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.
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:
- 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.
- 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.
- 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.
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.