New COBRA Provisions in the Stimulus Law
For employers, the time is now to comply with a little-known provision in the new stimulus law, signed by President Obama on February 17th. Part of the American Recovery and Reinvestment Act of 2009 is a revamping of COBRA law for certain employees.
The new key provision: Individuals who were terminated on or after September 1, 2008, who qualified for COBRA but declined coverage, now have the right to choose to be covered -- with a government-paid subsidy of the insurance premium. The COBRA premium subsidy runs for up to nine months for persons who become eligible because of an involuntary termination between Sept. 1, 2008 and Dec. 31, 2009.
The key date is March 1: Employers who terminated employees between September 1, 2008 and March 1, 2009 must notify qualifying employees who declined COBRA coverage that they (and their spouses, ex-spouses, and qualifying dependents) now have the right to choose to continue coverage.
An employer's notice must tell eligible individuals they have a new 60-day period in which to elect COBRA coverage. If they do so, under the new law, the premium subsidy ends after 9 months or when they become eligible for health insurance coverage from another employer or enroll in and are covered by Medicare, whichever is sooner.
Organizations that terminate employees on or after March 1, 2009 must notify them (and their qualifying spouses, ex-spouses, and dependents) of the right to continue coverage if they've been in an employer's benefit plan. Employers must use a federal government issued model notice, which must be sent to eligible individuals within 60 days of the enactment date of the new law, which was February 17th, 2009.
Here's a rundown of other COBRA changes:
- Starting March 1, COBRA premiums may not exceed 35 percent of the cost. The remaining premium cost must be paid by employers, who then can claim a tax credit against wage withholding and payroll taxes to cover their paid portion of the premiums.
- Individuals are not eligible for COBRA subsidies in a year when their adjusted gross incomes (AGIs) exceed certain limits.
- The employer can permit eligible individuals to switch their coverage option to a less expensive choice when they elect to exercise their COBRA rights. This is a change from the previous COBRA provision that allowed qualifying individuals only to continue the coverage option they had as active employees.
- COBRA Assistance eligible individuals pay a reduced premium equal to 35% of the full COBRA premium. The employer pays the other 65% and then is reimbursed for the subsidy by the federal government by taking a credit on its quarterly payroll tax return (Form 941).
For additional information, there are several resources available. The Department of Labor’s website offers a COBRA premium reduction fact sheet, employer and employee FAQs, and other helpful information on COBRA payments and credits. The IRS has modified Form 941 to handle the COBRA credits, and the new form, instructions, and Q&As can be linked to through an IRS news release that explains the changes.
