Over the past two weeks we’ve been reviewing important provisions of the “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act). Today, we’re going to focus on an important provision that imposes new administrative burdens on employers. Although the new legislation provides that the Federal government will pick up the tab for 65% of a terminated employee’s COBRA coverage for up to nine months following termination, employers will incur significant new unreimbursed costs administering the program. For your convenience, a bullet point summary is provided at the end of this post.
The 2009 Economic Stimulus Act includes a 65% subsidy of COBRA premiums for individuals affected by an involuntary termination of employment between September 1, 2008, and December 31, 2009. An eligible individual who elects COBRA coverage will be required to pay only 35% of the cost of that coverage. The remaining 65% is paid by the federal government via a payroll tax credit to the employer. The subsidy may continue for up to 9 months after the first day of the first month for which the subsidy applies, but it will end earlier if the individual becomes eligible for other group health plan coverage (other than coverage consisting only of dental, vision, counseling or referral services, or a flexible spending arrangement) or at the end of the maximum period of coverage required under COBRA. The DOL has indicated on its website that it will provide expedited review of denials of treatment by group health plans and will post the procedures for filing a claim at a future date.
Example: Employer, Inc. is a Form 941 filer that makes monthly payroll tax deposits. For March 2009, it has a total payroll tax liability of $20,000. On March 19, 2009, Employer received a $275 COBRA payment from an electing individual, which is 35% of the individual’s total $786 monthly COBRA premium. Employer pays the entire $786 COBRA premium to the health insurer out of its pocket. Then, when the employer deposits its payroll taxes, it will deposit $19,489 ($20,000 liability - $511 the amount of premium that is paid by the employer) with the Federal government. When Employer completes its 2009 first quarter Form 941, it will show a total liability of $20,000, deposits of $19,489, and COBRA premium payments of $511. The COBRA premium payment is entered on line 12a, of Form 941. An overpayment may be credited to the next return or requested as a refund.
Eligible Individuals and Special Enrollment Rights
Individuals who are eligible to elect the premium subsidy include qualified beneficiaries who lost coverage due to a covered employee's involuntary termination between September 1, 2008, and December 31, 2009. Eligible individuals who did not elect COBRA coverage prior to the enactment of the 2009 Economic Stimulus Act are permitted to elect COBRA and receive the premium subsidy. Thus, terminated individuals who are not now receiving Cobra coverage may elect to do so in the future.
Individuals Who Previously Elected COBRA
In general, if an eligible individual previously elected COBRA coverage and paid the full premium in the first and/or second period of coverage following the date of enactment (February 17, 2009), then the employer, multiemployer plan or insurer to whom the premium payment was made must reimburse the individual for the amount paid in excess of 35% of the premium cost or provide a credit that reduces the individual's future premium payments. However, if it is not reasonable to believe the credit for the excess payment will be used within the 180-day period following receipt of the full payment amount, then a refund must be made to the individual within 60 days of the payment (or within 60 days of the date it became unreasonable to believe the credit would be used).
Individuals Who Did Not Previously Elect COBRA
The 2009 Economic Stimulus Act provides an extended election (or re-election) period for eligible individuals who did not elect COBRA prior to enactment (or who initially elected COBRA coverage but allowed coverage to lapse). The election period begins on the date of enactment (February 17, 2009) and ends 60 days after the date (April 18, 2009) on which notice of the premium subsidy was provided to the individual (see below for notice requirements). Any COBRA coverage elected during this period begins with the first period of coverage following the date of enactment, rather than reaching back to the date of the individual's qualifying event.
Income Restrictions
Individuals with a modified adjusted gross income (AGI) over $145,000 (or $290,000 for joint filers) are not entitled to the COBRA premium subsidy. A reduced subsidy is available for individuals with modified AGI between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers). In the event the income limitations are met, the employer does not deny the subsidy. Instead, the employer provides the subsidy and claims the credit, but the employee then recovers the subsidy as additional taxable income.
The income restrictions are based on an individual's income in the year in which he or she elects the premium subsidy, rather than the income earned prior to the qualifying event. Thus, an individual who earned in excess of the income restrictions in 2008 may elect the premium subsidy in 2009. The subsidy will be recaptured if the individual becomes reemployed in 2009 and subsequently exceeds the income limits. An individual who anticipates earning income in excess of the income restrictions may avoid this recapture tax and still receive COBRA coverage by waiving the subsidy and notifying the employer.
Although not announced yet, the IRS is expected to require employers to report to terminated employees the subsidies claimed on their behalf to facilitate taxation in the event the income limitations are exceeded.
Affected Employers
The COBRA premium subsidy is available for coverage offered pursuant to COBRA, as well as under state laws that require coverage comparable to that mandated by COBRA. As a result, employers that are not subject to federal COBRA, such as employers with fewer than 20 employees, may be affected by the COBRA premium subsidy (consult applicable state law).
The payroll credit that offsets the premium subsidy is available to the person to whom premiums are payable (not necessarily the employer). For multiemployer plans, the plan is entitled to the payroll credit. For nonmultiemployer plans that are subject to federal COBRA, or for plans that are fully or partially self-insured, the employer is entitled to the payroll credit. For all other plans, the insurer is entitled to the payroll credit. The employer, insurer, or plan may file a claim for reimbursement, and after the individual's portion of premium is received, the employer, insurer, or plan receives a credit against liability for payroll taxes in the amount of the requested reimbursement.
