Small Business Benefit Solutions Blog

Archive for the ‘State Continuation/COBRA’ Category

There is no information yet as to whether individual states will act on these subsidies for state continuation for employees who work for companies with fewer than 20 employees.  Many states are financially strained with payments to insurance companies for these subsidies that have already been approved.  With budget shortfalls across the country, many states are unsure if they can afford the extensions.

As we get updates, we’ll be sure to post them.

COBRA provisions in the massive economic stimulus law are by far the biggest expansion in the history of the COBRA health care statute. Under the law’s core provisions, the federal government will pay 65% of the COBRA premium for employees involuntarily terminated from their position, for reasons other than gross misconduct, from Sept. 1, 2008, through March 31, 2010. The subsidy is available for up to 15 months or until a former employee becomes eligible for new group coverage or Medicare. But many other details and requirements are confusing, especially for smaller employers who are not subject to Federal COBRA laws, but rather to their individual state’s mirror copies, commonly called State Continuation.

In an effort to clear these muddy waters, here are some frequently asked questions and their answers. We will periodically update this page as changes are announced.

Q: Is anyone involuntarily terminated from Sept. 1, 2008, through March 31, 2010, eligible for the full premium subsidy?
A: Yes, with two exceptions. Under the first exception, employees terminated for gross misconduct would be ineligible for COBRA/STATE CONTINUATION and the subsidy. Also ineligible are laid-off workers with annual adjusted gross incomes exceeding $125,000 for individuals and $250,000 for couples in the year or years the subsidy was available.

Q: The subsidy generally begins March 1, 2009. Would individuals involuntarily terminated since Sept. 1, 2008, and who opted for COBRA/STATE CONTINUATION then be entitled to a subsidy for the months in which they paid the full premium?
A: No. The subsidy is prospective. It would be provided only for coverage starting on or after March 1.

Q: Would an employee who declined COBRA/STATE CONTINUATION coverage prior to the March 1 effective date be eligible for the subsidy?
A: Yes. Employees involuntarily terminated since Sept. 1, 2008, would have a new right to enroll, with the federal government paying 65% of the premium. Eligible former employees would have 60 days once they are notified to enroll.

Q: When does the 65% federal premium subsidy end?
A: The subsidy ends if any of a number of events occur, including the former employee becoming eligible (underline please) for health care coverage from another employer or becoming eligible (underline please) for Medicare. Former employees would be required to inform their former employers of their new eligibility. 
A: This is different from more traditional, unsubsidized COBRA/STATE CONTINUATION coverage in which eligibility ends only when a former employee actually enrolls (underline please) in new group coverage or Medicare. In addition, former employees who received the subsidy to which they no longer were entitled would be required to repay 110% of the subsidy to the government.

Q: How does the employer receive the 65% share of the COBRA/STATE CONTINUATION premium paid by the federal government? 
A: The employer would be paid through reducing payroll taxes it remits to the government. If that does not recoup costs, the employer then would file with the Internal Revenue Service to receive the necessary payments. Under State Continuation provisions, many carriers are offering to decrease employers billed premiums by the subsidy amount.  Contact your agent to see if your carrier is offering this option.

Q: Must subsidy-eligible former employees enroll in the same health plan they were in before they were involuntarily terminated?
A: Former employees eligible for the subsidy can elect coverage in a plan in which they last were enrolled. The new law also permits employers to offer former employees plans that have the same or lower costs than the one in which they were enrolled before being involuntarily terminated.

Q: What happens in a situation where a former employee who is receiving the subsidy dies? Would the individual’s spouse and children have a right to the subsidy?
A: Yes, the subsidy applies to each qualified former employee. So, if the spouse decides to continue COBRA/STATE CONTINUATION for himself or herself and children after the primary former employee dies, the subsidy would continue.

Q: Let’s say an employee who was involuntarily terminated was eligible for COBRA/STATE CONTINUATION coverage on Oct. 1, 2008. The employee, though, declined coverage. Now, the individual decides, in light of the 65% premium subsidy, to enroll in COBRA/STATE CONTINUATION, effective March 1, 2009. Would the individual be entitled to 18 months of COBRA/STATE CONTINUATION coverage, starting from March 1?
A: No, the 18-month eligibility clock would begin to run from the time of the individual’s original COBRA/STATE CONTINUATION entitlement. So, in this example, the individual would be entitled to 13 months of COBRA/STATE CONTINUATION coverage. The individual could receive the 65% premium subsidy for nine of those 13 months.

