Employers Have New Obligations Under COBRA
03/ 19/ 2009
Tips for small business compliance
As part of the American Recovery and Reinvestment Act, the federal government will subsidize 65 percent of the COBRA costs for employees who are involuntarily terminated from employment between Sept. 1, 2008, and Dec. 31, 2009. The former employee would be responsible for the remaining 35 percent of premium. Employers and insurance companies will administer the subsidy, which imposes new administrative and notice requirements on business owners.
Why COBRA provisions may affect your small business
Under federal law, COBRA is required for group health plans sponsored by employers with 20 or more employees. The temporary COBRA assistance provisions outlined in the American Recovery and Reinvestment Act also apply to state mini-COBRA laws. There are 40 states that have mini-COBRA laws, meaning employees of small businesses offering health insurance in those 40 states would be considered eligible for the premium assistance.
Effective date
The subsidy is available starting March 1, 2009, but not all guidance has been provided. Based on what we know, below are some tips for small business owners.
Who is eligible:
All employees involuntarily terminated since Sept. 1, 2008, until Dec. 31, 2009, are eligible for the subsidy.
- Gross misconduct (like theft from the employer) never qualified as involuntary termination.
- No one is eligible for the nine-month subsidy until March 1, 2009, even if they were terminated prior to that date.
How it works:
The bill establishes a special election requirement for COBRA coverage.
- The special election is available for an individual who has been eligible for COBRA, but either failed to accept or allowed the election to lapse. Such individuals will have a 60-day special election period.
- The employer must send a notice by April 18, 2009, to all employees terminated since Sept. 1, 2008, not just employees involuntarily terminated. Violation of the notice requirement results in a $100 per day per violation fine. (This doesn't mean they will be eligible for COBRA coverage and the subsidy--it just means that notice must be provided to all employees terminated since Sept. 1, 2008.)
- The Department of Labor has until March 19, 2009, to provide guidance on the special election. That guidance should be available in the middle of March.
The amount of the subsidy is 65 percent of what the employer charges the individual for continuation of coverage. A payroll tax credit is available for the employer on the date they receive the individual's 35 percent payment.
- The subsidy will be reported on the updated Form 941.
- The credit will be an offset to any federal payroll taxes (federal withholding and employer and employee FICA taxes). Any subsidy in excess of the payroll tax amount will be refunded to the employer after the employer fills out a special form.
- The employer should document the date payment is received for each employee. This could be an issue of concern in a future payroll tax audit, so the employer should keep detailed records to answer any possible questions that could arise on audit.
- The employer may also have to report the amount of the subsidy received on a year-end W-2. Further guidance is expected on this issue.
Employers or an entity that claims the subsidy must provide an attestation of involuntary termination for each covered employee.
- More guidance is expected on the attestation and how it is to be made.
The employer also must file a report with the IRS containing:
- Tax ID or Social Security Number for all covered employees,
- Amount of the subsidy paid with respect to each person, and
- Whether the subsidy was for one person or more than one person.
- A model form is not available and more guidance is expected on this issue.
What to do now:
- Determine whether your state has a mini-COBRA law. Check with your insurer to learn more about mini-COBRA requirements in your state.
- Compile a list of individuals who were involuntarily terminated on or after Sept. 1, 2008 and any eligible spouses and dependents who were enrolled in coverage prior to the termination;
- If your business' health plan is insured, check with your insurance carrier to find out how to enroll individuals who are not currently enrolled in COBRA;
- Make sure COBRA premium billings for March 2009 account for the 65 percent subsidy; and
- Stay tuned for more information, including model notices and updated employment tax forms for taking the subsidy credit.
More information
This tip sheet provides an overview of new law. It is not intended to be legal advice for any specific factual situation.
