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How the 'COBRA Subsidy' Works

What the heck is the "COBRA subsidy" and what impact does it have on small businesses that have laid off employees or plan to? —T.M., San Francisco

COBRA gives some employees who lose their health benefits when they lose their jobs the right to choose to continue their former employer's group health benefits for up to 18 months. It is named after the Consolidated Omnibus Budget Reconciliation Act of 1985, signed by President Ronald Reagan.

Since it was enacted, those who elected COBRA have had to pay the entire premium to continue their coverage until they are able to get a new job or get alternative health insurance, an onerous burden on individuals who have lost employment. However, as part of the stimulus bill passed in February (formally called the American Recovery and Reinvestment Act of 2009), employers now must subsidize up to 65% of their former employees' COBRA premiums for up to nine months. The employer is reimbursed by the federal government through a payroll tax credit for its portion of the subsidy; the former employee pays the remaining 35%.

The COBRA subsidy applies to small business owners who employ 20 or more workers and offer them health insurance benefits, says Gregg Wind, a partner at the accounting firm of Wind Bremer Hockenberg in Los Angeles. If you don't offer medical benefits or have fewer than 20 employees, this provision does not apply to you.

Also, "in order for employees to qualify, they have to have been let go for lack of work. They don't qualify if they were let go for disciplinary or performance reasons," Wind says. The subsidy applies to employees laid off between Sept. 1, 2008, and Dec. 31, 2009, and it ends when the former employee is offered employer-sponsored health-care coverage by a new employer; becomes eligible for Medicare; or when his COBRA coverage expires. The subsidy is not available to individual former employees whose income is more than $125,000 a year or who have family income of more than $250,000 annually.

Employer's Burden

While the business owner does get reimbursed by claiming a credit when she files her quarterly payroll tax returns, "the onus is on the small business owner to float the boat" until the tax credit comes through, Wind notes. Also, if your quarterly payroll tax deposits are fairly low and several of your laid-off workers elect COBRA, you might wind up having to request reimbursement of your 65% from the U.S. Treasury. This could be difficult for small businesses that have laid off employees because they are struggling with cash flow issues during this recession.

The other difficulty, besides the increased paperwork and employee notification requirements, is that the employer must collect the former employee's 35% before he can claim the payroll tax credit. "The small business owner has to go back and notify anybody who was involuntarily terminated. So if you laid off Mr. or Mrs. Jones last October, they have to be made aware they are eligible for this," Wind says.

Small business owners should talk to their accountants or health-insurance providers about how the COBRA subsidy will affect them, Wind says. Those using third-party payroll administrators should have been informed about the subsidy and reimbursement plan, says Luis Campos, regional vice-president at Priority Pay Payroll, with headquarters in Hoboken, N.J. "Your payroll company should create a report tracking the payments made to COBRA," he says. The employer would use that report to document his or her payroll tax credit when filing the quarterly Form 941.

Not all laid-off employees will elect COBRA coverage and, in fact, some may find that it is cheaper to buy individual health insurance even though they are required to pay only 35% of their former premiums through COBRA. More information for employers on the COBRA subsidy and how it works is available at the Web sites of the IRS and the Labor Dept.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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