labor lawAdivision of labor law center

The IRS recently issued new regulations regarding the COBRA Subsidy under the ARRA.

 

As most employers know by now, the most recent stimulus package included a provision to provide continued healthcare at just 35% of the usual premium, to employees who are laid off between September 1, 2008 and December 31, 2009. The COBRA subsidy continues for 9 months.

 

The most recent IRS regulations provide guidelines on several key subjects, including the definition of involuntary termination, the calculation of premium reduction and other issues.

 

Under the ARRA, an employee is entitled to a COBRA subsidy if they meet the income guidelines and are involuntarily terminated between September 1, 2008 and December 31, 2009. According to the IRS regulations, an employee who terminates employment due to the employers material adverse actions, qualifies for the COBRA Premium Reduction. For example, an employee who accepts a severance package rather than be laid off, would qualify for the COBRA subsidy.

 

In another example, an employee who quit rather than accept a significant reduction in wages or hours, would qualify for the COBRA premium reduction.

 

Layoffs, whether temporary or permanent, where the employees hours are effectively reduced to zero, are considered involuntary termination for the purposes of the COBRA subsidy according to the IRS. Lockouts initiated by the employer, are also considered involuntary termination. However, strikes initiated by workers are not considered involuntarily termination for COBRA subsidy purposes.

 

The COBRA premium reduction is based on the amount that the employee would otherwise have to pay for group health insurance coverage under COBRA. Employers who have entered into agreements to pick up the tab for any portion of the COBRA premium, must continue to pay that portion of the COBRA premium under the subsidy.

 

Suppose Jon accepts a severance package from his employer, XYZ Corp. Jon’s COBRA premium would normally be $1,000 per month. Under the severance package crafted in November 2008, Jon would pay just $200 per month for his COBRA coverage, with XYZ Corp. paying the remaining $800 per month. Under the COBRA Premium Reduction (or subsidy) Jon will pay just $70 per month, or 35% of his COBRA premium. In this example, Jon’s employer would continue to pay $800 per month of the COBRA premium, while the employer will take a credit on their quarterly payroll taxes equal to $130 – the amount of Jon’s COBRA Premium Reduction (.65 x $200 = $130).

 

The COBRA premium reduction does not apply to employees who qualify for other health insurance coverage, such as coverage on a spouse’s group health insurance or Medicare. This is true, even if the reduced COBRA premium would be less expensive than alternate coverage.  

 

 

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