ADP Advisor ®
Summer 2009 | Volume 19 No. 3
Employers must now pay a COBRA premium subsidy, to be recovered by claiming payroll tax credits
If your company has more than
20 employees and provides health
benefits, COBRA allows workers you
have laid off to keep their medical
coverage for up to 18 months. But
doing so has been expensive for out-ofwork
employees, who had to pay
100% of the premiums plus a 2%
administrative fee. The average
cost was nearly $400 a month for
individuals and more than $1,000 a
month for families.
The American Recovery and
Reinvestment Act of 2009, signed into
law this past February, makes this
coverage temporarily more affordable.
Employees who lose their job between
09/01/08 and 12/31/09, and have a
family income of less than $290,000 a
year ($145,000 for individuals)*, pay
only 35% of the COBRA premium
for the first nine months. The U.S.
government will pick up the rest.
Employers reimbursed via
a tax credit
As the employer, you must treat the
35% payment by former employees as
full payment of the COBRA cost. But
you are entitled to claim a credit for
the remaining 65% on your payroll tax
return. The 2009 version of Form 941
includes new lines for requesting this
credit.
As an ADP client, you will receive
instructions on how to provide this
data so that ADP can claim the credit
on your behalf.
You must maintain supporting
documentation
You must maintain supporting
documentation for the credits you
claim. This includes:
- Documenting your receipt of
the employee’s 35% share of
the premium.
- In the case of insured plans, a copy
of the invoice or other supporting
statement from the insurance carrier,
plus proof of timely payment of the
full premium to the insurance carrier.
- In the case of self-insured plans, proof of the premium amount and proof of coverage
provided to assistance-eligible individuals.
- Your attestation of the employee’s involuntary termination, including the date.
Employees now allowed to switch plans
Ordinarily, employees who sign up for COBRA are required to stay with the plan that
covered them while they were working. But if employees are eligible for the subsidy,
you can allow them to switch to a less-expensive plan as well (e.g., a plan with lower
premiums in exchange for a higher deductible).
This subsidy ends once the employee becomes eligible for other group coverage,
after nine months, or when eligibility for COBRA coverage expires, whichever comes
first. Employees are also ineligible if:
- They retired or left voluntarily.
- They have access to other group insurance coverage, such as a spouse's insurance
plan or Medicare.
An additional administrative burden
The COBRA subsidy increases the administrative burden for employers who must now
keep track of which former employees are eligible for subsidized and unsubsidized COBRA
rates. ADP’s COBRA Administration Service can simplify this by distributing notifications,
correspondence, election packets, and COBRA termination notices as required by law. ADP
processes election forms and tracks key dates to help ensure accurate and timely responses
to COBRA administrative requirements.
ADP has also published a detailed explanation of the subsidy, including required
employer notices to employees and the election period extension for individuals who
previously did not elect continuation coverage under COBRA.
To download a more
detailed explanation of the subsidy, visit www.ADP.com and enter “COBRA subsidy” in the search field.