National Feb 18, 2009
PIA provides Q&A on COBRA subsidy in stimulus act
Stimulus Plan Contains Temporary COBRA Subsidy Provisions
H.R. 1, The American Recovery and Reinvestment Act, was signed into law on Feb. 17, 2009. Among many other provisions, it will provide a temporary subsidy for the cost of COBRA continuation benefits to certain laid-off workers. The federal Department of Labor is expected to post information at its Web site, to guide employers and workers in the implementation. However, no information is available from this site at the time of this reporting. The IRS also said it will provide model notice language within 30 days. Here is what is known at this point.
Q. What employers are subject?
A. Nearly all employers providing group health plans, including private and governmental employers that are subject to federal COBRA rules and small employers that are subject to any of the ?mini-COBRA? laws currently in effect in more than 40 states.
Q. Who is eligible?
A. Workers who become eligible for COBRA benefits between Sept. 1, 2008, and Dec. 31, 2009, may be eligible. However, ?assistance?eligible individuals,? also known as AEIs, are limited to qualified beneficiaries who become eligible for COBRA continuation coverage during this time period due to involuntary termination of their employment. Workers who become eligible through other types of qualifying events (reduction in hours, divorce, voluntary resignation, etc.) are NOT eligible for the subsidy.
Q. Is there a means test?
A. Yes. If the worker (individual) has an annual modified adjusted gross income of more than $125,000 or if filing jointly, $250,000 per year, the full subsidy is not available. The amount of the subsidy phases out, and those whose MAGI is more than $145,000 ($290,000 for joint filers) are not eligible for any subsidy amount.
Q. When does the subsidy start?
A. Premium subsidies become available for periods of coverage beginning on and after the date of enactment. For many plans, that would be March 1, 2009.
Q. How much is the subsidy?
A. The subsidy is equal to 65 percent of the monthly COBRA premium. (If the employer already is subsidizing the premium, the subsidy will apply only to the COBRA premium that the AEI actually is required to pay.)
Q. How will the subsidy be paid?
A. The subsidy will pay 65 percent of the worker?s monthly COBRA bill directly to the employer in the form of a payroll tax credit, once the worker has paid 35 percent of the bill. After receiving the AEI?s reduced payments, employers may offset their periodic payroll tax deposits by the remaining subsidy amounts. To claim the subsidy reimbursement, employers will submit reports to the IRS. The IRS will provide guidance and regulations setting the time and form of these reports.
Q. How long does the subsidy last?
A. AEIs may receive subsidy payments for a maximum period of nine months, effective as of the first period of coverage that begins on or after the date of enactment.
Subsidy eligibility for an AEI ends on the earliest of (1) nine months after the subsidy first becomes available to the AEI; (2) expiration of the AEI?s maximum coverage period under COBRA rules; (3) expiration of the AEI?s maximum coverage period under the ?extended election period? (see below); or (4) the AEI becomes eligible for coverage under another group health plan or Medicare (note: the subsidy ends on the date of eligibility, not the date when new coverage begins).
Q. What if the laid-off employee did not elect to take the COBRA benefit, or elected but dropped COBRA coverage?
A. Employers are required to notify AEIs who declined COBRA initially about the subsidy and give them another opportunity to elect the subsidized COBRA coverage. The act provides for an ?extended election period.? It applies both to these AEIs who did not elect COBRA and to those AEIs who may have terminated coverage prior to enactment.
The ?extended election period? begins on the date of enactment (Feb. 17, 2009) and ends 60 days after the plan administrator provides notice of the extended election period. If elected, COBRA continuation coverage is effective as of the first full period of coverage beginning on or after the date of enactment. If elected under this provision, the AEI?s maximum length of coverage is determined as if the AEI had timely elected continuation coverage after the qualifying event.
Q. Are any other notices required?
A. Yes. AEIs who are paying the full cost must be notified of the change in their cost, and provided with new premium statements. Also, beneficiaries must be informed that their subsidy ends when they become eligible for coverage from another employer (not when they actually enroll).
In addition, employers may (but are not required to) offer all AEIs a different benefit coverage option within 90 days of the notice date. Again, the IRS will provide model notices.
Q. What if someone overpays?
A. With the short lead time, some AEIs with COBRA coverage likely will overpay their premiums for the first month or so of their eligibility for the subsidy. Employers will have a choice of providing such beneficiaries with either a refund or a credit against future payments.
Q. How much is the subsidy worth?
A. The average monthly COBRA premium is more than $400 for individuals and more than $1,200 for families, so the subsidy would be 65 percent of this figure. The total cost to the government is estimated at $24.7 billion. An estimated seven million involuntarily terminated workers will be eligible for the subsidy.
Q. What if someone receives a subsidy but later proves ineligible?
A. No proof of income is required at the time the beneficiary signs up for COBRA coverage. However, if, upon filing taxes, the beneficiary proves to have been ineligible due to income, the beneficiary will be required to repay the subsidy. The IRS will recapture ineligible subsidy payments by increasing the worker?s income tax for the year rather than penalizing the employer for underpayment of payroll tax.
If a premium subsidy has been provided with respect to any COBRA continuation coverage that covers a taxpayer, the taxpayer?s spouse or any dependent during a taxable year and the taxpayer?s modified adjusted gross income exceeds $145,000 (or $290,000 for joint filers), then the amount of the premium subsidy for all months during that taxable year must be repaid. For taxpayers with adjusted gross incomes between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the premium subsidy for that year that must be repaid is reduced proportionately.
Q. What if someone collects the subsidy longer than they are eligible?
A. They will be required to repay the government 110 percent of the subsidy they received after they no longer were eligible.
Q. I thought there was going to be COBRA eligibility for people over 55 until they could get Medicare. What happened?
A. A number of options were considered by Congress that did not end up in the final bill. This is one of them.
Q. What can employers do right away?
A. Contact COBRA administrators to determine who will be carrying out compliance activities. Contact payroll or HR departments to identify AEIs (so far, there is no definition of ?involuntary termination?). Identify AEIs terminated on or after Sept. 1, 2008, who do not currently have COBRA coverage (for purposes of offering the extended election period).
Legal Disclaimer: This information is general in nature and was compiled from published sources. PIA has made efforts to ensure its accuracy, but this information is not intended, and may not be used or relied on, for the purpose of providing legal or compliance advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.