Under the American Recovery and Reinvestment Act of 2009, certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under State law, may receive a subsidy for 65 percent of the premium. These individuals are required to pay only 35 percent of the premium. The employer may recover the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on its quarterly employment tax return. The employer may provide the subsidy — and take the credit on its employment tax return — only after it has received the 35 percent premium payment from the individual.
Throughout this Q&A, Benefit Allocation Systems, Inc and COBRA Control Services, LLC. Will be referred to collectively as “BAS/CCS.” The American Recovery and Reinvestment Act of 200 (a.k.a The Economic Stimulus Bill) will be referred to as “ARRA.”
The ARRA is brand new as of February 17, 2009, and effective as of March 1, 2009, and lacks federal administrative guidance, at this time. However, we do expect such guidance to be issues shortly. In the interim, the following Q&A is for informational purposes only should not be construed as providing legal advice about your obligations under the American Recovery and Reinvestment Act of 2009, COBRA or ERISA.
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The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.
Q: How will an employer be reimbursed for the COBRA subsidy that it has provided to eligible individuals?
A: The COBRA subsidy amount is reimbursed by being claimed as a credit on the Form 941. The Form 941 has been revised to allow for this credit.
Q: How does an employer claim the credit for the COBRA subsidy?
A: The credit is claimed on Line 12a of the January 2009 revision of the Form 941, which was posted on the IRS website on Feb. 20. In addition, the Form 941 filer also needs to include the number of individuals provided COBRA premium assistance on Line 12b. (Get Form 941)
Q: What other information relating to the COBRA subsidy must be submitted with the Form 941 besides the entries on Lines 12a and 12b? (Get Form 941)
A: No additional information relating to the COBRA subsidy is to be submitted with the Form 941, either electronically or in paper form. However, those claiming the credit must maintain supporting documentation for the credit claimed. Such documentation includes, but is not limited to:
- Information on the receipt, including dates and amounts, of the assistance eligible individuals’ 35% share of the premium.
- In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
- In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
- Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
- Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage.
- A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
- Other documents necessary to verify the correct amount of reimbursement.
Q: The employer paid the bill and took the credit for March. In April the employer finds out that the employee did not continue his/her coverage (i.e., did not pay the 35 percent). The credit element must be allowed to be a negative, which would increase the deposit due.
A: The premium subsidy and the related credit for the employer apply only after the individual has paid his or her 35 percent of the premium, so this situation should not occur.
Q: I haven’t seen the legislation, but why does this belong on the Form 941? (Get Form 941)
A: The legislation as passed provides for reimbursement of the subsidy through the employment tax process, so Form 941 is the applicable form.
Q: What will happen if Line 12a ends up being larger than Line 10 on a 941 return? Will this result in a net negative of taxes for a company? (Get Form 941)
A: If Line 12a is larger than Line 10, Line 13 would also be larger than Line 10, resulting in an overpayment that could be applied to the next return, or requested as a refund.
Q: Is the IRS considering any other form changes (e.g., 941X)?
A: Yes. All appropriate forms are being revised and will be updated on the IRS.gov web site as soon as possible.
Q. Will the due date for the first-quarter Form 941 be extended?
A: No, the due date for the first quarter 2009 Form 941 is not being extended.
Q: Would the number of beneficiaries need to be reported each quarter, whether or not there was a tax credit amount to apply?
A: Line 12b of the revised Form 941 must indicate the number of individuals who received the total COBRA subsidy reported on Line 12a of the Form 941. If there is no tax credit amount because no subsidy was provided, then the entry on Line 12b would be zero.
Q: Now that the legislation has passed, how is this going to be communicated to the employer/payroll community?
A: The IRS will continue to provide updated information through this Web site as it becomes available.
Q: Can an employer decide only to claim the credit at the end of the quarter rather than reducing its tax deposits during the quarter?
A: Yes. The employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter.
Q: When does the law become effective?
A: The law became effective on the date of enactment, Feb. 17, 2009. However, under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., for March and April), and the subsidy can be provided retroactively.
Q: It was mentioned that this would be a temporary statute. How long is this change expected to be in effect?
A: For assistance-eligible individuals, the qualifying event must occur on or before Dec. 31, 2009, and the COBRA subsidy may apply for up to nine months.
Q: What individuals are eligible for the COBRA subsidy?
