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COBRA rules change April 18; new notices now available online

November 15, 2010

The American Recovery and Reinvestment Act of 2009 (ARRA) materially altered the Consolidated Omnibus Budget Reconciliation Act (COBRA) and imposed new rules that will require employers and plan administrators to take certain actions before April 18, 2009.

By then, plan administrators must notify all individuals who experienced or will experience a qualifying event between Sept. 1, 2008, and Dec. 31, 2009, of these new COBRA rules, even if the individual previously rejected or discontinued COBRA coverage.

The U.S. Department of Labor issued four model notices to be used with the new COBRA rules. The model notices can be found at www.dol.gov/ebsa/COBRAmodelnotice.html.

COBRA Premium Reduction and Tax Credit

The new rules give "assistance-eligible individuals" a 65 percent subsidy toward the cost of their COBRA premiums. The subsidy ultimately will be funded by the federal government through an offset of payroll taxes for the employer, who initially bears the burden of the subsidy.

The 65 percent COBRA premium subsidy provided by the ARRA may be recovered through the employment tax process. The reimbursement mechanism operates in three steps:

1. An assistance eligible individual pays 35 percent of the COBRA premium to the employer;* 
2. The employer pays the remaining 65 percent balance of the COBRA premium; 
3. The employer claims the reimbursement at the time Form 941 is filed.

* Some employers have asked whether it is possible to recover all or any portion of the COBRA premiums that have been voluntarily paid by the employer on behalf of terminated employees under severance agreements. There is no explicit guidance on the subject of employer-provided COBRA payments; however, the analysis of the ARRA provisions and the DOL and IRS guidance issued thus far indicates that the subsidy is available only for assistance-eligible individuals, and the employer must demonstrate that the 35 percent portion of the premium was paid by the assistance-eligible individual or by individuals other than employer.

The IRS recently published a revised Form 941 to implement the reimbursement mechanism. As part of the revisions, two new lines were added: 12a – where employers must report the total amount of COBRA premiums paid on behalf of assistance eligible individuals (65 percent of the individuals’ total COBRA premium); and 12b – for reporting the total number of individuals who received COBRA subsidy.

The IRS also posted a list of Employer Q&As, at www.irs.gov/newsroom/article/0,,id=204708,00.html. One noteworthy Q&A is the guidance on supporting documentation that employers must keep with respect to the credit claimed.

CATA dealers can call the association’s labor relations counsel, Franczek Radelet & Rose, for more information on the changes. Contact benefits attorneys Andrew Malahowski, Veronica Minin or Michael Richardson at 312-986-0300.

 

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