On March 31, 2009, the IRS released Notice 2009-27 to provide additional guidance on the COBRA premium subsidy under the American Recovery and Reinvestment Act of 2009 (ARRA). Under ARRA, certain individuals who are "involuntarily terminated" between September 1, 2008 and December 31, 2009, are required to pay only 35% of the COBRA premium to continue COBRA coverage. Typically, the employer will be required to pay the remaining 65% of the premium and will be reimbursed for the subsidy by taking a credit against its payroll tax liabilities on its quarterly Form 941. Notice 2009-27 provides the following guidance:
Involuntary Termination. The notice clarifies that involuntary termination includes situations where an employee's hours are involuntarily reduced to zero (e.g., furlough, suspension). In addition, the notice explains that certain "voluntary" terminations of employment will be considered "involuntary" where the employee terminates work as a result of certain adverse employer actions. For example, early retirement or the acceptance of a severance package in light of announced layoffs, resignation as a result of job location changes, and opting to quit instead of accepting a position with significantly reduced hours would all be considered involuntary terminations.
Calculation of Premium Reduction. The general rule is that the base amount for the 35% premium which must be paid by the employee is the amount of the premium that otherwise would be charged to the employee. Thus, if the employee would normally be required to pay 102 percent of the premium, then the employee need only pay 35 percent of the 102 percent premium. The notice clarifies, however, that if the premium charged an employee is less because the employer voluntarily pays all or part of the cost, then the employee need pay only 35% of the reduced premium (because this is what is actually charged to the employee). For example, if the actual COBRA premium is $1,000, but the employer requires terminated employees to only pay $200 for continuation coverage, under ARRA the employee need only pay $70 (35% of $200). In addition, the employer will only receive a credit in the amount of $130 (65% of $200) despite the fact that it actually paid much more. Employers who now charge less than the maximum premium allowed under COBRA may now wish to charge more to their employees for continuation coverage. If an employer properly notifies employees and complies with other legal requirements, the employer may increase the amount it charges to employees and the premium subsidy will then apply to the increased amounts.
Will the W-2 or Form 1099 Be Changed? Typically, the employer will be reimbursed by the government for paying 65% of the premium by taking a credit against its payroll tax liabilities on its quarterly Form 941 (which has been updated to add two new lines). It is unclear how the IRS will keep track of individual employees who are beneficiaries of the premium subsidy. The IRS has stated that it is currently considering changes to other forms and may even produce new forms. Employers should be reminded that regardless of what forms are changed, they must keep adequate documents substantiating payments received from employees and premium payments made on their behalf.
This is not intended as a complete analysis of the subject matter, or legal advice on any specific matter. Contact Jared R. Callister or Douglas M. Larsen if you have specific questions or need further assistance.