IRS Publishes Guidance to Implement New COBRA Subsidy

April 9, 2009

The American Recovery and Reinvestment Act of 2009 (Recovery Act) included a COBRA premium reduction for employees involuntarily terminated between September 1, 2008, and December 31, 2009. Under the provision in section 3001 of the Recovery Act, 65 percent of continuing COBRA premiums would be covered by the federal government, and 35 percent by the eligible individual. Employers will be reimbursed the other 65 percent of the premium that is not paid by the assistance-eligible individual through a credit against payroll taxes.

The premium reduction applies as of the first period of coverage beginning on or after February 17, 2009, (the date of enactment of the Recovery Act), for which the eligible individual is required to pay only 35 percent of the premium (as determined without regard to the premium reduction) and be treated as having made full payment. An assistance-eligible individual is eligible for the premium reduction for up to nine months from the first month the premium reduction provisions of the Recovery Act apply to the individual.

The premium used to determine the share that must be paid by the assistance-eligible individual is the cost charged for COBRA continuation if the individual were not an assistance eligible individual. If the individual is required to pay 102 percent of the applicable premium (the maximum under the previous law: 100 percent of the cost of the premium plus 2 percent administrative fee) for continuation coverage, the eligible individual is required to pay only 35 percent of the 102 percent of the applicable premium. For premiums charged that are less than the maximum COBRA premium, the amount charged to the assistance-eligible individual is used to determine the individual’s 35 percent share. Payments on behalf of the individual by another person are taken into account when determining if an eligible individual has met their required 35 percent share of the premium.

The complete notice, largely in a question and answer format, can be read here. Included in the notice are several examples providing explanation of the new rules.

NACUBO Contact: Mary M. Bachinger, director, tax policy