COBRA Subsidy Extension Update

Ask Rita in HR • By Pamela Fyfe • February 19, 2010 • Email Print

Dear Rita: I have heard that when an employee separates from employment, the federal government will help pay for continuing health insurance in the form of a subsidy. I have so many questions: Is every ex-employee eligible for this help? Are all  benefits covered (medical, dental and vision)? Are an employee's dependents eligible  for the subsidy? How long will the government help out? And how much of the premium does the federal government subsidize? This seems almost too good to be true! Am I missing something here? Clueless

Dear Clueless: You may think you are clueless but you have asked all the right questions. My answer --posted February 2010 -- will include a little background about the COBRA subsidy benefit.

Stimulus Package - COBRA Subsidy

In February, 2009, President Barack Obama signed the American Recovery and Reinvestment Act, commonly known as the "Stimulus Package." This Act provided a 65% subsidy towards COBRA health care premiums to employees who were involuntarily terminated (laid off) between September 1, 2008 and December 31, 2009, with the exception that the employee could not have been terminated for "gross misconduct." The way it worked was that the former employee paid 35% of the COBRA premium, with the employer paying the remaining 65% and recouping the payment from the federal government. The COBRA subsidy also applied to family members who were insured under the former employee's policy. Under this Act, former employees who qualified for the benefit were referred to as "assistance eligible individuals" or "AEIs."

DODAA and the Extended COBRA Subsidy

On December 19, 2009, President Obama signed the Department of Defense Appropriations Act of 2010 (DODAA) which extended the availability of COBRA  subsidies from 9 to 15 months and extended coverage to those employees who were involuntarily terminated through February 28, 2010.

Covered benefits

The COBRA subsidy is generally available for coverage under any group health plan, including medical, dental and vision benefits. However, it does not apply to a flexible spending arrangement (FSA) offered under a cafeteria plan. In general, COBRA coverage is based on the same coverage that the AEI carried on the last day of employment. However, an employer may offer an AEI the option of choosing other coverage that is also offered to active employees and that does not have higher premiums than the AEI's coverage. And if the employer changes the group health plan offered, the AEI can sign up for the new plan.

Termination of COBRA Subsidy

The COBRA subsidy ends when any of the following occur:

• The AEI has received 15 months of subsidy payments;
• The AEI fails to pay the 35% portion;
• The AEI becomes eligible for coverage under any other group health plan or becomes eligible for Medicare.

Payment of the 35% share of the COBRA premium

Only the employee can pay the 35% share of the COBRA premium.  The employer cannot pay the AEI's 35% share of the premium, but must collect it from the individual.  And the employer cannot claim the tax credit until it receives the AEI's 35% share.

Employer refund of 65% of COBRA premium

Nonprofits, subject to Federal payroll tax requirements, can claim credit for the COBRA subsidy on IRS Form 941. If no taxes are due, the nonprofit can receive a refund check from the Secretary of the Treasury. In some states, depending on who collects the COBRA payment, the insurance company/broker may pay the 65% and recoup it from the Federal government on its quarterly payroll taxes. For example, in California, an employer with fewer than 20 employees is covered by CalCOBRA, and the insurance company/broker will collect the 35% payment from the employee and recoup the 65% directly from the Federal Government.  Instructions on how to complete Form 941 may be found on the IRS' Web site at http://www.irs.ustreas.gov/newsroom/article/0,,id=204708,00.html and at http://www.irs.ustreas.gov/pub/irs-pdf/f941.pdf.

Employers claiming the tax credit also must maintain the following documentation which need not be furnished to the IRS, except on request:

• Information on the receipt (including dates and amounts) of the AEIs' 35% share of the premium
• Supporting statements or invoices from the insurance carrier (if applicable) and proof of timely payment of the full premium to the carrier
• Proof of the premium amount and coverage provided to the AEIs.
• Attestation of involuntary termination for the AEIs
• Proof of the AEIs' eligibility for COBRA coverage at all relevant times, and their election of COBRA coverage
• A record of the Social Security Numbers of all AEIs, and the amount of the subsidy reimbursed with respect to each AEI
• Other documents necessary to verify the correct amount of reimbursement.

Be sure to provide COBRA Subsidy Notices to Former Employees

In a nutshell, employers must notify all qualified individuals who lost COBRA coverage on and after September 1, 2008, through February 28, 2010, whether or not the loss of coverage was voluntary, regarding:

1.   The availability of the 65% COBRA subsidy
2.    Eligibility for the 65% COBRA subsidy
3.    How to elect the COBRA subsidy
4.    The second chance election (for those who did not initially elect COBRA coverage upon separation from employment)
5.    Any optional alternative coverage (basically for state COBRA plans)
6.    The former employee's obligation to notify the COBRA administrator if the employee becomes covered under any other health plan, including eligibility for Medicare.

The Federal Department of Labor (DOL) is responsible for providing guidance on notices that must be provided about the subsidized COBRA benefit.  The DOL has released three revised model COBRA notices:

• General Notice:  The amended general notice must be sent to all qualified beneficiaries who experienced a COBRA-qualifying event at any time from September 1, 2008, through February 28, 2010, regardless of the type of qualifying event (i.e., even if the beneficiary is not qualified for subsidized benefits under the Act).
• Alternative Notice: The revised alternative notice may be used by employers subject to state continuation coverage, but not Federal COBRA requirements, provided that the applicable state agency has approved its use. This notice may require adjustment to conform to applicable state law. 
• Premium Assistance Extension Notice: This notice is for individuals who have already been provided with a COBRA election notice that did not include the COBRA subsidy extension information.

For more information on the COBRA subsidy notice requirements, visit DOL's COBRA page at www.dol.gov/COBRA, which contains model notices and other guidance on these provisions. You can also call 1-866-444-3272 to speak with a benefits advisor from DOL.

Employee Benefits Security Administration

Beware: Both ERISA and the tax code impose penalties for failure to  provide the required notices in a timely way or to make COBRA coverage available.  Penalties may be assessed of up to $110 per day under ERISA, and an excise tax penalty of up to $200 per day under the tax code may be added.

Hopefully this will help you, as the employer, to "get it right." As for an employee who has separated from employment between September 1, 2008 and February 28, 2010, if you have not received Notice of this COBRA subsidy, you might want to contact the person in charge of HR functions at your former job to see if you are eligible for help paying your insurance premiums.

So, Clueless: hope this information clues you in. Thanks for the question! --"Rita"

See also:

• When You Lose Your Health Insurance
• Laid Off From a Nonprofit: Me!
• Nonprofit Layoffs and Furloughs: Do Them Right