A: An assistance-eligible individual can be any COBRA qualified beneficiary associated with the related covered employee, such as a dependent child of an employee, who is covered immediately prior to the qualifying event. The qualifying event for purposes of eligibility for the subsidy is involuntary termination of the covered employee’s employment that occurs during the period beginning Sept. 1, 2008, and ending Dec. 31, 2009. The individual must also be eligible for COBRA coverage, or similar state coverage, during this period.
Q: Is this provision for employees who involuntarily lose their jobs — or will it apply to all employees even if they leave voluntarily?
A: The credit applies only to involuntarily terminated employees and their family members who are qualified beneficiaries.
Q: Will the COBRA premium subsidy be taxable income for the individual?
A: The premium subsidy is not included in the individual’s income. However, there is a phase-out of eligibility for the subsidy, which will increase some high-income individuals’ tax liability if they receive the subsidy. The phase-out impacts individuals whose modified adjusted gross income exceeds $125,000, $250,000 for those filing joint returns. Tax liability is increased, to achieve repayment of a portion of the subsidy, for those taxpayers whose modified adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If a taxpayer’s modified adjusted gross income exceeds $145,000, $290,000 for those filing joint returns, the full amount of the subsidy must be repaid as an additional tax. There is no additional tax for individuals with modified adjusted gross income less than these income levels.
Q: When more than one entity may be responsible for receiving COBRA premiums, who should claim the credit?
A: The law as enacted clarifies that the person to whom the reimbursement is payable is (1) the multiemployer group health plan, (2) the employer maintaining a group health plan that is subject to Federal COBRA continuation coverage requirements or that is self-insured, or (3) the insurer providing coverage under a plan not included in (1) or (2). Only this person is eligible to offset its payroll taxes by the amount of the subsidy.
Q: Is the employer required to provide the COBRA subsidy?
A: The subsidy requirement applies to group health plans that are subject to the Federal COBRA continuation coverage requirements or to similar requirements under State law. If you are an employer with such a plan and you receive a 35 percent payment from an assistance-eligible individual, you are required to make the remaining 65 percent payment.
Q: What if the employer’s group health plan is self-insured? Do the subsidy requirements apply?
A: Yes, the subsidy requirements apply to all plans subject to the COBRA requirements, including self-insured plans. In that case, the employer must provide the COBRA coverage if the assistance eligible individual pays 35 percent of the otherwise required premium. The remaining 65 percent is treated as a payment of payroll taxes by the employer maintaining the plan.
Q: What other agencies will provide information about the COBRA subsidy?
A: Information about the COBRA subsidy will also be available through the Department of Labor and the Department of Health and Human Services, which, along with the IRS, share responsibility for the COBRA requirements.
Q. When do the ARRA COBRA regulations go into effect?
A: Effective with the coverage beginning March 1, 2009.
Q: Who is eligible for a premium subsidy?
A: An individual will be eligible for a premium subsidy (an Assistance Eligible Individual) if he/she meets all of the following conditions:
- Individual must have become eligible for COBRA continuation coverage on or after September 1, 2008 (and before December 31, 2009).
- The qualifying event which entitled the individual to elect COBRA continuation coverage must have been an employee’s involuntary termination of employment that occurred on or after September 1, 2008 (and before December 31, 2009); and
- Individual must elect COBRA (this includes giving non-participants a “Second Chance” enrollment period to be effective 3/1/09).
COBRA enrollees whose qualifying event is the loss of coverage due to an employee’s involuntary loss of employment between September 1, 2008 and December 31, 2009 will be eligible for a 65% COBRA premium subsidy. These COBRA participants will only be required to pay 35% of their COBRA premium otherwise due (plus 100% of their healthcare FSA premium due, if any). The subsidized COBRA premium will become effective beginning with the March 1, 2009 coverage. This premium subsidy can last for a maximum of nine months, but may terminate early if the COBRA participant becomes eligible for coverage under another group health plan or Medicare, or if the COBRA participant’s continuation coverage ends.
Q: Is the Premium Subsidy available for coverage prior to 3/1/09?
A: No. The premium subsidy is only applicable for Assistance Eligible Individuals enrolled in COBRA on or after 3/1/09.
Q: How long will the premium subsidy last?
A: The earlier of 9-months or the end of an Assistance Eligible Individual’s COBRA coverage.
Q: How will Assistance Eligible Individuals enroll to get the subsidy?
A: If your COBRA is administered through BAS/CCS, BAS/CCS will notify you about the premium subsidy and a second chance enrollment, if any. You will be asked to complete an enrollment form or other form attesting to your status as an involuntarily separated employee.
Q There was mention about people over age 55 receiving COBRA indefinitely, is this true?
