Although some indicators point the economy recovering, other signs are not as encouraging.
For example, the U.S. economy lost 85,000 jobs in December of 2009, and the unemployment rate continues at 10 percent, according to statistics just released by the Labor Department.
|What Is Involuntary Termination?
An employee is “involuntarily terminated” under the COBRA assistance provisions if he or she:
- Is laid off.
- Is suspended in some other fashion that results in the loss of group health insurance.
- Resigns as the result of a material change in the geographic location of employment.
- Resigns when his or her hours are cut sufficiently to constitute a “material negative change” in the employment relationship.
- Retires because the only alternative to retirement is termination.
- Is not permitted to work because the employer is engaged in a lockout.
- Is discharged due to extended illness, disability, or for cause. However, if the discharge is based on “gross misconduct,” the employee isn’t eligible for the COBRA subsidy.
|Downsizing? Be Careful with Waivers
The current economic downturn has resulted in widespread layoffs. In some cases, older employees are let go because they are paid the highest salaries.
Employers that lay off some employees, while retaining others, must be careful not to discriminate based on age, race, sex, national origin, religion, or disability.
Many employers offer departing employees money or benefits in exchange for a waiver (or release) of liability for all claims connected with employment, including discrimination claims under civil rights laws.
The EEOC has published information for employees to help them understand the legal issues involved in waivers. Click here to read it. Consult with your attorney about any documents you ask departing employees to sign.
Fortunately, the federal government has provided a last-minute reprieve for some unemployed taxpayers. In new legislation, Uncle Sam extended the COBRA assistance program for some unemployed people who want to continue health insurance with their former employers. Specifically, the law made these changes:
1. The COBRA assistance program is now available to workers laid off between January 1, 2010 and February 28, 2010. (Previously, it was supposed to end on December 31, 2009.)
2. The law extends the subsidy for currently eligible people an additional six months for a total of 15 months, up from the current nine months.
The provisions extending reduced COBRA payments were tacked onto a defense funding bill – the Department of Defense Appropriations Act of 2010 — signed on December 19, 2009. Under the new law, the benefits are available to qualified workers through February 28, 2010.
Background: COBRA (short for the Consolidated Omnibus Budget Reconciliation Act) allows workers who are fired or laid off to continue employer-sponsored health insurance coverage for up to 18 months. (It may be longer under certain circumstances). The ex-employees are generally required to pay 100 percent of the premiums, plus a 2 percent administrative fee. Technically, COBRA applies to companies with 20 or more employees, although smaller companies may voluntarily offer this option.
The COBRA assistance program was initially authorized by the American Recovery and Reinvestment Act of 2009 passed early in 2009. Under that law, certain employees who were “involuntarily terminated” from employment between September 1, 2008 and December 31, 2009 could pay only 35 percent of the required premiums for extending COBRA coverage. The employer was responsible the remaining 65 percent of the cost. (See right-hand box for examples of when an employee is involuntarily terminated.)
Now, under the latest law, the COBRA assistance is extended to newly laid off workers through the end of February and made available to currently unemployed people for another six months.
Upper Income Taxpayers Lose Out
But the COBRA discount isn’t available to all workers. The benefit is phased out for upper-income taxpayers. Single filers with an adjusted gross income (AGI) exceeding $125,000 and joint filers with an AGI exceeding $250,000 must repay part of the amount as an additional tax. The phase-out is complete at $145,000 of AGI for single filers and $290,000 for joint filers.
The subsidy doesn’t mean that employers are forced to subsidize the reduced cost for eligible ex-employees. An employer can recoup the cost through a payroll credit, which is generally claimed on Form 941 for the quarter in which payments are made (or annual Form 944 if employment tax liability for the year is $1,000 or less). Otherwise, an employer can elect to claim the credit in a subsequent quarter in the same calendar year.
Impact for Plan Administrators
The new extension means more paperwork for employers. Under the extension, plan administrators have additional notice requirements. In some cases, they may also have to reimburse employees who paid 100 percent of the insurance premium in December.
Note: An employer can’t claim the credit until it has received the 35 percent payment from an employee. Employers should keep documentation of employee payments. If the credit exceeds the amount of employment tax due, the IRS will reimburse an employer for the difference.
Alternatively, instead of claiming the new payroll credit, an employer can reduce its regular employment tax deposits. For this purpose, the COBRA premiums are treated as having been made on the first day of the quarter and will be applied against regular deposit requirements.
Business owners should consult with their employee benefits professionals if additional information is needed about the subsidy and the relevant notice requirements.
More to Come?
Undoubtedly, we haven’t heard the final word on this subject. Congress is expected to revisit the COBRA assistance program prior to its current expiration on March 1, 2010. Another extension may be forthcoming. We’ll keep you up to date on any future developments.