Notice Requirements
The 2009 Economic Stimulus Act requires additional information to be included in COBRA notices. Notices provided upon future qualifying events must include the following:
- The forms necessary for establishing eligibility for the premium subsidy;
- The name, address, and telephone number of the plan administrator and any other person maintaining relevant information about the premium subsidy;
- A description of the extended election period;
- A description of the qualified beneficiary's obligation to provide notice of eligibility for subsequent coverage (see below);
- A prominently displayed description of the qualified beneficiary's entitlement to a premium subsidy, along with any conditions; and
- A description of the qualified beneficiary's option to enroll in different coverage, if offered by the employer.
Notice of Extended Election Periods
Plan administrators have until April 18, 2009, to provide notice of the extended election period to each eligible individual who became entitled to the premium subsidy before the date of the enactment of the 2009 Economic Stimulus Act (February 17, 2009). The Department of Labor is required to provide model notices within 30 days of the date of enactment. As of March 10, 2009, such notices were not available on the DOL web site; however, job loss posters mentioning the provisions are available now. When the notices are available, they will be published here: http://www.dol.gov/federalregister/DocumentList.aspx?AgencyId=8&DocumentType=3. This notice must go to ALL individuals, whether or not they have COBRA coverage, who had a qualifying event from September 1, 2008 through December 31, 2009.
Qualified Beneficiaries Required to Provide Notice
Eligible individuals are required to notify in writing, in accordance with Department of Labor requirements, the group health plan offering COBRA coverage if they become covered by another group health plan. The penalty for failure to notify a group health plan of cessation of eligibility is 110% of the premium subsidy.
IRS Requires Strict Record Retention
Those claiming the credit must maintain supporting documentation for the credit claimed. Such documentation includes:
- Information on the receipt, including dates and amounts, of the assistance eligible individuals’ 35% share of the premium.
- In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
- In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
- Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
- Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage.
- A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
- Other documents necessary to verify the correct amount of reimbursement.
Transition Rule
Under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., March and April), and the subsidiary can be provided retroactively.
No COBRA Assistance if Employer Out of Business
COBRA assistance does not help displaced employees who lost their employer-based health insurance coverage because their employer went out of business. That is because in that situation there no longer is a health insurance plan to continue.
How is the Credit Claimed?
Employers recover the 65% subsidy by taking the subsidy amount as a credit on their quarterly employment tax returns (Federal Form 941). Employers may provide the subsidy and take the credit only after they have received the 35% premium payment from the individual.
The credit is claimed on Line 12a of the January 2009 revision of the Form 941. The Form 941 has been revised to allow for this credit. If the amount of the subsidy entered on Form 941, Line 12a exceeds the employer’s tax liabilities for the quarter, the employer can choose to have the excess either refunded or applied to the next quarter.
The amount of COBRA subsidy the employer provides during the quarter will be treated as having been deposited on the FIRST day of the quarter and applied against the employer’s deposit requirements. Therefore, employers can reduce their payroll deposits during the quarter by the amount of the COBRA subsidy if not otherwise underpaid.
Employers also have the option to claim the credit on Form 941 for a later quarter in the same taxable year. Alternatively, if an employer has not claimed the credit on the original Form 941 for the quarter during which the COBRA subsidy was provided, the employer can file Form 941X for that quarter.
An employment tax form, whether the quarterly filed Form 941, or the annually filed Forms 943 or 944 are the only means to clam the credit and be reimbursed for the COBRA subsidy. No extensions are available for filing of employment tax returns.
Summary:
- Eligible individuals pay 35% of coverage; the employer pays the rest, with reimbursement coming in the form of an employment tax credit on line 12a of Form 941.
- If credit results in overpayment, the overpayment can be credited to the next tax return or claimed as a refund.
- The subsidy requirements apply to all plans subject to the COBRA requirements, including self-insured plans.
- Applies to involuntarily terminations occurring September 1, 2008 through December 31, 2009. The provision does NOT apply to individuals who terminate their employment voluntarily.
- Applies to coverage beginning on or after February 17, 2009 – thus for calendar year coverage the premium reduction period starts on March 1, 2009.
- The individual must have actual group coverage at the time of the involuntary termination of employment.
- Individuals involuntarily terminated on or after September 1, 2008 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled (because they were unable to continue paying the premium) may now elect (or re-elect) COBRA coverage.
- The extended election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice, which is April 18, 2009. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months).
- DOL will publish model notices on its website (as of March 10, 2009, model notices were not available).
- Employers have 60 days after February 17, 2009 to provide notice to all individuals who were involuntarily terminated on or after September 1, 2008 and before February 17, 2009, regardless of whether they originally elected COBRA continuation.
- If an individual overpays his or her premium, the employer must credit the overpayment to future premiums (and expect to use up within 180 days), or refund within 60 days.
- If the plan permits individuals to change coverage options, the plan must provide the individuals with a notice of their opportunity to change. Individuals have 90 days to elect to change their coverage after the notice is provided.
- Eligible individuals are required to notify the employer if they no longer qualify for COBRA continuation.
- The employer must maintain adequate records for IRS to verify the correct amount of the reimbursement.
- Although not announced yet, the IRS is expected to require the employer to report to the terminated employee the subsidy claimed on his or her behalf to facilitate taxation in the event the income limitations are exceeded.