New Federal COBRA Subsidy - Employer Actions Required

The American Recovery & Reinvestment Act of 2009 (ARRA) includes a federally-funded COBRA continuation subsidy of 65%, which lasts up to nine months for workers (and their families) involuntarily terminated between September 1, 2008 and December 31, 2009.  The effect of this law is that the employer must pay the 65% subsidy and then recover the payment by reducing the employer’s required federal tax deposits or apply to the government for a reimbursement.  What does this mean for businesses?

• First, businesses are required to notify within 60 days of February 17 (ARRA date of enactment) former employees involuntarily separated between September 1, 2008 and February 17, 2009.  The business must advise these former employees that they have 60 days to elect COBRA and receive the 65% subsidy.  The subsidy is subject to AGI phase outs beginning at $125,000 and $250,000 (single and MFJ, respectively). It appears that the AGI limits are for the year in which the employee separated service.

• Second, employers must recover the 65% subsidy by offsetting federal employment tax deposits.  Employers could find themselves in negative cash flow if the subsidy is greater than their required tax deposits.  The IRS has issued newly-updated Form 941 (Employer's Quarterly Federal Tax Return), Form 941SS (Employer's Quarterly Federal Tax Return (for US Territories)) and Form 941 Instructions.  Pay special attention to new lines 12a and 12b (to record COBRA assistance payments), as well as page six of the instructions, which explains how to request a refund for overpayment.

If your business is subject to COBRA requirements and you have additional questions regarding this requirement, please call this office.

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