Employers Should Prepare Now to Implement COBRA Provisions in Economic Stimulus Bill

Health Policy Alert

The American Recovery and Reinvestment Bill of 2009 is the next stimulus package Congress is seeking to enact. The House passed its version of the bill last week and the Senate version is being considered by the full Senate this week. The goal is for President Obama to sign the legislation on February 16 (although that date could slip). Currently there are two COBRA provisions in play: a COBRA subsidy and a COBRA extension. Employers have significant concerns with the subsidy provision because of the very tight timeline to comply, and with the extension provision because of the significant cost it could create for employers long-term.

COBRA Subsidy

Both versions of the bill include an employer subsidy of 65% of the COBRA premium for employees who were terminated involuntarily between September 1, 2008 and December 31, 2009. The employer can immediately be reimbursed by withholding the payment as a credit against payroll taxes. The subsidy is available for a maximum of 12 months under the House bill or 9 months under the Senate bill. (COBRA will still be available for a total of 18 months, as is true under current law.) The employer will need to send an additional COBRA notice and, for individuals who are eligible for the subsidy but have not yet elected COBRA, the employer will need to provide a special 60-day election period.

There are a number of administrative issues and open questions, some of which are described below. If the stimulus bill is enacted as expected in February, this provision will almost certainly be included and will take effect March 1. Therefore, employers should begin reviewing their systems now to determine how they will comply with the subsidy requirement and how (and when) they will take the resulting payroll tax credit.

Administrative Issues

Employers and plan administrators have a number of open questions regarding how to comply with the subsidy provision. For example, some employers have already provided terminated employees with a severance package that included a subsidy for continuing health coverage; it is unclear whether employers can claim a credit for those amounts. Furthermore, it is unclear whether 65% of the “COBRA premium” is based on 100% of the cost of active-employee coverage or whether it also includes the 2% COBRA administration fee that plans may impose. In addition, it is unclear how the offset mechanism for claiming the subsidy will actually work and what documentation and reporting requirements will apply to employers. Many provisions in the bill provide that the IRS has the authority to issue regulations, which would be helpful, but it is unlikely that the agency will be able to issue significant guidance in the two weeks between when the bill is expected to pass and when the COBRA subsidy provision takes effect.

Payroll Tax Issues

The credit for the 65% COBRA subsidy for terminated employees will take the form of a refundable credit on Form 941. Most employers will want to quickly reduce their payroll tax deposit requirements by the amount of the COBRA subsidy for cash flow purposes and will probably attempt to do so for the pay cycle following the date they make their qualifying subsidy payments. Nevertheless, employers should exercise caution with respect to the date on which they claim the COBRA credit. The credit is treated as if the employer had made a tax deposit to the U.S. Treasury on the day the subsidy payment for the qualified beneficiary is received. The meaning of the date “received” is unclear although presumably it means the date the health plan receives the subsidy payment, which will likely be a date after which the employer actually makes the payment. This is important because the IRS generally determines penalties for late payroll tax deposits by comparing the actual deposits received to the employer’s payroll tax liabilities set out on Schedule B of Form 941.

The IRS has not yet specifically explained how it will require employers to report the COBRA credit on Form 941 and Schedule B for purposes of administering deposit requirements, but it will need to act quickly to revise the forms for use for the first quarter of 2009. In the meantime, employers should ensure that they have procedures in place to verify and document the date on which the health plan receives COBRA subsidy payments in order to properly claim the COBRA credit.

The following example demonstrates the importance of the timing issues:

March 2 - Employer sends $30,000 of COBRA subsidies to the health plan

March 3 - Employer has a $100,000 payroll tax liability from the weekly payroll

March 3 - Employer wire transfers $70,000 to the IRS ($100,000 of payroll taxes less $30,000 of COBRA subsidies that the employer paid)

March 4 - IRS receives the wire transfer and credits the employer with $70,000 of payroll taxes

March 5 - Health plan receives the $30,000 of COBRA subsidies from the employer that is treated as a credit against payroll taxes

In this scenario, the employer is a day late to deposit $30,000 of payroll taxes, for which the IRS would typically assess a 2% penalty. This is because the employer was required to deposit $100,000 on March 4, but only deposited $70,000. The employer did not receive credit for the $30,000 of COBRA subsidies until March 5: they were paid on March 3, but not received until March 5.

COBRA Extension

The second COBRA provision is much more troubling for employers. It would allow any employee (who terminates employment for any reason) who is either age 55 or has 10 years of service to remain on COBRA until age 65. This means that an employee who is age 55 and has worked for one more, or an employee who is age 35, and has 10 years of service, could remain on COBRA until age 65. Because the majority of COBRA beneficiaries incur claims that exceed their premium contributions, the cost to employers of such a provision could be significant.

The extension is currently included in the House bill but not the Senate bill. We understand that Senators Baucus (D-MT) and Grassley (R-IA), the Chairman and Ranking Member of the Senate Finance Committee, both feel strongly that it should not be included because it is not a short-term stimulus provision. They think it should be debated as part of the comprehensive health reform discussion that is expected to begin sometime this year. (For more information, see Miller & Chevalier’s November 13, 2008 Health Policy Alert.) Ultimately the COBRA extension is a provision that will be decided in the conference to reconcile the House and Senate versions of the stimulus bill.


Employers and plan administrators should closely monitor the COBRA subsidy and COBRA extension proposals as the stimulus package progresses through the legislative process, and should begin thinking about how they will implement the provision. If enacted, employers will need to act quickly to ensure compliance and to take all steps necessary to receive the full benefit from the payroll tax credit.

For more information, please contact any of the following lawyers:

Susan Relland

Michael Lloyd, mlloyd@milchev.com, 202-626-1589

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