As part of the American Recovery and Reinvestment Act which was signed on February 17, 2009 the government will subsidize (on a limited basis) up to 65% of the cost of COBRA premiums for eligible workers who are involuntarily terminated for other than cause. This subsidy is being implemented as an employer obligation to pay 65% of the COBRA premium (this includes the 2% allowable surcharge for administrative expense) for eligible individuals who have elected COBRA coverage effective September 1, 2008 as well as those individuals eligible for COBRA coverage who declined at the time. The employer will then be reimbursed for these COBRA premiums through payroll tax credits and/or refunds. Employees subject to State Continuation provisions are also subject to these provisions. The following are highlights of the new rules:

  • Who is Eligible?
    • An individual who has been involuntarily terminated from employment on and after September 1, 2008;
    • Who is not designated a "high income" individual based on certain income tests.
    • 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.
  • Who Must Comply?
    • Employers subject to Federal COBRA legislation;
    • Small employers subject to State Continuation legislation
      • Premium Subsidy - NJ Small employers with less than 20 employees do not have the responsibility of paying the 65% subsidy, rather, ARRA requires the insurance carrier pay the 65% of the continuation premium
      • Special Election Opportunity – State with Continuation provisions may decide whether or not to allow the Special Election Opportunity. NJ has determined that the Special Election Opportunity must be allowed for persons for whom NJ Continuation is applicable.
      • Plan Change Election – Under COBRA this option is available only if the Employer permits it. For employees subject to NJ Continuation the plan change option is allowed.
  • When is this Effective?
    • Rules are effective immediately.
    • The subsidy begins for coverage starting March 1, 2009;
    • There is a 60 day transition period where employers can still collect 100% of the premium and "make up" the subsidy in future premiums, if necessary.
  • How long is the Subsidy effective?
    • 9 months after the COBRA election
    • Will end earlier if the individual becomes eligible for other coverage.
  • Are Written Notifications Required?
    • Yes, All individuals qualifying for COBRA due to involuntary termination as of September 1, 2008 must be notified in writing of the subsidy;
    • Specific information must be included in the notification;
    • Department of Labor is to issue a model notice within 30 days.
    • All Notifications must be made no later than April 18, 2009.
  • If an Individual previously declined coverage can he/she now elect coverage?
    • Yes, the individual can now elect coverage;
    • There will be a 60 day special election period beginning on the date the notification is provided;
    • Coverage will begin as of the date of enactment of the legislation or March 1, 2009 (not retroactive to the original qualifying date);
    • The individual will be eligible for no more than 18 months of Continuation beginning as of the date of the original qualifying event.
  • Can an Individual Opt to Change Coverage?
    • Yes, the individual can elect to change his/her current election to a lower cost plan during the special enrollment period if the employer has decided to allow it; (In NJ, a Small group subject to Continuation must allow the election).
    • Once that election is made, it cannot be changed.
  • How Does an Employer Claim Credit for the COBRA subsidy?
    • The IRS has revised Form 941 which is posted on the IRS website.
    • Lines 12a and 12b must be completed;
    • Payroll taxes will be offset by the amount of premium paid for COBRA eligible individuals only after the COBRA eligible individual has paid his/her 35% portion.
    • If the 65% COBRA subsidy is higher than the payroll taxes due, the overpayment could be applied to the next return or a refund can be requested.
  • What Type of Documentation will be Required?
    • In order to obtain the payroll tax credit the employer must substantiate entitlement to reimbursement by providing certain specific reports
      • Report of payroll taxes offset for the reporting period and an estimate for next period; (On Form 941)
      • Attestation of involuntary termination of employees for whom reimbursement is claimed; (Must be maintained as supporting documentation but does not need to be submitted)
      • Specific information regarding each covered individual; (Must be maintained as supporting documentation but does not need to be submitted).
    • Updated and revised forms will be available on the IRS website as released.

Model COBRA and Continuation Notification Letters are now available on the Department of Labor Website.

For additional information or guidance, please call or email: Onofrio Cirianni (908) 429-0025 X2361 or Susan Wolfman (908) 429-0025 X2369

Information in this document is based on IRS guidance. It is not intended to serve as legal or tax advice. Consult your tax advisor for applicability to your situation.

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