Q: Are the premium subsidies considered as income or are they tax free for former employees?
A: The law is clear that benefits received in the form of a subsidy are not included as taxable income.

Q: Some employers pay part of the COBRA/STATE CONTINUATION premium for several months for terminated employees. How is the 65% federal premium subsidy calculated in such situations?
A: The federal subsidy is keyed in to the amount of premium paid by the former employee. Take the example of a former employee who pays $200 of a $1,000 monthly COBRA/STATE CONTINUATION premium for family coverage for three months after termination of employment. In that example, the individual would have to pay a premium of only $70, which is 35% of the $200 premium, while the government would pick up $130, which is 65% of the $200 premium he otherwise would have to pay.

Q: The federal COBRA premium subsidy is reduced for individuals earning at least $125,000 a year and unavailable to those earning $145,000 or more. Can former employers deny the subsidy to such individuals?
A: The employer cannot prevent the former employee from receiving the subsidy and only the former employee can waive that right. However, former employees whose income exceeds the allowable amount would be required to return the subsidy to the government. Benefit experts say it may make sense for higher-income individuals to take the subsidy and return it if necessary. The chief reason is that such waivers are irrevocable. For example, someone who made $200,000 in 2009 and lost his job near the end of the year decided to waive the subsidy. During 2010, that individual’s income might be well below $125,000, but he could not receive it because he previously waived the right to the COBRA subsidy.

Q: To be eligible for the subsidy, an employee must be involuntarily terminated. In some cases, though, an employee decides to retire after being told that he or she will be terminated. Would that person be entitled to the subsidy?
A: Yes. The IRS says that absent retirement, the employer would have terminated the employee and the employee knew retirement avoided termination, so the individual is entitled to the COBRA/STATE CONTINUATION subsidy.

Q: Is there a limit on the number of times an individual can obtain the subsidy?
A: No. Eligibility is linked to each involuntary termination event. Take the example of an employee terminated on April 1, 2009, and who opted for COBRA/STATE CONTINUATION with the government paying 65% of the premium. On Sept. 1, 2009, the individual begins a new job and enrolls in the new employer’s health plan, losing COBRA/STATE CONTINUATION premium subsidy eligibility. One month later, the individual is terminated. That gives the former employee a new right to up to nine months of COBRA/STATE CONTINUATION premium subsidies.

Q: Is the subsidy available to employees who are called up from the reserves for active military duty?
A: Yes. The IRS says such employees would be considered involuntarily terminated regardless of whether the civilian employer treats the employee’s absence as a termination of employment or a leave of absence.

Q: Are employees who are hired for only a limited period of time, such as a teacher hired for an academic year, eligible for the subsidy when their employment ends?
A: Yes. If the employee hired for a limited period of time works to the end of the period and is willing to continue but terminates employment because the employer does not offer additional work, an involuntary termination of employment has occurred, making the individual eligible for the COBRA/STATE CONTINUATION subsidy.

Q: Would an employee who uses a balance in a health reimbursement arrangement to pay COBRA/STATE CONTINUATION premiums after termination of employment be eligible for the subsidy?
A: No. The IRS says payments from an HRA are effectively from the employer. As a result, the employee really isn’t making his or her own contribution and thus isn’t eligible for the subsidy.

Q: What are the details of the most recent extensions to the Federal COBRA premium subsidy law?
A: In late December, President Obama signed into law a military spending bill that extends eligibility for the COBRA premium subsidy. Specifically, the law extends the subsidy by six months to 15 months. In addition, that law extended the subsidy to employees involuntarily terminated through Feb. 28, 2010. Without the extension, employees involuntarily terminated after Dec. 31, 2009, would not have been entitled to the subsidy. The new law also requires employers to notify COBRA former employees of the extension. Then, in early March, President Obama signed legislation that extends the subsidy to employees involuntarily terminated through March 31.   So far, many states have also extended the subsidy for small companies subject to State Continuation provisions.

Q: Are further extensions of the Federal COBRA premium subsidy likely?
A: Yes. Congress is now considering a stop-gap bill that would extend the 15-month subsidy to involuntarily terminated employees through April 30, as well as another measure that would further extend the subsidy through Dec. 31, 2010.  It is unclear if state budgets will allow for these subsidies to carry over to the State Continuation provisions.