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By Florence Olsen
Employers entitled to claim tax credits for federal health care continuation COBRA subsidies on their quarterly payroll tax returns can expect to see those credits within a few weeks of filing their returns, a Treasury Department official said March 12.
However, many other questions about the subsidies remain unanswered as Treasury officials hurry to issue guidance in the form of a notice by the end of March or early April, said Kevin Knopf, attorney-adviser in Treasury's Office of Benefits Tax Counsel. Knopf and other government officials spoke during a Webcast sponsored by the American Bar Association's Joint Committee on Employee Benefits.
Knopf said the Treasury and IRS notice will provide guidance on the big issues, such as defining “involuntary termination” for purposes of the COBRA subsidy, and others raised by §3001 of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), which requires employers, multiemployer plans, and insurers to implement the federal subsidy for all qualified employees, spouses, and beneficiaries.
The law applies to COBRA continuation coverage provided under most health plans, with the exception of flexible savings accounts under §125 cafeteria plans, Knopf said.
“Involuntary Termination” Requirement
Unemployed workers must be involuntarily terminated to qualify for federally subsidized COBRA premiums, but no one is certain what that means, not even Treasury Department officials, a senior tax official said March 6 at a conference sponsored by the Employers' Council on Flexible Benefits.
With all the various ways in which employers terminate employees, including voluntary early retirements, severance packages, furloughs, and reductions in hours, defining involuntary termination is a challenge for tax policy officials, Knopf said. However, he did say that a reduction in hours, which is a trigger for regular COBRA, would not qualify a person for the COBRA subsidy. Eligibility in other cases, such as those involving severance packages, most likely would depend on the facts and circumstances, he said.
To qualify for the subsidy, an employee's involuntary termination must occur within the window provided in the statute, which opened Sept. 1, 2008, and closes Dec. 31, 2009, Knopf said. Some people have asked whether unemployed workers are eligible for the subsidy if they were involuntarily terminated Aug. 31, 2008, the Friday before Monday, Sept. 1, 2008. The answer depends. “Is involuntary termination the last hour you worked, or is it the first hour you didn't work?” Knopf asked rhetorically. “The qualifying event has to be in that window,” he said.
Administering the subsidy program will require close communication and coordination between human resources and payroll departments, Knopf said.
In response to questions from benefits administrators in the conference audience, Knopf said a domestic partner generally will be ineligible to elect the subsidized COBRA coverage. That question most likely will be answered in the forthcoming guidance, he said.
He also said it is unlikely that family members would be eligible for the COBRA premium assistance if the unemployed workers did not have family health coverage when they were involuntarily terminated.
To a question reflecting the hard times that companies are facing, Knopf said a company's bankruptcy would not prevent its former employees from receiving the subsidy if they are eligible.
In addition to Treasury guidance on involuntary termination, the department will help employers with guidance on how to calculate COBRA premiums. However, it will not be written in typical guidance language. “We're thinking of doing a narrative form of guidance,” Knopf said.
The COBRA subsidy provisions in ARRA require unemployed workers to pay 35% of the cost of their COBRA premiums before the federal government pays the remaining 65%. In answer to a question from the audience, Knopf said some severance packages might have to be restructured if they pay 100% of the cost of COBRA premiums for the first six months a worker is unemployed. Unemployed workers are ineligible for the 65% subsidy if they are paying nothing for their COBRA coverage, he said.
Concerning notices that are required under the COBRA subsidy provisions, Knopf said Congress intended that all employees who are terminated—either voluntarily or involuntarily— receive the notices. “It's better to go broad than narrow” in notifying employees about the subsidized COBRA premiums, he said.
Treasury shares responsibility with the Labor Department for the COBRA subsidy program. The Labor Department, for example, has primary responsibility for developing model notices to inform terminated employees about the subsidies.
The Labor Department will issue four model notices: a general notice about COBRA coverage; a more limited notice for those enrolled in COBRA to notify them of the new subsidy; an alternative notice for state continuation coverage; and an extended election period notice for individuals who may have elected, then discontinued, COBRA coverage.
Enacted Feb. 17, ARRA gave the department until March 19, about 30 days, to create the model notices, Keller said. Employers then will have about 30 days to get the notices out by April 18, she said. Penalties for missing the notification deadlines can be $110 a day under the Employee Retirement Income Security Act and an excise tax of $100 a day under the tax code, enforceable through the courts system, she said.
Income Limits on Subsidy
The law, discussed above, which provides a 65% federal subsidy for nine months to persons eligible for COBRA continuation coverage, will require high-income earners to partially or fully repay the subsidy if they choose not to permanently waive the subsidy, Knopf said.
For example, single and married taxpayers with modified adjusted gross incomes greater than $145,000 and $290,000, respectively, are eligible for the federal subsidy, but they must repay it when they file their income taxes.
Knopf said high-income workers can permanently waive their right to receive the subsidy to avoid having to repay it when they file their income taxes. However, anyone who is uncertain about what their income is going to be in 2010 should probably avoid waiving that right, he said.
Form 941 Revised for COBRA Reporting
The subsidy is being administered through the payroll tax system because all entities that provide COBRA continuation coverage—employers, multiemployer plans, and insurers—have payroll systems even if they have no income tax liabilities, said Patricia McDermott, special counsel in IRS's Office of the Associate Chief Counsel in the Tax Exempt and Government Entities Division.
Those entities will file for reimbursement using the quarterly Form 941, which IRS revised so employers can report the dollar amount of COBRA premium assistance they provide and the number of individuals who receive the assistance.
The amount of premium reimbursement that employers, multiemployer plans, or insurers will receive under the law will be based on the amount the plans charge for COBRA premiums, Knopf said. For example, if COBRA insurance costs an employer $1,000 a month, but COBRA participants pay only $500, then $500 is the basis for determining the 65% subsidy, Knopf said.
Qualifying Event for Eligibility
Treasury officials are trying to determine how facts and circumstances fit the law, which seems to require a specific qualifying event for eligibility, Knopf said.
For example, construction and hospitality workers covered by multiemployer plans typically do not experience a classic involuntary termination, said Webcast moderator Charles (Chip) Kerby, an attorney in the Washington, D.C., office of the Liberte Group. “When work starts to slow down, and people don't get enough hours to qualify for coverage, are those workers involuntarily terminated?” he asked.
Knopf said Treasury and IRS guidance will clarify when the nine-month coverage clock begins ticking, whether it starts at involuntary termination, at the loss of health coverage, or a combination of both, and whether people will be permitted to delay the start of the clock if they receive a limited-term COBRA subsidy from their former employer, Knopf said. Under traditional COBRA coverage, former employees are responsible for paying the full amount of their COBRA premiums.
Turner said Labor Department and Health and Human Services Department officials already are moving ahead with preparations for the law's 15-day review process for individuals who are denied the COBRA subsidy. The departments must complete the reviews within 15 business days after receiving an application for review.
The Labor Department is working on a process that would be practical and reasonable, Turner said. “The intent is to have a formal application that would help ensure that the 15-day clock doesn't start until the information is complete that we would need to do a review,” she said. That formal process likely will include some opportunity for employers to submit materials before the departments issue their final decisions, she added.
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