COBRA Health Continuation Coverage Subsidy Extension
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, referred to in the press as the Economic Stimulus Act. One provision in this Act that had an immediate impact on employers who provide health benefits to employees was a 65% subsidy for former employees and their dependents who have elected, or were offered the opportunity to elect, to continue health insurance coverage following involuntary termination of employment. The Department of Defense Appropriations Act signed by the President in December of 2009 extended the duration of the subsidy and the eligibility period. The subsidy was further extended by the Temporary Extension Act of 2010. The Unemployment Compensation Extension Act signed by President Obama on July 22, 2010 did not further extend the subsidy.
Following are some frequently asked questions about the new requirements and the extension of the subsidy. As of this writing, the subsidy applies only to involuntary terminations of employment that occurred prior to June 1, 2010. However, it is never too late to review COBRA administration for any issues.
Who is eligible for the subsidy?
Generally, a former employee or dependent of the former employee (collectively, "qualified beneficiaries") who lost coverage or loses coverage under a group health plan as a result of an involuntary termination of employment between September 1, 2008 and May 31, 2010 with the employer sponsoring the group health plan is eligible for the subsidy.
What does "involuntary termination of employment" mean for eligibility for the subsidy?
The subsidy is available to employees and their dependents if the termination of employment arose out of the exercise of the employer's authority to sever the employment relationship. It includes firing, layoff (even with a right of recall), or a change in the requirements of a job that justify an employee's voluntary resignation. The Internal Revenue Service imposes a "facts and circumstances" test to determine whether the termination is involuntary.
Does a reduction of hours resulting in a loss of employer-provided coverage entitle an employee to the subsidy?
Generally, no. However, if the reduction in hours is followed by an involuntary termination of employment that occurred between March 2, 2010 and May 31, 2010, the employee will be entitled to COBRA coverage retroactively to the date of the loss of coverage, with the subsidy beginning effective after the termination of employment.
To which group plans does the subsidy apply?
The subsidy applies only to group health plans, including health reimbursement accounts. COBRA premium payments for flexible spending plans are not eligible for the subsidy.
What is the amount of the subsidy?
Qualified beneficiaries who are eligible for the subsidy are required to pay 35% of the required COBRA premium.
How long does the subsidy last?
The subsidy lasts for fifteen months. As originally enacted, the subsidy lasted only for nine months. However, the subsidy will end if the qualified beneficiary is eligible for coverage under another comparable group health plan or Medicare. For these purposes, the qualified beneficiary does not have to actually become covered under the other group health plan or Medicare - simply being eligible for coverage is sufficient to end the subsidy.
Does the subsidy extend the amount of time a qualified beneficiary will be eligible to continue coverage?
No. COBRA coverage still ends on the statutory termination date --18, 29 or 36 months following loss of coverage, depending on the event causing the loss of coverage.
Does the employer receive a tax credit for the subsidy?
Yes. The employer providing the subsidy will receive a credit against its payroll taxes for the amount of any subsidies provided to eligible individuals.
What notice requirements are imposed on employers?
An employer's general notice of COBRA continuation rights must be amended to reflect the extension of the subsidy for involuntary terminations of employment through May 31, 2010, and the extension of the duration of the subsidy from nine to fifteen months. In addition, if an employee who lost health insurance coverage following an involuntary termination of employment, or a dependent of such an employee, received a notice including outdated information, that individual must be provided with a supplemental notice noting the new extensions.
Are the election periods extended?
Generally, yes. If a terminated employee or dependent has to receive a supplemental notice, the election period is extended for 60 days from receipt of the supplemental notice.
Is the subsidy taxable to the recipient?
Generally, no, subject to income limits on the recipient of the subsidy.
Are there income limits on qualified beneficiaries on exclusion of the subsidy from gross income?
Yes. The tax free aspect of the subsidy phases out for individuals with adjusted gross income of $125,000 or more ($250,000 for joint filers) with a complete phase out for individuals earning $145,000 ($290,000 for joint filers). These individuals may make an election to waive the subsidy.