ARRA and the COBRA Subsidy: What These Two Acronyms Mean to Your Business

Beth Dean 03.01.09
108 Ipad On Bed

Designed to boost the economy, secure jobs, and offer aid to laid-off employees, the American Recovery and Reinvestment Act (ARRA) was signed into law on February 17, 2009, and includes many provisions that will impact businesses.

Nextep clients will feel little of this impact since Nextep will largely manage the work. This bulletin will explore how this bill will impact COBRA for both employees and employers.

COBRA Subsidy
A major component of ARRA is a 65% premium subsidy of COBRA continuation coverage for qualified beneficiaries. Qualified beneficiaries are considered employees who are terminated between September 1, 2008, and December 31, 2009. Qualified beneficiaries will only have to pay 35% of their COBRA, mini-COBRA, or state continuation premium for medical, dental, and vision up to nine months.

Employees must fulfill all three criteria below to qualify for the subsidy:

  1. The employee must be involuntarily terminated between September 31, 2008, and December 31, 2009. Voluntary quits and termination for gross misconduct do not qualify. Proving gross misconduct will be difficult and will only apply to extreme circumstances.
  2. To receive the full 65% subsidy, individuals must have an adjusted gross income of less than $125,000 if filing single or ($250,000 married filing jointly). A reduced subsidy will be available for individuals with an adjusted gross income between $125,000 and $145,000 (individual), or $250,000 to $290,000 (married filing jointly). Any employees earning more than $145,000 ($290,000 married filing jointly) will not be eligible for the subsidy.
  3. The employee must not be eligible for any other group medical coverage. If the employee can obtain coverage through a spouse’s plan, for example, he or she would not be eligible for the COBRA subsidy.

Highlights of the plan include:
The federal government will pay for the subsidy; however, the employer is responsible for paying the premium initially and will be reimbursed by the government. The employer portion of the premium is refundable as a tax credit on the IRS Form 941. The IRS has released a new form 941 for this purpose. The tax credit can only be reported on the IRS Form 941 after the 35% employee portion of the premium has been paid.

Revised COBRA statements must be sent out retroactively to all employees who have been terminated since September 31, 2008. To receive the subsidy, employees would elect the COBRA continuation coverage as laid out in the revised statement.

  • Employees can elect COBRA coverage with the subsidy even if they did not elect it during their initial eligibility period. If the company offers dual option plans, they may elect to offer both options to the employee.
  • If COBRA continuation coverage is elected during the second notification period (for employees terminated before February 17, 2008), the COBRA continuation coverage would begin on March 1, 2009. The coverage will not retroactively begin to the original qualifying event date. The maximum COBRA coverage period of 18 months remains in effect. The coverage period is measured from the original qualifying event, which would be the date the employee was terminated.
  • If COBRA continuation coverage is elected during the initial eligibility period (for employees terminated after February 17, 2009), coverage will be in effect the first of the month following the termination of employment.
  • Once the eligible employee elects the COBRA continuation coverage, he/she will pay 35% of the premium for nine months or until the maximum COBRA continuation coverage period expires, whichever occurs first.

Nextep’s Role:
If Nextep administers COBRA reporting and pays the benefit bills for you all responsibility for compliance will be transferred to Nextep. We will send out revised COBRA notifications, pay the 65% employer portion of the premium and process the tax credit through 941 filings.

If Nextep is not administering COBRA, those clients need to ensure revised COBRA statements are sent out, carefully record who elected COBRA continuation coverage, make copies of payment and paid benefit bills, and send all documentation to Nextep’s Benefits Department. Nextep will then review the documentation, determine if additional information is needed and issue a tax credit on the next applicable payroll.

If you have any questions regarding ARRA and how it impacts COBRA, please contact Nextep for further guidance.

Also on Nextep

Ah, the holiday season—a time for joy, festivities, and the age-old puzzle of compensating your employees. Let’s demystify the rules of holiday pay for both our hourly (nonexempt) and salaried (exempt) workers. For the Hourly Heroes Picture your business decked out in holiday cheer, but your nonexempt employees are sipping cocoa at home. Under the […]
Read more
Keep Your Party Pants Professional As the year ends, and you’ve achieved feats at work that deserve a standing ovation, the holiday office party is your well-earned, much-awaited reward.  But beware! When the festive spirit meets the allure of a bottomless drink supply, things can take a wild turn, leaving you nursing a hangover, regret, […]
Read more
At Nextep, we aim to stay informed about CEO concerns in order to better help with problem-solving. We were surprised to learn that sustainability has become a top concern. The statistics bring CEO concerns to light: A Gartner survey found that CEO concern about sustainability has increased 292% from their 2021-22 survey. In a survey […]
Read more
It’s not the most savory of topics, but still merits discussion. All of your employees will need to use the bathroom during work. Here’s a potty primer, if you will. Disability and Bathrooms The Americans with Disabilities Act (ADA) has clear regulations on bathroom accessibility in the workplace. Much of the guidance revolves around making […]
Read more
We’ve reported at length about preventing discrimination in the workplace. But let’s take a step back now and brush up on Title VII, the sweeping regulation that started it all.  Title VII of the Civil Rights Act forbids discrimination in any aspect of employment, including hiring, firing, pay, job assignments, promotions, layoff, training, fringe benefits, […]
Read more
Illinois to Join in on Pay Transparency As we recently reported, pay transparency laws are gaining momentum across the United States. Now, they have another state to add to the roster.  Illinois recently passed an amendment to the Illinois Equal Pay Act that will require employers to show pay and benefits information when posting a […]
Read more
Time to check your handbook again for NLRB compliance The National Labor Relations Board (NLRB) has been busy shaping employee handbooks and workplace policies. With the recent Stericycle Inc. decision, the NLRB has introduced a new legal standard for evaluating employer work rules under Section 8(a)(1) of the National Labor Relations Act (NLRA).  Understanding the […]
Read more
Spoiler Alert: Yes We frequently see a question posed to HR pros: “Do I have to pay my employee if…?” We’ll go ahead and give you a major hint at the outset. In many of the scenarios we see, the answer is yes, you do have to pay your employee. Here are a few scenarios. […]
Read more
The Answer Depends on Your State…For Now As we reported in January, non-compete agreements preventing employees from working for competitors are becoming increasingly unenforceable. The FTC is currently working on banning them at a federal level, but unless and until that decision comes, non-competes are enforced at a state (and sometimes even local) level.  As […]
Read more
When hiring workers, knowing whether they’re employees or independent contractors is essential. The difference between the two can significantly impact your business, including your tax liability, your liability for workers’ compensation claims, the worker’s rights and benefits, and your ability to control how your workers do their jobs. Read all about it here, and check […]
Read more
Employers Must Now Prove “Substantial Increased Cost” to Deny Religious Accommodation Recently, the Supreme Court ruled that employers must now demonstrate a substantially increased cost to deny an employee’s request for a religious accommodation.  This ruling, which comes in the case of Groff v. DeJoy, clarifies the standard for “undue hardship” under Title VII of […]
Read more
Here’s How the Recent Ruling Affects Your Company You may have read that in late June, the Supreme Court struck down affirmative action in college admissions. Here’s the implication this ruling could mean for you as a small or medium-sized business owner. To be clear, the Supreme Court’s decision on affirmative action does not explicitly […]
Read more

Download Our App