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April 01, 2009
IRS Answers Questions on COBRA Subsidy Program

The Internal Revenue Service has released more guidance on the program offering a subsidy for COBRA continuation premiums to workers who are involuntarily terminated.

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The recently enacted American Recovery and Reinvestment Act of 2009 (ARRA) provides for a 65 percent subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated.

To qualify for the subsidy, individuals must meet all of the following requirements:

  • Is eligible for COBRA continuation coverage at any time during the period beginning September 1, 2008 and ending December 31, 2009;
  • Elects COBRA coverage (when first offered or during the additional election period), and
  • Has a qualifying event for COBRA coverage that is the employee's involuntary termination during the period beginning September 1, 2008 and ending December 31, 2009.

The new IRS guidance comes in the form of questions and answers. Several questions focus on what qualifies as an involuntary termination. For example:

Question: Does involuntary termination include involuntary termination for cause?

Answer: Yes. However, for purposes of Federal COBRA, if the termination of employment is due to gross misconduct of the employee, the termination is not a qualifying event and the employee and other family members losing health coverage by reason of the employee's termination of employment are not eligible for COBRA continuation coverage.

Other questions deal with the definition of an assistance eligible individual. for the premium subsidy. For example:

Question: Does an involuntary termination of an employee following another qualifying event, such as a divorce, satisfy the requirements for the qualified beneficiary from the first qualifying event to be an assistance eligible individual?

Answer: No. Generally, if COBRA continuation coverage is based on a qualifying event before the involuntary termination, the later involuntary termination does not cause the qualified beneficiary to become an assistance eligible individual. However, if, in anticipation of an involuntary termination that would otherwise qualify an individual as an assistance eligible individual, the employer takes action other than the involuntary termination of the individual that results in a loss of coverage for the individual (for example, a reduction in hours for the employee in anticipation of involuntarily terminating the employee), the action causing the loss of coverage prior to the involuntary termination is disregarded in determining whether involuntary termination is the qualifying event that results in the COBRA continuation coverage for the individual.

Example 1. An employee is divorced after September 1, 2008, and before December 31, 2009. The divorce results in a loss of health coverage for the spouse of the employee. The spouse is eligible for and timely elects COBRA continuation coverage. After the divorce, and before December 31, 2009, the employee is involuntarily terminated and loses health coverage. The employee elects COBRA continuation coverage that begins before December 31, 2009. The spouse is not an assistance eligible individual because the qualifying event with respect to the spouse's COBRA continuation coverage is not an involuntary termination. The employee is an assistance eligible individual.

Other topics covered in the guidance include the calculation of the premium subsidy, the types of coverage are eligible for the premium subsidy, determining the beginning and end of the premium subsidy period, and more.

You can find the guidance at: http://www.irs.gov/pub/irs-drop/n-09-27.pdf.

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