COBRA Subsidy FAQs

What companies are required to offer the COBRA subsidy? COBRA generally applies to plans sponsored by employers with more than 20 employees. Many states have similar requirements for small plans providing benefits through an insurance company. The premium reduction is available for plans covered by these state laws. Who qualifies for the COBRA subsidy? Employees who are involuntarily separated (except for gross misconduct) between September 1, 2008, and December 31, 2009, and their qualifying dependents qualify for the COBRA subsidy.  The law doesn't define "involuntary separation," so it is important to use caution when determining who qualifies for the subsidy in this case.  In cases where employers are unsure, they should contact the Department of Labor for guidance at (866) 444-3272.  Those who are eligible for other group coverage, such as a spouse's plan, are not eligible for the subsidy. Can qualifying dependents elect COBRA and use the subsidy even if the qualifying employee does not? Yes.  Qualifying dependents may elect COBRA and use the subsidy independently. How much is the subsidy? The subsidy covers 65% of the COBRA premium.   The employee is said to have paid the full cost of the premium by paying 35% of the total cost.   When does the subsidy start? Most employers will be responsible for providing the subsidy beginning on March 1, 2009. How long does the subsidy last? The maximum length of time a qualifying individual may take advantage of the subsidy is nine months.  Covered individuals who become eligible for coverage under another group health care plan or become eligible for Medicare coverage before the end of the nine month period must notify the health plan providing COBRA in writing or face a 110% penalty of the subsidy received.  Example:  If a person was involuntarily terminated October 31, 2008, and elected COBRA beginning on November 1, 2008, they are eligible for the subsidy beginning on March 1, 2009, since this is the first day of the month after the law was passed.  The subsidy for them will end after nine months (November 30, 2009). Assuming they've elected COBRA for the full 18 months, and they've already paid the full premium for four months (November 1,  2008 - February 28, 2009), they will be responsible for paying the full premium again for the remaining five months (December 1, 2009 - April 30, 2010) which is when COBRA was scheduled to end for them anyway. Are there any income restrictions? Qualifying individuals may not have an adjusted modified gross individual income of more than $125,000 or $250,000 for couples.  Employees who make more than this amount are still eligible for the subsidy, however, they have the option to opt out if they think it will be more beneficial for them at the end of the tax year.  Employees who opt out for this reason may not opt in at a later date. How will employers be reimbursed for the 65% subsidy? Employers will be reimbursed by the Treasury Department in the form of a quarterly payroll tax credit.  Employers must use a revised version of IRS Form 941 to claim the tax credit.  If payroll taxes aren't enough to cover the reimbursement, employers may request a refund. Can employees elect coverage from a different plan offered by an employer? Yes, employers are now permitted but not required to offer qualifying individuals the option to elect different coverage under the health plan when electing COBRA continuation coverage.  This allows individuals who may have been participating in a more expensive group health plan through the employer (e.g., high deductible plan or PPO) to select a less expensive plan, also provided by the employer (e.g., low deductible plan or HMO).  If an employer decides to offer the different coverage option, the employer must provide the employee with an election notice, or include the language in the general election notice, then allow the employee an election period of not less than 90 days. How does the Special Election period work? Eligible employees who lost their jobs between September 1 of last year and February 16 of this year who either didn't sign up for COBRA or who signed up but dropped the coverage have another chance to sign up and get the reduced premium.  The subsidy will have an effective date of March 1, 2009, but will expire 18 months after the date COBRA coverage would have begun because of the original qualifying event.  Once qualifying individuals receive notice from the employer or insurance plan, they will then have 60 days from the date of notice to accept COBRA coverage under the new terms.  Example: If an employee was terminated on October 31, 2009, and did not elect COBRA initially, but wants to do so as a part of the special election period, then they would be eligible for the subsidy beginning on March 1, 2009, for nine months.  They have lost four months of coverage that is not retroactive.  If they wish to continue COBRA for the remaining five months, they will have to pay the full premium amount.  Since COBRA cannot be retroactive back to the date of the qualifying event, the subsidy would still end for them on November 30, 2009.  In this case, they would only have COBRA coverage for a maximum of 14 months since they did not elect COBRA for the first four months. How should employers notify qualifying individuals of these changes? The COBRA notice, which was already required of employers, must now include information on the premium subsidy and the ability to change plan options.  This means that employers who provided involuntarily separated employees and their dependents with COBRA notices after September 1, 2009, must now send a second COBRA notice by April 18, 2009.  A second notice must also be sent out to those who qualify for the special election.  It is also important to note that the second notice must go out to qualifying dependents of these former employees.  Once all qualifying individuals receive the second notice, it is only necessary to send the new COBRA notice going forward. What language is necessary for this notice? The Department of Labor (DOL) is supposed to provide sample notices and language before March 19, 2009, however, employers may elect to use their own language as long as it follows the requirements of the DOL.  The model notice should be posted at www.dol.gov/COBRA once it becomes available. What if employers couldn't get the notice out (using their own language) in time for the March 1, 2009, effective date? Employers are given a two-month grace period to continue to accept the full premium from COBRA participants for March and April ONLY. How should employers apply the subsidy to premium payments that have already been made at the regular 102% rate? If full premium payments are made for March and/or April, then plan administrators must either refund the subsidized portion within 60 days or credit the subsidized portion of the premium against future COBRA premiums, as long as the overpayment is fully applied within 180 days. What if an employer already subsidizes COBRA premium payments voluntarily? If an employer already subsidizes COBRA premium payments voluntarily, then the qualifying individual is only responsible for paying 35% of the unsubsidized amount.  For example, if the full COBRA premium payment is $500 per month and the employer subsidizes 80% ($400) of the premium voluntarily, then the qualifying individual is only responsible for paying $35 (i.e., 35% of the $100 difference.) Additional Information: Fact Sheet: COBRA Premium Reduction (DOL, Feb. 26, 2009) COBRA Health Insurance Continuation Premium Subsidy (IRS, Feb. 26, 2009) COBRA: Answers for Employers (IRS, March 5, 2009) Employers' Quarterly Federal Tax Return - Form 941 (IRS)