Subsidy Offers Relief for Terminated Workers and Employers
of the federal “safety nets” designed to catch
employees when they lose their job has undergone some changes,
thanks to the American Recovery and Reinvestment Act of
2009 (ARRA). The so-called COBRA subsidy not only makes
the cost of health care more affordable for an employee
after termination, it also offers employers an opportunity
to reduce their payroll taxes.
of the subsidy took effect in February and end on Dec. 31,
2009. Understanding these temporary changes will help employers
streamline the paperwork and processing required to claim
the federal tax credit.
includes changes to the health benefit provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985,
commonly known as COBRA. Under COBRA, certain former employees,
retirees, spouses, former spouses and dependent children
have the right to continuation of health care benefits at
many terminated employees, the cost of coverage under COBRA
is not affordable, especially if there is no other family
income. Consequently, some former employees are forced to
go without health benefits, at least until they find a new
the new law, eligible former employees who were enrolled
in their employer’s health plan at the time they were
involuntarily terminated, are required to pay only
35 percent of the cost of COBRA coverage. The employer is
required to make the remaining 65 percent payment, and consider
the employee paid in full.
this payment is made, the employer is then entitled to a
credit on their payroll tax return for the 65 percent of
COBRA payments that were made.
whose health plan is subject to COBRA continuation coverage
requirements, or similar requirements under state law, are
required to notify any employee who is terminated between
Sept. 1, 2008, and Dec. 31, 2009, that the subsidy is available.
Since the subsidy will be available for employees terminated
through Dec. 31, 2009, and COBRA coverage is generally available
for nine months, employers will be able to claim the credit
for premiums paid in 2010.
important note is that there is a phase-out of eligibility
for the subsidy that may increase the tax liability of some
high income individuals who receive the subsidy. This phase-out
will impact individuals whose modified adjusted gross income
exceeds $125,000 ($250,000 for those filing joint returns).
In some cases, the full amount of the subsidy must be repaid
as an additional tax.
order to qualify for the credit, employers must maintain
supporting documentation, including:
of receipt of the employee’s 35 percent share of
A copy of an invoice or other supporting statement from
the insurance carrier.
Declaration of the former employee’s involuntary
details on this temporary tax relief, visit the Internal
Revenue Service at www.irs.gov or the Department of Labor