The economic stimulus legislation that became law on February 17 sets out to help people who are laid off by subsidizing their COBRA health insurance premiums for up to nine months. Although COBRA (the federal law that allows workers who have lost jobs to purchase insurance under their former employers’ plans) generally exempts companies with fewer than 20 employees, businesses with smaller workforces may be subject to state laws that require them to offer COBRA coverage. The stimulus provision is designed to help laid-off workers covered by either state or federal COBRA laws.
Under the stimulus law, employees who are “involuntarily terminated” from their jobs will only have to pay 35 percent of the premiums for COBRA insurance covering themselves and their dependents. The employer must pay the entire premium and then claim the subsidy as a credit against payroll taxes on Form 941. Employers are eligible for a cash refund from the federal government if their withholding tax payments to the IRS are not high enough to cover the remaining 65 percent of the premiums. Alternatively, they may opt to carry the left-over subsidy over to their next payroll tax period.
Workers who are/were laid off between September 1, 2008, and December 31, 2009, are eligible for the subsidy program, and those who declined COBRA coverage before the law took effect must be given another chance to sign up now that they know they would only need to pay 35 percent of the premium. The subsidy will help pay for up to nine months of medical insurance.
Although COBRA coverage is generally based on the insurance plan the individual had when employment ended, under the subsidy provision the employer may offer workers the option of choosing other coverage available to active employees as long as it does not have higher premiums than the coverage the individual had at the time of the COBRA-qualifying event.
The subsidy is available for any worker who involuntarily leaves employment (except those who are fired for gross misconduct) and his/her beneficiaries who were covered by the company’s medical insurance plan at termination. The amount of the subsidy is not included in the worker’s taxable income, but it begins to phase out for individuals whose modified adjusted gross income exceeds $125,000 ($250,000 for those filing joint returns). Taxpayers with modified adjusted gross income exceeding $145,000 ($290,000 if married and filing joint returns) do not qualify for the subsidy.
The IRS has issued a new Form 941 with instructions for claiming the subsidy as a credit against employment taxes. This new form should be used for quarterly reports that are due on or after April 30, 2009.
Employer Requirements
In addition to filing Forms 941, employers have some recordkeeping and notice requirements under the stimulus law relating to the subsidy. They must retain evidence that they paid the full premium, that the employee paid them 35 percent of the premium, and a declaration of involuntary termination for each individual whose insurance premiums are subsidized under the law.
In addition, the law specifies that all individuals whose employment is terminated should receive notice of the subsidy. Congress gave the Department of Labor until March 19 to issue model notices for employers to use for explaining the subsidy program to terminated employees. Employers will have to send the notices out to former employees by April 18, and penalties for missing the deadlines are pretty stiff.
Information is available on the Labor Department’s Web site at http://www.dol.gov/ebsa/cobra.html. The IRS forms, instructions, and other information for employers and individuals is available at http://www.irs.gov/newsroom/article/0,,id=204505,00.html.
