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

Rest Up! For Illinois Workers, ODRISA is Now Law Beginning in 2023, The One Day Rest In Seven Act (ODRISA) allows Illinois employees the right to take one day off in seven, plus breaks during a long workday.  Here’s a breakdown of the basics: Employees must get a minimum of 24 hours of rest every […]
Read more
Starting in 2023, Illinois workers have expanded job-protected bereavement leave under the Family Bereavement Leave Act (FBLA). Let’s dig into the details. FBLA allows eligible employees to take up to 10 work days of unpaid leave following the death of a family member. Specifically, they are allowed time for any of the events covered by […]
Read more
Your medical leave could qualify for paid time off if you work in Colorado.  We’re familiar with the Family Medical Leave Act (FMLA), allowing qualified employees up to 12 weeks of unpaid, job-protected leave to care for themselves or a family member during certain medical or family events. But the FAMLI program takes this coverage […]
Read more
What business owners need to know right now. On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to prohibit non-competition clauses (“non-competes”) in employment agreements.  Non-compete provisions include broadly written non-disclosure agreements that ban working in the same field post-employment and require employees to pay “training costs” if the employment terminates within […]
Read more
At Nextep, we know the end of the year brings taxes top of mind for many. It also may be easy to forget about 2023 benefit limits that can impact your taxes.  Partnering with a PEO like Nextep means you can easily get all the details you need. Here is a cheat sheet of some […]
Read more
The Ins and Outs of a PEO Relationship Are you thinking of moving your in-house HR tasks to a PEO? That’s great! Here’s what to expect. Professional Employer Organizations (PEOs) are a tried and true way for companies like yours to take advantage of some powerful perks: Access better benefits than you might be able […]
Read more
The Equal Employment Opportunity Commission (EEOC) recently released the “Know Your Rights” poster, which updates and replaces the previous “EEO is the Law” poster. Covered employers are required by federal law to prominently display the poster in their workplace.  DOWNLOAD POSTER What it covers The poster includes federal laws prohibiting job discrimination, as well as […]
Read more
The IRS has released FSA and HSA limits for 2023. A flexible spending account (FSA) allows you to deduct a set amount of pre-tax money from each paycheck to pay for certain IRS-qualified out-of-pocket health expenses, such as medical copays, dependent care, prescription drugs, transit, and parking. Aside from the annually allowed rollover amount ($610 in […]
Read more
How to handle the SSN in the workplace The Social Security Administration has announced that an individual may now self-select their gender on their social security number (SSN) record. Previously, the sex marker would have to match medical records and other legal documentation. Now, a person can select the male or female sex designation of […]
Read more
When completing the I-9 to verify employment eligibility, you may notice that the form will expire on October 31, 2022. Usually, the government releases a new form to replace the old one. However, the Department of Homeland Security (DHS) and US Immigration and Customs Enforcement (ICE) has announced an extension to the existing form.  As […]
Read more
Get the low down on how to handle pay correctly. Should you pay your employees for working during lunch? Yes.  Easy answer! Right? Well, no. Though the simple answer is an emphatic yes, it’s a bit more nuanced.  The topic of lunch and compensable time can be tricky. There are many ways an employee could […]
Read more
Could your employee handbook stand up to a lawsuit or EEOC claim? Here are six tricky areas that could mean trouble for your company. Landmine 1: A handbook that’s older than dirt When was the last time you reviewed your company’s employee handbook? If it’s been longer than a year, then it’s been too long.  […]
Read more

Download Our App