Dealing with the new COBRA requirements in the federal stimulus package

Background

Since mid-February, we have been hearing about new temporary COBRA obligations coming from the President’s stimulus package, the American Recovery and Reinvestment Act of 2009 (ARRA). We’ve seen articles and newsletters about it but haven’t heard much about the extra work and the potential cash-flow issues for businesses. The purpose of this article is to outline the new federal COBRA obligations for employers of 20 or more employees, and obligations under NYS continuation for employers under 20 employees. We’ll also suggest some steps to take to comply without the legalese. If you have legal questions or an unusual situation beyond this outline, you should seek appropriate legal advice.

In a nutshell, these new obligations require employers or others who are actually administering an insurance plan to temporarily subsidize 65 percent of the COBRA insurance premiums for any employee and qualified family members continuing their coverage through the federal COBRA or NYS continuation programs. It would apply to employees who involuntarily lost or involuntarily loose their jobs from September 1, 2008 to December 31, 2009.

For employers subject to federal COBRA (20 or more employees), the new obligations require the employer to pay 65 percent of the monthly cost and then get a tax credit, with the employee or other family member paying the other 35 percent of the cost.

For employers of less than 20 employees subject to NYS insurance continuation, the employee or other family member pays 35 percent of the cost but for this temporary subsidy program, the insurance carrier providing coverage under the group insurance program will get the tax credit. Whoever has been informing employees about insurance continuation will inform employees about this special program as well.

This subsidy arrangement will begin on March 1, 2009 and last a maximum of nine months or end earlier if the former employee or family members become qualified to participate in another insurance program. They don’t have to actually participate, just be qualified to join another plan, for example, through a spouse’s insurance plan or a new employer’s plan if the employee has a new employer.

Employers or others administering the COBRA or continuation plan will then be able to recover the premium subsidy paid by claiming a credit on the future payroll taxes paid through submission of the IRS Form 941 which has been modified by the IRS for this purpose. After subsidization of an employee or family member for nine months, the responsibility for payment of the full COBRA or NYS continuation insurance premium returns to the responsibility of the employee or family member for the remainder of the COBRA continuation period.

Action

Since there is a look-back to September 1, 2008 required by ARRA, here are some steps to take now:

  • Check your records and note any employees involuntarily terminated since September 1, 2008. If any of these persons have an adjusted gross income of at least $125,000 or $250,000 for joint filers, these high income individuals will have to repay all or part of the subsidy if they take it. If these employees, back to September 1, 2008, have already elected to participate in your COBRA or continuation program, notify them about the subsidy, their new lower premium and inform them of the period (maximum nine months) of the subsidy. If, after the end of the subsidy period, they still have COBRA or continuation time left, the premium reverts back to the amount they were paying prior to the subsidy period.

If any employees who were involuntarily terminated since September 1, 2008 declined COBRA or continuation participation or started it and dropped it, you must contact them and offer them a special 60 day enrollment period. During this special enrollment period, they may enroll or re-enroll in COBRA or continuation and be eligible for the subsidy coverage beginning March 1, 2009. It will last a maximum of nine months. Regular COBRA or continuation coverage at the full unsubsidized cost to the employee will continue after the end of the nine month subsidized period. Use the new department of labor subsidy notification form to inform them of this new entitlement and do it no later then April 18, 2009. For employees who leave your employment for any reason after February 17, 2009 until December 31, 2009, you should also use the new department of labor subsidy notification form even if it appears that they are not eligible.

Next:

  • Continue the usual COBRA billing method for these former employees except you will only bill for 35 percent of the insurance cost for those eligible. Be careful with your billing because you will continue billing former employees and family members who voluntarily left your employment the full COBRA premium amount while at the same time billing the former employees and family members eligible for lesser payment through the subsidized program. For smaller employers under NYS continuation, remember the note above that the insurance carrier providing coverage under the group insurance program will get the subsidy tax credit so this may temporarily change your billing procedure.

Finally:

  • Following the start of your subsidy payments, employers or carriers handling billing under NYS continuation can offset the cost of the subsidy on the quarterly IRS Form 941 for 2009 which has been modified for this purpose. The Form 941 instructions contain more information for you. But, you are not finished yet. In addition, please note that you must keep additional business records to back up your claim for subsidy credit. You don’t have to submit it with the 941 but you need to record and retain it. This additional information includes:

    • Who, when and how were notices provided;
    • Proof of eligibility for each subsidy;
    • Proof that the premium was paid to the insurer;
    • Subsidy covered employee’s name and social security number, amount of the subsidy and category of coverage (single, family etc.);
    • Date, reason and an attestation of each involuntary termination;
    • Information on date and amount of individual’s 35 percent share; and
    • Any other information verifying the correct amount of reimbursement.

So, get started now and observe that April 18th deadline. Call The Business Council’s Resourceline at 800.332.2117 if we can assist you along the way to complying with this new temporary COBRA subsidy, or with any other HR related issue or question.