IRS and DOL Issue Guidance on COBRA Subsidy

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March 18, 2009

The IRS and DOL have issued initial guidance on the government-funded COBRA subsidy resulting from the passage of the American Recovery and Reinvestment Act of 2009 (“Act”). Under the Act, the federal government will subsidize, for up to nine months from termination of employment or enactment (if later), 65% of the COBRA premium for involuntarily terminated employees and their families who elect COBRA coverage under an employer-sponsored group healthcare plan.

The IRS published guidance titled “COBRA: Answers for Employers,” which is accessible at http://www.irs.gov/newsroom/article/0,,id=204708,00.html. Highlights of this guidance include:

  • Employers that claim the credit for delivering the COBRA subsidy must maintain supporting documentation for the credit claimed. Such documentation includes, but is not limited to:
    • Information on the receipt, including dates and amounts, of the assistance eligible individuals’ 35% share of the premium.
    • In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.

In the case of a self-insured plan, proof of the full premium amount and proof of the coverage provided to the assistance eligible individuals.

    • Records that provide confirmation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
    • Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage.
    • A record of the social security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and, with respect to each covered employee, whether the subsidy was for 1 individual or 2 or more individuals.
    • Other documents necessary to verify the correct amount of reimbursement.
  • The premium subsidy and the related credit for the employer apply only after the individual has paid his or her 35% of the premium.
  • In order to receive a reimbursement, employers may decide either to offset payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter.
  • Under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., for March and April), and the employer can reimburse or provide credit for the overpayment.

The DOL also published guidance on the COBRA subsidy, including a fact sheet relating to the COBRA premium reduction, which is accessible at http://www.dol.gov/ebsa/cobra.html. The fact sheet summarizes the changes to COBRA resulting from the Act and reminds employers of their responsibility to offer a special COBRA election opportunity to individuals who were involuntarily terminated from September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled, within 60 days of February 17, 2009. The fact sheet further reinforces that plan administrators must provide notice about the premium reduction to all individuals who have a COBRA qualifying event during the period from September 1, 2008 and December 31, 2009. These notices may be provided separately or along with the standard COBRA notices. The DOL will provide model notices by March 17, 2009.

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When an employer has multiple healthcare coverage options for active employees, the fact sheet reiterates the employer’s option to allow assistance eligible individuals to switch the coverage options they had when they became eligible for COBRA in order to obtain a reduced premium for continued medical coverage. Any individual who is denied status as an assistance eligible individual may request a review by the DOL for a determination of his or her subsidy eligibility.

For more information regarding the COBRA subsidy, please see our previous newsletters “Recovery Act Includes COBRA Subsidy” and “IRS Publishes Revised Payroll Tax Forms to Reflect COBRA Subsidy.”

If you have any questions about how to implement the COBRA subsidy with respect to your group health plan, contact a member of Blank Rome’s Employee Benefit and Executive Compensation Group.

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