Congress Approves Stimulus, Impacting COBRA Administration and Payroll Tax Reporting

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Published February 2009

On February 13, the Congress passed the American Recovery and Reinvestment Act of 2009 (the “Act”, a.k.a. the Economic Stimulus Package). The Act includes tax breaks for businesses and individuals, including COBRA subsidies for involuntarily terminated workers. According to a Wall Street Journal graphic available online as a PDF, about 38 percent of the joint House-Senate stimulus bill is to go toward tax cuts and to aid. The remaining 24 percent is to be targeted toward social spending programs.

For general information on the Economic Stimulus Package, please see the Timely Opportunities article titled “Congress Passes Stimulus Law”.

The Act is now cleared for President Obama’s signature, which is expected on Tuesday, February 17th. Although the final COBRA subsidy is defined, there are still many unanswered questions regarding the actual application and administration of the Act. BASIC is working diligently with all our resources to seek clarification regarding the administration of the COBRA subsidies, including integration of the employer tax credit through Payroll Tax reporting (form 941).

What is the COBRA subsidy?

  • 65% federal subsidy for COBRA premiums
    • Under the subsidy, the qualified beneficiary would pay 35% of the applicable COBRA premium and 65% of the premium would be initially paid by the employer.
    • The employer would then able to recoup its portion of the premium payment as a tax credit against their federal payroll tax (form 941).
    • Please note: For the clients that we administer COBRA, BASIC is working to develop reporting from our COBRA System that will provide the information for the federal payroll tax reporting. For BASIC’s clients whom we do their payroll processing and COBRA administration, this integration will be handled by BASIC.
  • Up to 9 months for involuntarily terminated workers and for their families
  • This subsidy also applies to state health care continuation coverage if required by states for small employers
  • The subsidy is not taxable to the individuals

 

Who does this subsidy apply to?

  • Workers involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009.
    • This subsidy terminates upon offer of any new employer-sponsored health care coverage or upon Medicare eligibility.
  • Workers involuntarily terminated between September 1, 2008 and enactment, but failed to initially elect COBRA coverage because it was unaffordable.
    • These workers must be given an additional 60 days to elect COBRA coverage and receive the subsidy. Employers will be required to locate prior employees who were involuntarily terminated since September 1, 2008 and who declined COBRA coverage to tell them they have a new right to opt for coverage.
  • The subsidy is not available to individuals with an annual income exceeding $125,000 or to couples with annual incomes exceeding $250,000.

 

Some things to keep in mind:

  • Employers/COBRA administrators will need to prepare a special enrollment notice. Both bills require the DOL and Treasury to adopt model notices within 30 days of enactment.
  • Your business can prepare for the upcoming COBRA legislation change by taking a closer look at current healthcare administration and HR systems. It is projected that the federal subsidy will likely increase costs for record-keeping, COBRA administration, and the changes required in company payroll systems in order to recover their portions of premiums under subsidized coverage.
  • Getting prepared for this new COBRA subsidy provision will serve to strengthen your compliance in a timely manner.

 

We understand that these changes have resulted in many questions regarding your obligations. Please note that BASIC will continue to update you as we work through these requirements.