A: In H.R. 598 there was a proposal to extend COBRA duration for people age 55 and older; however, this was stricken in the final ARRA.
Q: If an employee is on workers compensation and COBRA and not receiving a salary, are they eligible for the premium subsidy?
A: Probably not. It appears that such employee would not be eligible for the subsidy, if they had not involuntarily separated from the employer.
Q: If an employee is on Long Term Disability and COBRA and not receiving a salary, are they eligible for the premium subsidy?
A: Probably not. It appears that such employee would not be eligible for the subsidy, if they had not involuntarily separated from the employer.
Q: What is a “Second Chance” enrollment?
A: ARRA provides that any former employee who involuntarily separated from the employer and was eligible for COBRA coverage on or after 9/1/08 (and before 12/31/09) and did not enroll in COBRA at the time mandated by regulation, may have a “Second Chance” to enroll.
Q: When are “Second Chance” enrollments effective?
A: “Second Chance” enrollments are effective March 1, 2009, only.
Q: Can a “Second Chance” enrollment result in a lapse in coverage for the individual (and his/her qualified dependents)?
A: No. ARRA specifically protects preexisting conditions to assure coverage regardless of the lapse in coverage. Furthermore, this protection assures ongoing portability and ongoing protection of preexisting conditions for continued coverage.
Q: What will an employer need to claim the 65% premium subsidy from the government?
A: Specific guidance on this subject has not been issued yet. However, it appears that employers will need to provide the following, which BAS/CCS will be providing to its client employers at least monthly:
- an attestation of the involuntary termination of employment for each covered employee BAS/CCS will collect and scan these to archived images;
- a report of the amount of payroll taxes offset for the reporting period and the estimated offsets for subsequent reporting periods (BAS/CCS will produce a report to help employers identify these values); and
a report containing the TINs of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and - qualified beneficiaries and a designation with respect to each covered employee as to whether the subsidy reimbursement is for coverage of 1 individual or 2 or more individuals (BAS/CCS will produce a report to help employers identify these values).
Q: What services will BAS offer to assist current employer clients with the new COBRA requirements set forth by ARRA?
A: BAS will offer the following services:
- Updates about ARRA as it pertains to COBRA
- Updates about government-issued administrative guidance pertaining to COBRA
- Send required premium subsidy notices to all former employees who are/were eligible for COBRA coverage beginning on or after 9/1/08 (and before 12/31/09).
- Send “Second Chance” enrollment options to eligible Assistance Eligible Individuals in #3 above.
- Provide client employers with the reporting need to take back subsidies from payroll taxes and the backup support documentation from participants.
Q: Should every employee, regardless of their qualifying event receive a premium subsidy notice required by ARRA?
A: BAS/CCS legal counsel, at this time and perhaps until issuance of specific administrative guidance, recommends notifying every person whose qualifying event is the loss of coverage between September 1, 2008 and December 31, 2009. This breaks down into four (4) notice types:
- Individuals covered by COBRA, and whose qualifying event was an employee’s involuntary separation, will be provided the required explanation of the premium subsidy and an election form to designate whether they expect to earn $125,000 or more in 2009 ($250,000 in the case of a joint return) and, if so, whether or not they want to permanently waive their subsidy in order to avoid a reclamation of the subsidy on their IRS 1040.
- Individuals covered by COBRA, and whose qualifying event was an event other than an employee’s involuntary separation, will be provided the required explanation of the premium subsidy, only.
- Individuals who had a qualifying event on or after September 1, 2008 but are not covered by COBRA, and whose qualifying event was an employee’s involuntary separation, will be will be provided the required explanation of the premium subsidy and a “Second Chance” enrollment form.
- Individuals who had a qualifying event on or after September 1, 2008 but are not covered by COBRA, and whose qualifying event was an event other than an employee’s involuntary separation, will be provided the required explanation of the premium subsidy only.
Q: How can I review the assigned qualifying event status assigned to our former employees?
A: While evaluating our clients’ COBRA data with respect to ARRA, we have discovered many instances where administrators or their designees did not discern between involuntary and voluntary separation from service when assigning an employee’s qualifying event.
We believe this may have occurred because, prior to ARRA, choosing either the voluntary or involuntary qualifying event did not affect the offer or duration of COBRA coverage.
