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Cobra Subsidy: New Notice & Tax Credit Procedures
January 11, 2010

The year-end extension of the 65% COBRA premium subsidy means new notice requirements for employers' healthcare plan administrators.  Hopefully, however, a change announced last week by the IRS will make it easier for employers to claim the tax credit that finances the subsidy for employees who lost coverage when the original subsidy expired.

The premium subsidy for a terminated employee's first nine months of COBRA continuation coverage was an important feature in last year's federal stimulus law, the American Recovery and Reinvestment Act ("ARRA").  One of Congress's last acts before its Holiday recess was to amend ARRA in an effort to preserve healthcare coverage for many who lost their jobs during the current economic downturn.  The ARRA amendment, buried in a massive Defense appropriations bill, does three things:

  • Extends the nine-month subsidy to 15 months.
  • Expands eligibility for the subsidy to employees who are terminated through February 28, 2010. (Otherwise, employees who lost their jobs after December 31, 2009 would not have been eligible for the premium subsidy.)
  • Provides relief for employees who lost their COBRA coverage when the nine-month subsidy ended or who paid the full premium thereafter in order to keep their coverage. Employees who lost coverage can restore it by a retroactive payment of 35% of the back premium(s). Employees who paid the full premium can now get a credit against future COBRA premiums or receive a refund check from their employer for the overpayment.

Healthcare plan administrators are required to give notice of the new 15-month COBRA subsidy to individuals who were "assistance eligible" on or after October 31, 2009 or experience a qualifying event thereafter.  The notice must be sent within 60 days of December 21, 2009 (when President Obama signed the bill into law) for those employees already "assistance eligible" (or within 60 days of the qualifying event for individuals whose qualifying event occurred after that date).  Special notice is required for individuals whose nine-month subsidy ran out before December 21.  An employee who lost coverage when her nine-month subsidy period ended can restore it by making the retroactive 35% premium payment within sixty days after enactment or 30 days after receiving the required notice-whichever is later.     

Here is an example of how the restoration of coverage works:  Employee A lost coverage on November 30, 2009, when his subsidy expired, because he could not pay the full premium.  He gets the required notice of his extended subsidy rights on January 28, 2010.  By paying 35% of the back premiums for December 2009 and January 2010, he can restore coverage for those months and can continue to benefit from the COBRA subsidy through May 2010 by paying his monthly 35% of the premium.

This week's IRS action changes the process for employers to claim the 65% credit for prior-year COBRA subsidies.  Under the new procedure, if an employer receives the employee's 35% share of the COBRA premium in 2010 for a coverage period in 2009, the 65% credit should be claimed on Form 941 for either the quarter in which the 35% was received or a later quarter in 2010. The credit cannot be claimed for the quarter in 2009 when the coverage occurred.  (Previously, the IRS required employers to claim the credit on the Form 941 for the year of the COBRA coverage period, even when the payment occurred the following year. Had the IRS continued that policy, employers would have had to amend their prior-year Forms 941 to claim the tax credit for prior-year subsidies.)

If you have any questions regarding the new ARRA amendments, please call or email your MVA Employment or Employee Benefits Team contact.