COBRA Subsidy

The COBRA subsidy may be good news for people who have lost their jobs (and their health insurance coverage as a result).

COBRA Health Insurance.

COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) was made law under the Reagan administration. It allows people who were participating in a group health insurance plan through their employer to keep their health care coverage as long as they paid the entire amount of the premiums themselves. The former employees had the option to elect to use their rights under COBRA to keep their health insurance for up to 18 months. Being able to keep health insurance was a good thing, but it was a potentially expensive solution for people who were unemployed.

Under the American Recovery and Reinvestment Act of 2009, also known as the "Stimulus Bill," employers are required to subsidize their former employees’ COBRA health insurance premiums for up to nine months. The employer portion of the COBRA subsidy comes in at 65 percent while the employee is responsible for paying the other 35 percent of the cost of his or her health insurance coverage.

Companies employing 20 or more workers, and who offer health insurance benefits, are affected by the COBRA subsidy. If an employer has fewer than 20 people working or doesn’t offer healthcare benefits, then they are exempt.

Former employees who want to apply for the COBRA subsidy are subject to some restrictions as well. The former employee must fit these criteria in order to be eligible for the subsidy:

• Job loss due to downsizing, as opposed to disciplinary or performance-related reasons
• Lay off between September 1, 2008 and December 31, 2009
• Individual income of $125,000 or less, or family income under $250,000 per year

If the COBRA subsidy is granted, it will stay in place until the former employee is eligible for another group health insurance plan through an employer, his or her COBRA subsidy coverage expires, or the person becomes eligible for Medicare.

When a former employee exercises their right to a COBRA subsidy, the employer is entitled to a payroll tax credit when the quarterly return is filed. Until that point, though, the employer is required to keep the business operating. Since the COBRA subsidy is given to employees who lose their jobs due to lack of work, some employers would be hard-pressed to deal with the cash flow issues this situation can create.

The other difficulty with the COBRA subsidy plan from the employer’s point of view is that until the employer collects the laid-off employee’s 35 percent premium payment, they can’t apply for the 65 percent tax credit. The business owner is required to notify former employees that they may be eligible for the subsidy if they were laid off from October 2008 onward.

Detailed records must be kept of any payments made to COBRA, and this creates extra paperwork for the company’s payroll department. If the employer uses an outside service for its payroll needs, then the company needs to be notified as well.

COBRA coverage, whether subsidized or not, is not mandatory for laid-off employees. The program is available for those who qualify and elect to do so. Even with the discount on pricing to 35 percent of the premium costs, it still may be less expensive to buy individual health insurance coverage. Since group health insurance takes into account the fact that not everyone in the group is going to be healthy, premium rates are generally higher than for healthy people who apply for coverage on their own.

To get more information about COBRA and the subsidy program, please visit the United States Department of Labor web site.

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