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2009 Recovery Act – COBRA Subsidy Update

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March 24, 2009

The 65% COBRA premium subsidy provided by the American Recovery and Reinvestment Act of 2009 (ARRA) may be recovered through the employment tax process. The reimbursement mechanism operates in three steps:

  1. An assistance eligible individual pays 35% of the COBRA premium to the employer*
  2.  The employer pays the remaining balance (65% of the COBRA premium)
  3. The employer claims the reimbursement at the time Form 941 is filed.

* Some employers have asked whether it is possible to recover all or any portion of the COBRA premiums that have been voluntarily paid by the employer on behalf of terminated employees under severance agreements. There is no explicit guidance on the subject of employer-provided COBRA payments; however, the analysis of the ARRA provisions and the DOL and IRS guidance issued thus far indicates that the subsidy is available only for assistance eligible individuals, and the employer must demonstrate that the 35% portion of the premium was paid by the assistance eligible individual or by individuals other than employer.

The IRS recently published a revised Form 941 to implement the reimbursement mechanism. As part of the revisions, two new lines were added: 12a – where employers must report the total amount of COBRA premiums paid on behalf of assistance eligible individuals (65% of the individuals’ total COBRA premium); and 12b – for reporting the total number of individuals who received COBRA subsidy.

Additionally, the IRS issued a list of Q&As for Employers. Among these Q&As, most noteworthy is the guidance regarding supporting documentation employers must keep with respect to the credit claimed. This documentation includes:

  • Information on the receipt of the assistance eligible individuals’ 35% share of the premium. The records kept should include dates and amounts.
  • Proof of payment of the premium.
    • For insured plans - copy of invoice from the insurance carrier proving the payment of the full premium required under COBRA.
    • For self-insured plans - proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
  • Attestation of involuntary termination for each covered employee whose involuntary termination is the basis for eligibility for the subsidy. The record must establish that the date of the involuntary termination falls between September 1, 2008 and December 31, 2009.
  • Proof of each assistance eligible individual’s eligibility for COBRA coverage and election of COBRA coverage.
  • List of the Social Security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
  • Any other documentation necessary to verify the correct amount of reimbursement.

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