941, the quarterly payroll tax form required to be filed as a report to the government of certain federal wage withholding taxes, has been revised to add lines to report the COBRA assistance payments and the number of individuals assisted. Businesses will be required to maintain supporting documentation such as the following:

• Documentation of receipt of the employee's 35% share of the premium
• In the case of insured plans, copy of invoice or other supporting information 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

In practice, the credit will be available only after 1.) collection of the employee's portion of the premium and 2.) the business's payment of the full COBRA premium. For purposes of this alert, we will assume that you were able to comply with all COBRA required provisions and are not subject to any of the penalty provisions (up to $100 per eligible former employee per day).

An eligible individual is anyone who was "involuntarily terminated" for any reason other than "gross misconduct" between September 1, 2008 and December 31, 2009. The benefit starts to phase out based on the level of adjusted gross income reported on the tax return. The phase-out begins at $125,000 for single individuals or $250,000 for joint returns. The benefit ceases when the individual becomes eligible for alternative health coverage (Medicare or another employer group plan). It is the employee, not the former employer, who is responsible for complying with the income cap. The employee must repay the government via their tax return if they receive the COBRA subsidy when their income exceeded the cap.

The bill requires a 60-day special election period for those who are eligible for the subsidy but failed to previously elect coverage under COBRA. Employers are required to send a notice out to all former employees who did not initially elect coverage under COBRA. This notice must be sent within 60 days of February 17, 2009. The former employee will have 60 days to respond. If the employee responds that they now want to purchase COBRA coverage, you will need to provide coverage as of February 17, 2009. Unfortunately, the notification by the former employee could occur as late as 120 days after February 17. Exactly how coverage is to be obtained from February 17 to the date that the former employee notifies you of this election is unknown. Also, the exact definition of "involuntarily terminated" and "gross misconduct" is not clearly defined.

There are several required notices that must be sent to former employees who left employment since September 1, 2008 and up to February 17, 2009. There are also additional requirements for employees who leave employment on or after February 17, 2009. The Department of Labor will be issuing information with respect to these required notices. The purpose of this tax alert is not to advise you of the required communications with employees who have terminated employment. The purpose is to alert you to the fact that several of these provisions have an immediate or almost immediate effective date, and that your business will need to take steps to make sure it complies with the new regulations.

For more information see the Department of Labor Web site at http://www.dol.gov/ebsa/COBRA.html

The IRS has some information on their Web site:
http://www.irs.gov/newsroom/article/0,,id=204505,00.html

For more information, please contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative. Our thanks to Alan Alport for his assistance in writing this article. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.