You and the Law
Changes to Cobra Based on the American Recovery and Investment Act of 2009
Most employees think of Cobra the same —health insurance is affordable when their employer pays for it, but it becomes ridiculously expensive once the employee is no longer with the company and has to pay for it directly. These new changes seek to provide relief to former employees in such a situation.
The new law reduces the amount of premiums to be paid by former employees who were involuntarily terminated (defined for this purpose to mean an employer-initiated termination where the employee was willing and able to continue performing services). While the difference is ultimately made up by the government, employers are required to “front” the difference, then obtain reimbursement in the form of an offset to payroll taxes.
Here is how it works. In cases where a former employee was required to pay 100 percent (102 percent actually) of the premium, the stimulus law provides that the former employee pay only 35 percent of the premium. The employer must “front” the other 65 percent. The employer does get all of this 65 percent back, in the form of payroll tax credits. The employer gets a 1:1 tax credit against all payroll taxes. For employers who will pay more in payroll taxes than the total of the 65 percent of premiums, this is really only an accounting issue—payroll taxes withheld can be used to pay these premiums rather than be set aside to actually pay the taxes. The most affected employers are those where the 65-percent premiums will exceed payroll taxes. In such a case, the employer has to front the 65 percent, and will receive reimbursement in the form of a check from the government, which could take a little time.
For whatever reason, the law provides that the employer may only receive a credit for the 65 percent if the former employee has paid the 35 percent. Therefore, employers want to make certain that the former employee has paid the 35 percent before the employer pays the 65 percent.
The subsidy is available for up to nine months, but will end sooner if the Cobra coverage expires. The law does not extend the coverage period.
Covered employees (known as “assistance-eligible individuals”) include anyone who was involuntarily terminated between September 1, 2008 and December 31, 2009, even if they have already elected not to obtain Cobra coverage. In other words, employees who already passed up the coverage, possibly because of the cost, now have another chance to elect such coverage. However, former employees will not be eligible for this subsidy if they become eligible for coverage under any other group health plan, Medicare or Medicaid. Also, individuals with an adjusted gross income of $125,000 or more ($250,000 if married filing jointly), while eligible for the subsidy, will pay taxes equal to any subsidy received, completely negating any benefit from the subsidy.
All employers were supposed to have notified assistance-eligible individuals by April 18, 2009. Because this law did not take effect until this year, many employers may not be thinking about employees that were terminated last fall. The law requires the employers to locate those former employees to let them know that they may be eligible.
There are specific types of forms to be used for the notice, which depends on your situation. There are more nuances to this new law and how it pertains to OSHA, such as specific coverage periods and situations where the employer is already subsidizing coverage. Be sure to contact your attorney to get all of the details and make sure that your company is in compliance.
If you are an employer with fewer than 20 employees, Cobra does not apply to you, and therefore, the Cobra subsidy does not apply to your former employees. That said, 35 states have state-level programs with Cobra-like requirements for smaller employers (often referred to as “mini-Cobra” statutes). These mini-Cobra statutes have continuation requirements from anywhere from three months (Georgia) to 36 months (California, Connecticut, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, North Dakota and South Dakota). Subsidies may be available where the mini-Cobra continuation requirements are comparable to the Cobra continuation requirements. If you are in one of these states, be sure to contact your attorney to get the details regarding what you may need to do.
This article provides only general information about complex labor laws. It should not be considered as a legal opinion or legal advice. We strongly recommend that readers confer with legal counsel on the application of the law to their individual situations and the use or modification of this article. MF
There are no comments posted at this time.