Since the key determinant of a qualified beneficiary’s eligibility to be an Assistance Eligible Individual is the assigned qualifying event, it is important that the employer or its designee review each employee terminated on or after September 1, 2008 (and before December 31, 2009), and modify the assigned qualifying event, as necessary. BAS will provide you with an online program that lists each employee who was/is eligible for COBRA coverage on or after September 31, 2008 (and before December 31, 2009) and enables you to modify any assigned qualifying event, so you can accurately identify involuntary versus voluntarily separated employees, and we can use these designations to mail the appropriate notices to each set of former employees and their qualified beneficiaries.
Now, on www.cobracontrol.com or www.myenroll.com or www.BASusa.com you can log on to your private, secure administration account and access the new Qualifying Event Verification program. You will find this program in the COBRA module on the left menu and it is titled “Qual. Event Verification.” This program will list all former employees who were eligible for COBRA on or after 9/1/08 and before 12/31/09, as prescribed by ARRA, You will be able to use this program to modify any listed former employee’s assigned qualifying event, if necessary.
Q: Will the premium subsidy apply to a flexible spending account that and individual on COBRA is paying to continue?
A: No. ARRA specifically excludes healthcare flexible spending accounts from the premium subsidy.
Q: How will all this play out, step by step, with BAS services?
A: BAS/CCS has/is proceeding as follows:
- February 23, 2009, BAS sends employers and their insurance brokers of record a email with an attachment that summarizes ARRA’ COBRA requirements and BAS/CCS’ ARRA services and fee schedule. You can find a copy of this summary document on www.COBRAControl.com.
- February 24, 2009, BAS mails former employees participating in COBRA, or presently in a COBRA election period, a letter explaining how BAS is proceeding with respect to the premium subsidy and revised premium billing coupons and second chance enrollments. You may find a copy of this letter on www.COBRAControl.com.
- Subsequent to February 23, 2009, As each employer completes the online review and confirmation of their former employees’ assigned qualifying events, BAS/CCS will send the ARRA-required premium notice, second election information (if applicable), and attestation of involuntary separation form (if applicable).
Q: Does the ARRA COBRA provisions apply to State mandated COBRA-like coverage when such coverage expands coverage beyond the scope of COBRA?
A: Yes. The right to a “Second Chance” enrollment and the premium subsidy does apply to groups that are subject to State-mandated, COBRA-like coverage.
Q: How does an employer get back the 65% premium subsidy if the COBRA continuant only pays the required 35%?
A: Employers will be able to deduct the amount of the premium subsidies for Assistance Eligible Individuals from their payroll taxes. BAS will offer more details as they become available from the government.
Q. Would a group of less than 20 FTE employees in 2008 in Pennsylvania (a state without a mini-cobra requirement) who offers separated employees a continuation coverage, and uses a qualifying event letter that states “COBRA” throughout, be subject to ARRA?
A. No. Just saying you are subject to COBRA does not make you subject to COBRA. Employers with fewer than 20 employees are excepted from COBRA. An employer can always subsidize the cost of continuation coverage. If the employer is not subject to ARRA, the employer would not be able to recoup the subsidy from the government.
Q. I read in another firm’s newsletter that a qualified beneficiary would be eligible for the subsidy if the employee had “or reduction in hours.” What do you think?
A. A reduction of hours would not entitle a qualified beneficiary to assistance. The qualifying event with respect to COBRA continuation coverage must be the “involuntary termination” of the covered employee’s employment.
Q. If an employer provides COBRA to a separated employee who separated due to gross misconduct and now regrets providing such cobra coverage, can they go back and reclassify the employee and take away their coverage, or, minimally exclude them from ARRA?
A. In general, courts do not look favorably upon denying COBRA coverage due to gross misconduct. Courts have set a very high standard for gross misconduct. There is a good chance that going back and “undoing” COBRA coverage based on gross misconduct would not withstand scrutiny.
Have a question? Use the comments section below and we’ll try to answer it as quickly as possible.
I received 6 months of severance pay (which included regular withholding for medical etc.) from April 2008 – Oct 2008 which ended in Oct 2008. I’ve been receiving unemployment benefits since then and have had to pick up Cobra Insurance. A question, will we be able to receive the 65% assistance for Cobra payments in the stimulus bill. This would help greatly since we had to pay about $5,000 in January 2009 (to pick up coverage from 11/01/08 through 02/28/09). Just got 3/1 bill and another 1200.00 is due…
There are certain requirements that must be met in order to receive the subsidy.
