What Texas Businesses Must Know about the ARRA COBRA Premium Subsidy
The American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law on February 17, 2009 by President Obama. The ARRA allowed for a 65% government subsidy of COBRA premiums for American workers involuntarily terminated from employment. This COBRA subsidy was extended on December 19, 2009 to continue assistance for struggling American workers. Employers are required to cover the 65% of COBRA premiums up front as assistance for their former employees. The 65% of COBRA premium assistance paid by employers are refunded by the Federal government in the form of a tax credit.
How the Employer’s 65% Share of COBRA Premium Assistance Payment is Calculated
This is best explained using a simple example:
Suppose an employee has a plan that costs $100. The COBRA premium would be $102.00 (including the 2% administration fee). The ARRA reduced premium (that the employee pays) would be $35.70 ($102.00 * 35%). To calculate the employer’s 65% tax deduction, use the following formula.
Total Equivalent Premium = (Premium Received – ARRA Ineligible Premium) / .35
Employer’s 65% Reduction = (Total Equivalent Premium – Premium Received)
Total Equivalent Premium = $35.70 / .35 or $102.00.
Employer’s 65% Reduction = ($102.00 – $35.70) or $66.30
About IRS Tax Form 941 and Claiming COBRA Premium Assistance Payments
IRS tax Form 941 is for employers to file quarterly federal tax payments and is also the way for employers to be refunded their COBRA premium assistance payments. Form 941 includes lines 12a and 12b, which is where employers claim tax credits for the COBRA premium assistance payments they made on behalf of their former employees. Employers must add up all of the COBRA subsidy payments and enter that amount for line 12a and the number of individuals provided with COBRA premium assistance on line 12b.
The ARRA COBRA Premium Subsidy creates new paperwork, compliance and financial challenges to Texas Employers.
This is just one more reason for Texas Businesses to work with a third party administrator who understands the entire COBRA legislation requirements, which can change several times in a year. Given the low cost of services from third party COBRA administrators, any Texas business that attempts to self-administer COBRA with terminated employees is being short-sighted and is taking unnecessary financial and legal risks.
