August 31, 2009
Previously published on April 13, 2009
By now, all employers should be aware that the American Recovery and Reinvestment Act of 2009 (ARRA) – otherwise known as the federal economic stimulus – mandates that employers subsidize 65% of COBRA premiums for up to nine months to individuals who were involuntarily terminated between September 1, 2008 and December 31, 2009. The government then reimburses employers for this subsidy through a credit against their payroll taxes.
Reminder: By April 18, 2009, employers must send a notice to all COBRA-eligible individuals who refused or dropped COBRA coverage between September 1, 2008 and February 16, 2009. The notice must inform these individuals of the subsidy and provide them a second chance to elect COBRA coverage (“second chance” option).
Form Notices: To assist employers with meeting this deadline, as well as providing updated COBRA notices to individuals terminated on or after February 17, 2009, the Department of Labor has prepared several model COBRA notices. The notices are on the DOL’s website at: http://www.dol.gov/ebsa/COBRAmodelnotice.html.
New IRS Guidance: On April 1, 2009, the IRS published additional regulatory guidance about ARRA’s COBRA subsidy provisions in the form of Notice 2009-27. This Notice can be found on the IRS’ website at: http://www.irs.gov/pub/irs-drop/n-09-27.pdf. The Notice covers a number of topics, including the following:
Involuntary termination: An involuntary termination triggering the COBRA subsidy occurs when the employer unilaterally acts to terminate the employment relationship, when the individual is ready, willing and able to work. It also occurs in other less obvious situations, such as when the employer declines to renew a contract at its expiration, or when an employer terminates the employment of an individual because of an extended absence due to disability. Even a resignation may be an involuntary termination. If the resignation is forced or coerced by the employer (a “constructive discharge”), it is considered an involuntary termination. An involuntary termination also occurs if the resignation was due to a “material negative change in the employment relationship.“ This may occur, for example, in the case of a forced reduction in work hours or a forced relocation, depending on the circumstances. Additionally, an employee’s voluntary decision to accept a buy-out severance package and resign will be an involuntary termination if the employer has indicated that a certain number of individuals in the employee’s group will be terminated after the buy-out offer period expires.
Eligibility for COBRA Subsidy: To be eligible for the COBRA subsidy, both of the following must have occurred between September 1, 2008 and December 31, 2009: the employee must have been involuntarily terminated and must have lost plan coverage as a result. Thus, an employee who was involuntarily terminated in August 2008 will not be eligible even if she did not lose coverage until September 2008, and an individual terminated in December 2009 will not be eligible if he did not lose plan coverage until January 2010. In addition, individuals who are terminated for gross misconduct are not eligible for the subsidy because they are not eligible for COBRA in the first place.
High Earning Individuals: The COBRA subsidy phases out for individuals with an adjusted gross income (AGI) of $125,000 and $250,000 for married couples filing jointly. It is completely eliminated for individuals with AGI above $145,000 and $290,000 for married couples filing jointly. Important note: Employers must still provide such individuals with notice and an opportunity to elect the subsidy, and may not refuse to provide the subsidy if elected. If an eligible individual with income at these levels does not decline the subsidy, the employer will still be reimbursed through payroll taxes, and individual will have to repay the subsidy to the government through additional taxes. To decline the subsidy, the individual must notify the employer in writing that he or she is permanently waiving the subsidy. The notice must explicitly state that it constitutes a “permanent waiver.”
Cal-COBRA Subsidies: California employers with between 2 and 19 employees are covered by Cal-COBRA, not federal COBRA. But the ARRA requirement of providing a 65% premium subsidy also applies to these Cal-COBRA employers. Cal-COBRA employers, however, do not have to provide employees terminated between September 1, 2008 and February 16, 2009 with a “second chance” to elect Cal-COBRA coverage.
Subsidy Period: The subsidy period is nine months, beginning on the date that COBRA coverage commences, and ending on (i) the date the individual becomes eligible for other group plan coverage or for Medicare coverage, (ii) the nine-month anniversary of the date COBRA coverage commenced, or (iii) the date the individual ceases to be eligible for COBRA coverage, whichever occurs first.
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