Many unemployed individuals want to keep their former employer-provided health insurance but the cost is too high. To help pay for COBRA continuation coverage, the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) provides a temporary subsidy. COBRA premium assistance is available for individuals who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009.

The IRS recently posted additional information about COBRA premium assistance on its web site. The IRS described involuntary termination, documentation requirements, the payroll credit for employers, and more.

 Temporary subsidy

The 2009 Recovery Act provides nine months of COBRA premium assistance. Individuals pay 35 percent of the COBRA premium and employers must treat that payment as full payment. Employers and other qualified entities claim a payroll tax credit for the other 65 percent of the premium.

No every unemployed individual can take advantage of COBRA premium assistance. The COBRA subsidy phases out for individuals whose modified adjusted gross income (AGI) exceeds $125,000 and for married couples filing joint returns with modified AGI above $250,000. Taxpayers with modified AGI exceeding $145,000 ($290,000 for married couples filing joint returns) do not qualify for the subsidy.

Involuntary termination

An individual must be involuntarily terminated from employment to qualify for COBRA premium assistance. Generally, involuntary termination is a severance from employment due to the employer’s unilateral authority to terminate the employment. The IRS will accept an employer’s determination of involuntary termination as long as it is consistent with a reasonable interpretation of the statutory language and guidance.

In some cases, the end of employment for a seasonal worker may be treated as an involuntary termination. If an individual is willing and able to continue employment but ends employment because the employer does not have additional work, an involuntary termination has occurred, the IRS explained. This rule may apply, for example, to a teacher who is hired for only one school year.

An involuntary termination also occurs when a member of a military reserve unit or the National Guard is called to active duty. This is the case regardless of whether the civilian employer otherwise treats the employee’s absence as a termination of employment or a leave of absence, the IRS explained.

Under some multi-employer plans, which are common in the construction trades, an individual’s eligibility for health coverage is based on a minimum number of hours of covered employment. The IRS will deem an individual to have been involuntarily terminated if a reduction in his or her total hours of covered employment causes the individual to lose regular coverage and become eligible for COBRA continuation coverage.

Documentation

Employers should keep supporting documentation, the IRS advised. The documentation should include an attestation by the employer of involuntary termination for each employee who is eligible for COBRA premium assistance. Employers do not have to provide this information to the IRS unless the agency asks for it.

Revised form

The IRS also revised Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to reflect the employer’s payroll credit for temporary COBRA premium assistance. The revised form and instructions are on the IRS web site. Employers should use Form 941-X to report any errors on a previously filed Form 941 relating to COBRA premium assistance.

In some cases, a taxpayer other than the qualified individual’s former employer will claim the payroll credit. When coverage is provided by a multi-employer plan, the multi-employer plan claims the credit. In the case of fully insured coverage subject to state continuation coverage requirements, the insurer providing coverage under the group health plan takes the payroll credit.

If you have any questions about COBRA premium assistance please contact our office.