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IRS Issues Further Guidance on COBRA Subsidies

April, 02 2009

The Internal Revenue Service (IRS) has issued guidance useful to employers in administering the COBRA subsidy passed as part of the American Recovery and Reinvestment Act of 2009, or ARRA (otherwise known as the "stimulus" legislation). 

IRS Guidance

In Notice 2009-27, the IRS published its guidance in the form of 58 questions and answers. The Q&As address issues in the new subsidy law that were unclear.  Some of the highlights are:

• Involuntary terminations -- the guidance clarifies that "involuntary termination" for purposes of the subsidy includes lay-offs and furloughs and also includes resignations in response to a material "negative" change in the employment relationship.
• Who can claim reimbursement for the subsidy -- the notice explains that, in most cases in which the employer sponsors the plan the employer may claim reimbursement on its quarterly payroll taxes. For employer-sponsored plans not subject to COBRA but subject to state continuation coverage laws, the insurer must claim reimbursement.
• Calculation of the subsidized premium -- the IRS clarifies that the 35% premium the employee must pay is calculated based on the amount he would have been charged for coverage if there were no subsidy. If the plan would charge 102% of the full premium, then the employee must pay 35% of that price. If the plan would not have charged the maximum allowed 102% but some lesser amount, the employee's premium is 35% of the lesser amount.
• Who is covered -- employees and their qualfied beneficiaries who participated in the group health plan and experienced a loss of coverage on or after September 1, 2008 and through December 31, 2009 are eligible for the subsidy. Beneficiaries on a group health plan who are not qualified beneficiaries for COBRA purposes are not covered.
• Income limits -- although the ARRA provides that otherwise eligible individuals who have income over certain thresholds are not eligible for the subsidy, the plan may not deny such individuals the subsidy on that basis. However, the individual can notify the plan that he or she waives the subsidy.

Many other matters are also covered in the Notice.  The IRS also noted that it is aware that the Notice does not cover all outstanding issues and that it is considering further guidance.

April 18 Notice Deadline Nearing

Employers must send out notices to former covered employees and qualified beneficiaries who lost coverage because of an involuntary termination on or after September 1, 2008 but who did not elect COBRA, or who elected but dropped COBRA, by April 18, 2009.  The notices must explain to the individuals that they are eligible for the subsidy, that the period to elect COBRA is extended 60 days from the date of the notice, and how to enroll and claim the subsidy.  Employers that have not determined who will need to be notified should act quickly to ensure compliance with the deadline. The ARRA provides that employers who fail to send the notice are subject to the same penalties and liabilities as employers who fail to issue COBRA notices in a timely manner.

For more information, please see our previous articles on the subsidy, guidance from the Department of Labor (DOL), and the DOL's model notices. If you have questions about your organization's obligations or need assistance complying with the ARRA's subsidy provisions, please contact us.

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