IRS ANSWERS QUESTIONS ON

COBRA SUBSIDY PROGRAM

On April 1, 2009, the Internal Revenue Service (IRS) released guidance that provides some insight into the possible regulatory interpretations of the new COBRA subsidy program set forth in the American Recovery and Reinvestment Act (ARRA).  Some of these questions and answers are highlighted below:

Question: Does involuntary termination that allows the former employee to obtain a 65% premium subsidy include involuntary termination for cause?

Answer:  Yes.  However, for purposes of COBRA, if the termination of employment is due to gross misconduct of the employee, the termination is not a qualifying event and the employee and other family members losing health coverage by reason of the employee's termination of employment are not eligible for COBRA continuation coverage.

Question:  Does an involuntary termination include a reduction in hours?

Answer:  Generally no.  If the reduction in hours is not a reduction to zero, the mere reduction in hours is not an involuntary termination.  However, an employee's voluntary termination in response to an employer-imposed reduction in hours may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.

Question:  What premium amount is used to determine the 35 percent share that must be paid by an assistance eligible individual?

Answer:  The premium used to determine the 35 percent share that must be paid by an assistance eligible individual is the cost that would be charged to the assistance eligible individual for COBRA continuation coverage if the individual were not an assistance eligible individual. 

In other words, if without the subsidy, the eligible individual would be required to pay 102% of the premium [100% of the premium plus a 2% administrative fee], then the assistance eligible individual would be required to pay 35% of the 102% premium amount.  For example, if the COBRA continuation premium is $1000 and your company charges an additional 2% administrative fee [the highest allowed under the law], the total premium amount would be $1020.  If the COBRA eligible individual is also eligible for the subsidy, that person would be required to pay 35% of the $1020, or $357.