Tools and Resources

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.

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