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5500 Preparer's Manual for 2012 Plan Years
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The Treasury Department and IRS anticipate issuing guidance in the next few weeks on what constitutes “involuntary termination” for purposes of the new COBRA premium subsidy rules, Kevin Knopf, attorney-advisor, Treasury Office of Benefits Tax Counsel, said on March 12, 2009. Knopf spoke during a webcast sponsored by the American Bar Association.
COBRA premium subsidy
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) created a temporary COBRA premium subsidy for individuals who are involuntarily terminated from employment, and a payroll tax credit for employers to recover their costs.
Under the Act, an individual who is involuntarily terminated from employment may pay 35% of the premium and be treated as paying the full amount. Employers will pay the remaining 65% and be reimbursed through a payroll tax credit. Participation in COBRA is traditionally low because of the high cost of continuation coverage, Edwin Park, senior fellow, Center on Budget and Policy Priorities, Washington, DC, told CCH. “The average employer-based premium for health coverage for a family is $13,000 a year.”
Involuntary termination
To take advantage of the premium reduction, an individual must be eligible for COBRA as a result of an involuntary termination from employment at any time from September 1, 2008, through December 31, 2009. The individual must also elect COBRA coverage. The dislocated worker’s spouse and any dependents may also be eligible for the COBRA premium reduction. Knopf pointed out, however, that if an individual had self-only coverage at the time of involuntary termination, only the self-covered person will be eligible for the premium assistance.
The House Ways and Means Committee has provided some information on what is involuntary termination in frequently asked questions (FAQs) on its website: “Involuntary termination is a termination at the direction of the employer . . . termination for gross misconduct will generally disqualify an employee and his/her family from COBRA coverage.” The Ways and Means Committee also noted that “death is not an involuntary termination” for purposes of the COBRA premium reduction. Knopf declined to say how the government will define involuntary termination, but predicted that guidance will be issued before the end of March or in early April, most likely in the form of an IRS Notice.
The COBRA premium reduction is available for nine months. The IRS intends to clarify when the nine-month period starts, Knopf said. “The premium reduction in the 2009 Recovery Act does not extend the maximum COBRA coverage period of 18 months,” Kathryn Bakich, national director, Health Care Compliance, The Segal Company, Washington, DC, cautioned. Moreover, the premium reduction “cuts off if the individual becomes eligible for Medicare or other group coverage.”
Payroll tax credit
Employers recover their 65% premium assistance through a payroll tax credit. For most employers, the credit will be claimed on Form 941, Patricia McDermott, special counsel, IRS, Office of Associate Chief Counsel/Division Counsel, Tax Exempt and Government Entities, said. The IRS has revised Form 941 to reflect the COBRA subsidy.
“Until the 35% payment is received (by the employer), there is no subsidy eligible for reimbursement,” McDermott explained. “Eligibility for reimbursement is contingent on receipt of the 35% (premium).” Employers cannot assume that the payment will be received.
If the amount of COBRA premium reduction exceeds the employer’s tax liabilities for the quarter, the employer can choose to have the excess refunded or applied to the next quarter. “Refunds will be issued in a couple of weeks,” McDermott said.
Model notice
The 2009 Recovery Act gives some dislocated workers a second chance to elect COBRA coverage, Amy Turner, senior health law specialist, Department of Labor Office of Health Plan Standards and Compliance Assistance, said. This applies to individuals involuntarily terminated between September 1, 2008, and February 16, 2009, who did not elect COBRA when it was first offered or dropped it because they could not pay the premiums. The Treasury and Labor Departments are preparing a model notice employers can use to advise individuals about the special election.
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