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COBRA Premium Assistance Affects Employees and Employers

The American Recovery and Reinvestment Act (the Act) provides COBRA premium assistance, which offers a temporary 65% reduction in COBRA premiums for eligible beneficiaries. This new provision will affect former employees receiving or eligible to receive COBRA health insurance coverage and their families, as well as employers.

COBRA is a federal law that allows employees, their spouses, and dependent children who lose health insurance benefits due to involuntary termination of employment to elect to continue that coverage for up to 18 months. Qualified beneficiaries are obligated to pay up to the full cost of coverage plus a 2% administrative fee. However, under the COBRA premium assistance provisions, the employee's cost of COBRA insurance premiums is reduced to 35% of the total premium cost, including the 2% administrative fee. However, if the employer pays any portion of the premium, no subsidy is payable on that portion.

The COBRA premium reduction is available to assistance-eligible individuals (AEIs). These include the employee (and members of his or her family) whose employment is involuntarily terminated between (and including) September 1, 2008 and December 31, 2009, and is otherwise eligible for, and elects COBRA continuation coverage. The coverage subsidy is payable for a maximum of 9 months and is not available prior to February 17, 2009.

Other provisions applicable to AEIs include:

· AEIs who lost their jobs between September 1, 2008 and February 17, 2009, but either didn't apply for COBRA coverage or ceased coverage after a short time due to its cost have a new 60-day period within which to elect coverage and obtain premium assistance.
· The subsidy isn't taxable as income to the recipient, however it is phased out for individuals with adjusted gross incomes between $125,000 and $145,000 ($250,000 to $290,000 if married filing jointly).
· If an AEI pays COBRA premiums for March and April, the employer may either refund the amount of premium paid in excess of 35% or credit the amount against future premiums for the AEI.
· If the AEI becomes eligible for other group health insurance or Medicare, the subsidy is terminated. The Department of Labor has established a website (www.dol.gov/ebsa/cobra.html) that provides information to beneficiaries of COBRA insurance.

The premium assistance provisions also affect employers. Most importantly, the employer of the AEI must pay up to 65% of the premium to the insurer. The employer then gets credit for the amount of COBRA premium paid against payroll taxes. If the subsidy is greater than the tax liability, the excess amount is either paid to the employer or applied against future payroll taxes. The IRS has a website (www.irs.gov/newsroom/article/0,,id=204709.00.html) to help employers address COBRA premium assistance requirements. Other provisions important to employers include:

· Form 941 (Employers Quarterly Federal Income Tax Return) has been revised to address the payroll tax credits.
· Plan administrators must communicate the availability of the subsidy to eligible COBRA beneficiaries by April 18, 2009.
· Employers must maintain documentation of the AEI's 35% contribution and provide proof of payment to the insurer (if the plan is not self-insured).

@MitlinFinancial