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2009 Economic Stimulus Act - COBRA Premium Assistance

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February 17, 2009

Earlier today, President Obama signed into law the "American Recovery and Reinvestment Act of 2009." Among other things, the Act provides certain tax relief for low and moderate-income wage earners and their families and in particular to those affected by unemployment. This bulletin highlights: the relief provided to those who have lost health care coverage and are eligible for continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); state laws requiring continuation coverage similar to the COBRA rules under the Code; and the continuation coverage requirements of health plans maintained by Federal or State governments. The relief is provided in the form of a premium subsidy. In this regard, the Act amends the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). The following are the Act's most significant provisions related to this subsidy.

I. COBRA Premium Subsidy – For a period of no more than 9 months, individuals eligible for premium assistance need to pay only 35% of the cost of their COBRA premiums. The remaining 65% must be paid by the employer, and that employer payment is then eligible for a tax credit, as discussed below.

II. Assistance Eligible Individuals – Individuals who became entitled to continuation coverage under COBRA due to an involuntary termination of employment (other than for gross misconduct) at any time on or after September 1, 2008 and before January 1, 2010 will receive this subsidy if they:

  1. elect continuation coverage; and
  2. their modified adjusted gross income for the taxable year in which the subsidy is received does not exceed $145,000 (or $290,000 for joint filers); provided, however, that subsidies paid to taxpayers with incomes between $125,000 and $145,000 will be proportionately reduced.

The new law does not define what would constitute involuntary termination. Most likely there will be controversy regarding the scope of the term "involuntary" and consequently additional guidance may be forthcoming. Additionally, the Department of Labor will conduct expedited reviews (within 15 business days) of any denials of subsidy, if the affected individual so requests it.

III. Notice – The COBRA notice that a plan administrator is required to provide to qualified beneficiaries following a qualifying event must also contain information about the subsidy availability, its conditions for eligibility and the penalty described further below. A new notice must also be provided, during the special election period described below, to qualified beneficiaries who are entitled to elect COBRA, or who did elect COBRA, at any time due to a qualifying event occurring during the period of September 1, 2008 through January 1, 2010. The Secretary of Labor is directed to provide model language for this additional notification within 30 days of the enactment of the Act.

IV. Special Election – Individuals who became eligible for COBRA but did not elect continuation coverage as of the date of enactment, or those who had elected but are no longer enrolled on the date of enactment because, for example, they could not afford the cost of the premiums, must be provided a second chance to elect. The special election period begins on the date of enactment and ends 60 days after notice of this special opportunity to elect is provided.

V. Payment of Subsidy – The entity to which premiums are payable (usually the employer) shall be eligible for a tax credit against payroll tax liabilities in the amount of the subsidy. The entity is eligible for the subsidy reimbursement tax credit after it has received a reduced premium payment from the assistance eligible individual.

VI. Termination of Subsidy – The subsidy will end for the period of coverage beginning on or after the earlier of:

  • The date on which the 9-month period ends;
  • The date following the expiration of the maximum period of continuation coverage required under the applicable COBRA provision (i.e., 18 months for covered individuals);
  • The date on which the eligible individual becomes eligible for coverage under any other group health plan (other than coverage consisting only of dental, vision, counseling or referral services, or a combination thereof); or under Medicare benefits of title XVIII of the Social Security Act.

VII. Penalties – An eligible individual who continues to receive the subsidy after he or she is no longer entitled to it (and has failed to notify the entity to which the premiums are paid that his or her eligibility for the subsidy has ended), will be subject to a penalty equal to 110% of the value of the subsidy received after termination of eligibility.

VIII. Additional Rules

  • COBRA subsidy is excluded from the individual's gross income.
  • If permitted by the employer, COBRA subsidized individuals may change their coverage option to another alternative offered by the plan that costs the same or less than the coverage in place prior to the qualifying event (e.g., change from PPO to HMO coverage).  

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