“Cobra” Subsidy Also Affects Small Employers

The recently enacted American Recovery and Reinvestment Act (the “Act”) includes what is being called the “COBRA Subsidy,” which provides laid off workers with a reduction in the cost for continuing their group health insurance. COBRA is an acronym for the federal law requiring group health plans to extend insurance protection to qualifying terminated employees who would otherwise lose coverage. Because COBRA applies only to businesses with 20 or more employees, many small business owners believe that the COBRA Subsidy does not apply to them. However, the Act applies to all group health plans that are “subject to Federal COBRA continuation requirements or to similar requirements under State law.” Both Ohio and Kentucky law requires employers to offer continuation of their health plans to terminated employees, and therefore employers who are subject to those requirements must also provide the COBRA Subsidy.

State Laws
Currently, Ohio requires coverage under all group health policies to be extended for six months to employees who otherwise would lose coverage due to involuntary termination. To be eligible, the employee must have been covered under the policy for at least three months and be entitled to receive unemployment compensation. To meet the latter requirement, the worker would have to be involuntarily terminated (laid off rather than having resigned).

On April 1, the Ohio legislature extended coverage to 12 months for insurance policies issued, renewed, or delivered after April 1, 2009. Entitlement to unemployment compensation is no longer required, but employees must be involuntarily terminated other than for gross misconduct.

Kentucky’s law extends coverage for eighteen months to terminated employees as well as those losing coverage because of divorce, death of the employee, or loss of dependent status because of age. The law is similar to Ohio’s in that the employee must have been covered under the employer’s plan for three months, but there is no requirement that termination be involuntary.

The COBRA Subsidy
Qualifying employees who were terminated between September 1, 2008 and December 31, 2009 may be entitled to a 65% subsidy for the cost of premiums for health care continuation for up to nine months. Eligibility is phased out for single employees with over $125,000 in adjusted gross income (“AGI”) in the year of the subsidy ($250,000 if filing jointly) and is unavailable for those with AGIs over $145,000 and $290,000.

Employees who elected continuation coverage may begin paying the lower premium with the first premium due after enactment of the law (presumably March 1, 2009). Eligible employees who did not elect COBRA continuation must be given a second chance to do so, but the second election period does not extend the period of continuation coverage. An enrollee’s coverage will end when it would have ended if he had elected coverage when it first became available.

Notice of the right to elect and the available subsidy must be sent to all eligible employees. Model notices are available on the IRS website. Employees have 90 days from the date of the notice to elect continuation coverage. If an employee becomes eligible for Medicare or another group health insurance plan, he is required to notify the plan, and he is no longer eligible for the subsidy whether or not he actually becomes covered by the other plan.

Once the reduced premium (35%) is paid by the eligible employee or his dependents, the employer will pay 65% of the premium. The employer will be reimbursed by claiming those amounts as a credit on its quarterly employment tax return using a modified Form 941.

Employers are required to identify the subsidized employees and the amounts of the subsidies attributable to them. The employer must also verify fact that the subsidized employee was involuntarily terminated. Reports including the amount of the payroll taxes offset by the subsidy, as well as an estimate of the future payroll taxes that will be offset, must be filed. The IRS has issued preliminary guidance, which is expected to be updated as questions arise.

Should you have any questions about the subsidy and how it applies to you, please call Claudia Allen at (513) 629-9462.