Meridian Star

Business

June 20, 2009

New COBRA subsidies at work

 

The new American Recovery and Reinvestment Act of 2009 provides a health insurance “discount” for certain employees who lose their jobs this year. Part of the burden is being shifted to their former employers, but that cost may be recouped through a new payroll tax credit or reduced deposits.

The new law changes relate to the federal law called COBRA (short for Consolidated Omnibus Budget Reconciliation Act), passed back in 1985. Under COBRA, which applies to employers with 20 or more employees, an employee who is terminated from employment may elect to pay for continued health insurance coverage for up to 18 months (or even longer in certain situations). However, the ex-employee must bear the full cost of the premiums, plus a usual 2% administrative fee.

Now the new law effectively subsidizes the cost of COBRA coverage for employees “involuntarily terminated” after August 31, 2008, and before January 1, 2010. This includes workers who are laid off or fired from their jobs. An ex-employee can elect to pay only 35% of the cost of the premiums for up to nine months, while the employer is responsible for the remaining 65%.

If an employer is required to subsidize COBRA premiums, it can claim the new payroll tax credit. The credit is generally available to employers in the quarter for which subsidized payments are made. Alternatively, an employer may reduce its regular payroll tax deposits to reflect the subsidized payments.

Note: This benefit is phased out for high-income taxpayers. Single filers with an adjusted gross income (AGI) exceeding $125,000 and joint filers with an AGI exceeding $250,000 must repay all or part of the subsidy on their tax returns.



David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.

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