Details Regarding the New COBRA Subsidy

Reprinted with permission from the Management Association of Illinois’s Web site, www.hrsource.org. The article was posted in May 2009.

In February 2009, President Obama signed the American Reinvestment and Recovery Act (ARRA). Among the numerous provisions in this law is a requirement that employees and their dependents who were or are involuntarily terminated between September 1, 2008, and December 31, 2009, be offered the opportunity to continue their health care coverage at a subsidized rate. While we have covered the general provisions of this subsidy in other articles, here are some of the detailed questions we have received on the HR Hotline.

Q. If we agreed to pay employees’ COBRA coverage as part of a severance agreement, how does that affect the subsidy time frame and our ability to take a payroll credit?

A. Assistance-eligible individuals (AEIs) are granted nine months of COBRA coverage at a subsidized rate under ARRA. Any months an employer agrees to pay COBRA premiums can be included as months the former employees received subsidized coverage. However, the employer cannot take a payroll credit for the months it agreed to subsidize the coverage under a severance agreement.

Q. May we say we terminated someone for gross misconduct and therefore the person is not eligible for the subsidy?

A. If it is someone who was previously terminated who was offered COBRA and is now being given another chance to elect it with a subsidy, no. The employer cannot change its mind about why an employee was terminated (employees terminated for gross misconduct do not have to be offered COBRA). Going forward, we recommend using extreme caution in denying COBRA to an employee terminated for gross misconduct. There is no official definition of gross misconduct in the COBRA regulations, but a court case found that it is “evil design that causes great harm to employer; intentional and complete disregard for employer’s interest” (Mlsna v. Unitel). This is a very difficult standard to meet, and if you are considering not offering COBRA, contact legal counsel first.

Q. People eligible for other insurance do not get the subsidy. How do we know if they are eligible? Can we ask?

A. In the revised COBRA notice about the subsidy that AEIs have or will receive, it states clearly that if a person is eligible or becomes eligible for other insurance, he is not entitled to the subsidy and may face penalties for taking it. Employers still must rely on the AEI’s word. However, it is not illegal to ask AEIs if they are eligible for other insurance, so employers can pose this question as often as they would like.

Q. AEIs with gross incomes over certain amounts have to pay the subsidy back (all or a portion) to the government via their income taxes depending on their exact income. Do we have to provide them with a Form-1099 or include the subsidy in their incomes on the W-2s at the end of the year?

A. The regulations are silent on this issue, so at this point, there is not an answer. Stay tuned for more information as the year goes on.

Q. We only pay 10% of an active employee’s insurance premium. The other 90% is his responsibility. Even though with regular COBRA the ex-employee is paying 100% of the premium, people getting the subsidy actually pay less for their insurance than our active employees do! This does not seem right. Some employees are saying they are going to quit to get the subsidy.

A. While this may be a strange situation, it is how the law is set up to work. Remember though that only involuntarily terminated employees get the subsidy. If employees quit, they will still be offered COBRA, but they are not eligible for the subsidy.