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Economic Stimulus Package Includes COBRA Subsidy And Increase To Health Care Tax Credit Under Trade Adjustment Act
February 19, 2009-President Obama signed the American Recovery and Reinvestment Act of 2009 otherwise known as the Economic Stimulus Package on Tuesday, February 17, 2009. As part of the total package, they passed 2 key provisions affecting COBRA participants. It includes a 65% subsidy for certain COBRA participants as well as an increase of the HCTC (Health Care Tax Credit) to 80% for those qualifying under the Trade Adjustment Act of 2002.
COBRA SUBSIDY
EFFECTIVE DATE: The effective date of the subsidy is March 1, 2009.
THOSE AFFECTED: COBRA Participants and Qualified Beneficiaries who experience a Qualifying Event and corresponding loss of coverage due to Involuntary Termination of Employment (does not apply to Gross Misconduct and Voluntary Termination) that occurs or occurred between September 1, 2008 and December 31, 2009. This provision applies to all of those above without regard to previous election of COBRA. Qualified Beneficiaries will be offered Special Enrollment Rights as outlined below. This provision does not apply to Domestic Partners because they are not considered to be Qualified Beneficiaries under the code.
AMOUNT OF SUBSIDY: The amount of the subsidy is 65% while the COBRA Participant pays 35% of the total COBRA Premium. The premium under the legislation is 100% of the premium in effect absent any subsidy, therefore the premium used for calculation of the subsidy includes the 2% administrative fee.
DURATION OF SUBSIDY: The maximum subsidy period ends the earlier of 9 months, end of the maximum period of coverage for a Qualified Beneficiary, eligible individual becoming eligible for Medicare, or eligible for another group plan (not including plans that provide only or combination of dental, vision, counseling, referral, health FSA, HRA, or onsite medical first aid or wellness service).
CONTINUATION LAWS: Includes COBRA, Public Health Service Act (PHSA), as well as State Continuation Laws that provide continuation provisions similar to COBRA (I.e. Cal-COBRA).
PARTICIPANT TAX IMPLICATION; Subsidy amounts paid on behalf of Qualified Beneficiaries are not included in the taxpayers’ gross income with exception of amounts paid when the taxpayer’s Modified Adjusted Gross Income exceeds the income threshold. For single individuals, they can receive an unrestricted subsidy with an AGI below $125,000; proportional subsidy between $125,000 and $145,000 and no subsidy with an AGI exceeding $145,000. For couples, the threshold begins at $250,000, proportional between $250,000 and $290,000 and no subsidy beyond $290,000. Any excess subsidy will be reported on the taxpayer’s tax return and collected. High income individuals or couples can waive the subsidy; however, once they do, they cannot change their election nor can they request a tax refund of the subsidy if they later find their income qualifies. In other words, although the taxpayer may find their 2009 income does not allow them to have the subsidy and require it to be repaid through their taxes, they can still take the subsidy in 2010 if their income permits.
POTENTIAL COBRA PARTICIPANT PENALTY: If the COBRA participant is no longer eligible for the subsidy and fails to report it to the Health Plan or Employer, they will be subject to a penalty of 110 percent of the subsidy.
SPECIAL ENROLLMENT RIGHTS: Qualified Beneficiaries with Qualifying Events occurring prior to enactment of this law (March 1, 2009) and after September 1, 2008, will be offered another opportunity to elect COBRA. New Qualifying Event Notices (model notices to be provided by the Department of Labor within 30 days following enactment of the Law) including information about the subsidy as well as obligations will be provided within 60 days of enactment of the Law. If a Qualified Beneficiary elects COBRA, their COBRA Subsidy Date will be no earlier than March 1, 2009; however, their 18, 29, or 36 month period will be measured from the original Qualifying Event Date or Loss of Coverage Date. For example, if an individual had a loss of coverage on September 30, 2008, their 18 month coverage period would end March 31, 2010. The period of time between the Qualifying Event Date and their election under this provision will not be taken into account with relation to pre-existing condition clauses. The period will be waived.
PLAN CHANGES: COBRA Participants, subject to employer’s permission, can be allowed to elect other group health coverage as long as it is a lower cost premium than the coverage the participant had prior to the Qualifying Event.
SUBSIDY START DATE: The subsidy begins March 1, 2009. While it may take as long as 60 days for current eligible COBRA Participants to receive the subsidy, the amount will be reimbursed through repayment or credit against future 35% participant cost.
SUBSIDY DENIAL REVIEW: If a Qualified Beneficiary or COBRA Participant is denied the subsidy, the Department of Labor will provide an expedited review of such denials within 15 days.
WHO PAYS THE CREDIT: The previous employer of the Qualified Beneficiary/COBRA Participant initially pays the COBRA Subsidy under Federal COBRA. It appears that the Insurance Carrier will be responsible for the subsidy under Statue Continuation Plans. Generally, the COBRA Administrator will collect the 35% premium from the participant. The net premium (less 2% administrative fee) is forwarded to the employer to add the 65% subsidy and payment to the insurance carrier. Timely payment to insurance carriers is critical to alleviate any possible payroll tax penalties.
EMPLOYER PAYROLL TAX OFFSET: The employer or in the case of State Continuation, Insurance Carrier, can offset any subsidies they pay against their Payroll Tax liability. If there are not sufficient Payroll Taxes to offset the Subsidy, the employer can request a refund from the IRS.
REPORTING: The Department of Labor and IRS are developing methods and forms to report activity under this subsidy. These report formats are expected within 60 days following enactment of this law.
HEALTH CARE TAX CREDIT UNDER THE TRADE ADJUSTMENT ACT OF 2002
The Health Care Tax Credit (HCTC) was primarily established for workers displaced from their jobs due to foreign competition. It also applies to certain individuals over age 55 receiving benefits from the Pension Benefit Guarantee Corporation (PBGC). The original subsidy was 65%. The subsidy will increase to 80% on the first of the month following 60 days after enactment of the Act and will end on December 31, 2010. Furthermore, a change extending coverage for those qualified covered dependents following an employee’s eligibility for Medicare, Divorce, or Death will extend coverage by 24 months. If you feel you may be entitled to the Trade Adjustment Act, contact COBRA Plus for further details.
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