1. You must have become eligible for COBRA continuation coverage on or after September 1, 2008 (and before December 31, 2009);
2. The qualifying event which entitled you to elect COBRA continuation coverage must have been an employee’s involuntary termination of employment that occurred on or after September 1, 2008 (and before December 31, 2009); and
3. You must elect COBRA.
If you meet these requirements, you may be able to take advantage of the new COBRA subsidy. Please note that there are certain income limitations on eligibility for the subsidy. Generally, if your taxable income is $145,000 or greater (or your combined income with your spouse is $290,000), you may not take advantage of the subsidy. Additionally, the full amount of the subsidy begins to be phased out if your income is $125,000 or greater ($250,000 or greater in the case of a joint tax return).
The subsidy will be 65% of the premium amount you would otherwise pay for COBRA continuation coverage. This means that you will pay out of pocket only 35% of the cost of COBRA continuation coverage. The subsidy will be effective for the coverage period beginning March 1, 2009, and can continue for a maximum of 9 months (or the end of your COBRA coverage period, if earlier). The subsidy will apply to all COBRA eligible coverage except a Flexible Spending Account.
The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.
Thanks, so since the cobra qualifying event took place 11/01/08 (insurance ended 10/31/08) then I would qualify? Please confirm. (FYI…stopped working on 4/18/08 and severance was for 6 months- ended in 10/2008- which is when I started unemployment)..Jim
My job was eliminated and I have been a COBRA participant since June 2008. I intend to continue the coverage through the entire 18 month entitlement period.
Am I eligible for the 65% rate reduction for the period of March 2009 through Novemeber 2009, even though I started COBRA coverage prior to September 2008.
I assume that the rate reduction covers me as an active participant. Is that correct?
Thank you for your assistance.
The premium subsidy is only available if the COBRA coverage start date was/is on or after September 1, 2008. Therefore, the premium subsidy would not be applicable in your situation. Please refer to the following text from the Department of Labor:
An assistance eligible individual is a COBRA “qualified beneficiary” who meets all of the following requirements:
- Is eligible for COBRA continuation coverage at any time during the period beginning September 1, 2008 and ending December 31, 2009;
- Elects COBRA coverage (when first offered or during the additional election period), and
- Has a qualifying event for COBRA coverage that is the employee’s involuntary termination during the period beginning September 1, 2008 and ending December 31, 2009.
Those who are eligible for other group health coverage (such as a spouse’s plan) or Medicare are not eligible for the premium reduction. Other limitations may also apply. There is no premium reduction for periods of coverage that began prior to February 17, 2009.
The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.
Does this apply to employees who were involuntary terminated for cause or does it only apply to employees who were layed off?
This is the best information I have found so far on this subject on the internet, thank you for that. My question is, what if the business is no longer paying any payroll taxes at all, as it has laid off all employees (who are eligible for COBRA) and is just down to the principal partners (who are not taking a salary at this point)? Will the IRS refund the 65% that the employer is expected to pay? Can the employer get the money monthly or will it have to wait for the end of the quarter?
Thank you for any input you may have on this issue.
Thank you for your comments about the quality of our COBRA information. To answer your question, it appears that the revised Form 941 provides in line 15 a place to identify your credit amount and note whether you want to apply the credit to the next return or to have the IRS send you a refund.
Specifically, Form 941 Instructions state on page 6, Item 15 Overpayment: “If line 13 is more than line 10, write the difference in line 15. Never make an entry in both lines 14 and 15.
If you deposited more than the correct amount for the quarter, you can choose to have the IRS either refund the overpayment or apply it to your next return. Check the appropriate box in line 15. If you do not check either box, we will automatically refund the overpayment. We may apply your overpayment to any past due tax account that is shown in our records under your EIN.
If line 15 is under $1, we will send a refund or apply it to your next return only if you ask us in writing to do so.”
The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.
The regulations do not specificy a type of involuntary layoff except that such involuntary separation was not due to “Gross Misconduct.”
The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.
live in pa (chester county) and my cobra exhausts after 1st of next year, appx feb, mar 2010. i will not quality for indiv insur b/c of pre ex and am wondering if there is a safety net after cobra exhauts or can cobra continue? don’t know what to do i am 55 yrs old and female. thanks for any info. robbie
Has the Americn Recovery Act premium discount been temporarily extended to June?
Yes, the period of eligibility for newly, involuntarily separated employees extends to May 31, 2010.
The information contained herein is for informational purposes only and is not intended as legal or tax advice, nor is it intended to advise you of your obligations under ERISA, COBRA, HIPAA or the American Recovery and Reinvestment Act of 2009. It should not be used or relied upon as the basis for any action or choosing inaction. Consult an experienced benefits attorney or tax professional about your specific situation before deciding on any course of action or inaction.