Reduced premiums
Individuals who are involuntarily separated from employment between September 1, 2008 and February 28, 2010 may be able to make reduced premium payments for COBRA continuation coverage. Instead of paying the full monthly premium, assistance eligible individuals pay 35 percent of the premium and their former employers pay the remaining 65 percent of the premium. The former employer is reimbursed by a payroll tax credit.

Extension
Originally, Congress set a December 31, 2009 deadline for eligibility for COBRA premium assistance. The 2010 Defense Act extended the deadline for eligibility to February 28, 2010. The 2010 Defense Act also extended the maximum period for receiving the subsidy an additional six months (from nine to 15 months).

In some cases, an individual may have exhausted his or her nine months of COBRA premium assistance before Congress approved the extension. The 2010 Defense Act provides an extended period for the retroactive payment of the individual’s 35 percent payment. To continue coverage, the assistance eligible individual must pay the 35 percent of premium costs by February 17, 2010 or, if later, 30 days after notice of the extension is provided by their plan administrator.

In other cases, an individual may have exhausted his or her nine months of COBRA premium assistance and paid 100 percent of the COBRA premium for December. Individuals who paid the full COBRA premium in December are entitled to a refund under the 2010 Defense Act.

Automatic
Individuals who qualify for COBRA premium assistance are automatically eligible to pay reduced premiums for up to six more months for a total of 15 months. The individual must continue to be eligible for the subsidy. If he or she becomes eligible for other group health coverage (such as a spouse’s plan) or Medicare the individual is no longer eligible for COBRA premium assistance.

Income limits
Higher-income individuals may qualify for COBRA premium assistance but find they have to repay it. If an individual’s modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for married couples filing a joint return), the amount of the subsidy during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for married couples filing a joint return), the amount of the premium reduction that must be repaid is reduced proportionately.
Higher-income individuals may permanently waive the right to COBRA premium assistance. However, they may not later obtain the subsidy if their adjusted gross incomes end up below the limits. We can help you decide which option is best.

Possible extension
Many lawmakers in Congress support extending eligibility for COBRA premium assistance beyond February 28, 2010. In fact, the House of Representatives approved a bill in December extending eligibility through June 30, 2010. However, the Senate has yet to vote on the bill.

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.

Background

The 2009 Recovery Act temporarily allows individuals involuntarily terminated from their employment between September 1, 2008 and December 31, 2009 to elect to pay 35 percent of their COBRA coverage and be treated as having paid the full amount. In most cases, the former employer pays the remaining 65 percent of the premium and is reimbursed by claiming a payroll tax credit.

Some individuals who are “qualified beneficiaries” may also be eligible for the COBRA subsidy. They include spouses and dependent children. However, domestic partners generally do not qualify for the COBRA subsidy.

Income limits

The COBRA subsidy is excludable from gross income. However, individuals with modified adjusted gross incomes (MAGI) between $125,000 and $145,000 ($250,000 and $290,000 for married couples filing jointly) must repay part of the subsidy. For individuals with MAGI exceeding $145,000 and married couples with MAGI exceeding $290,000, the full amount of the subsidy must be repaid as additional tax.

Coverage period

The COBRA subsidy applies as of the first period of coverage starting on or after February 17, 2009 (the effective date of the 2009 Recovery Act). For most plans this was March 1, 2009. The subsidy is available for nine months. However, the nine-month subsidy period may end earlier if the individual becomes eligible for Medicare or another group health plan (such as one sponsored by a new employer).

Involuntary termination

One of the most important questions for purposes of the COBRA subsidy is what is involuntary termination? The IRS has explained that involuntary termination is severance from employment due to an employer’s unilateral authority to terminate the employment. However, the IRS stresses that whether an involuntary termination has occurred depends on all the facts and circumstances.

Involuntary termination can also occur when an employer:

• Declines to renew an employee’s contract;
• Furloughs an employee;
• Reduces an employee’s time to zero hours;
• Tells an employee to “resign or be fired;”
• Relocates its office or plant and an employee declines to relocate; or
• Locks out its employees.

Extended election

Moreover, individuals involuntarily terminated between September 1, 2008 and February 18, 2009, but who declined COBRA coverage, have a second chance under the 2009 Recovery Act. They may be eligible to re-elect COBRA coverage and receive the subsidy.

Small businesses

COBRA continuation coverage and the subsidy are generally unavailable to employees of small businesses (businesses with 20 or fewer employees). However, some states have mini-COBRA laws that extend COBRA continuation coverage and the subsidy to workers at small businesses. COBRA continuation coverage and the subsidy are also unavailable if the employer terminates its health plan.

If you would like to know more about the COBRA premium subsidy, please contact out offices. We can help determine your eligibility for this assistance.

Several provisions of the economic stimulus plan may have a significant impact on your company or clients’ business, including the “Making Work Pay” tax credit and a host of COBRA requirements and provisions, ranging from a special 60-day election period and an additional plan enrollment option for COBRA recipients.

Read the article for a summary of the provisions that may affect your business.