Labor and Employment Law Alert: The American Recovery and Reinvestment Act's COBRA Subsidy and Payroll Tax Credit
2/19/2009
What is it?
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act, commonly known as the $787 billion stimulus package designed to revive the economy. The law includes a COBRA subsidy for laid-off workers. Persons qualifying for the subsidy include employees who become eligible for COBRA between September 1, 2008 and December 31, 2009 due to involuntary termination. The law reduces the individual's COBRA premium to 35% of what it otherwise would have been. The employer pays the remaining 65%, but can recoup that amount through a quarterly payroll tax credit.
What's the rub?
Employers must begin complying with the new law soon and face penalties for failing to do so. Some details about the COBRA subsidy provision have implications for how employers draft future severance agreements. Importantly, the law may provide a subsidy to employees involuntarily terminated as long ago as September 1, 2008.
When does subsidized coverage begin?
Subsidized coverage begins March 1, 2009, assuming the plan charges a monthly premium. Employers must send required notices within the next 60 days. The Department of Labor is working on a model notice, which should be available soon, and we will get it to you as soon as it becomes available.
What must employers do to comply?
Employers must take action to administer this program, including:
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Identify employees who have been terminated involuntarily since August 31, 2008 for reasons other than gross misconduct (thus identifying the "assistance eligible individuals" who are eligible for both COBRA and the premium subsidy). |
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Determine which of them currently carry COBRA coverage. |
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For those currently carrying COBRA coverage, adjust the payroll system to reduce their required premium by 65%. |
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For those not currently carrying COBRA coverage, notify them of their right to revisit their COBRA election and qualify for the premium subsidy. |
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Adjust the payroll tax system to provide for those claiming the premium subsidy by offsetting against payroll tax liability. |
The law permits the full premium to be charged to the assistance-eligible individuals for March and April 2009, with the plan sponsor to then either repay the individual for the subsidy within 60 days or credit future COBRA premiums so long as it is reasonable to believe that the credit will be used within 180 days of the overpayment (taking into account, of course, the remaining period of continuation).
After May 2009, noncompliance penalties will apply, and there will be no statutory relief for inability to administer the program correctly, other than general ERISA noncompliance relief based on excusable neglect.
If you have any additional questions, please feel free to contact a Stoel Rives
Labor and Employment attorney.