Employers that maintain group health plans subject to a federal law known as COBRA are facing new requirements mandated by the American Recovery and Reinvestment Act of 2009. Very generally, the new law provides a 65% premium subsidy for nine months to employees who elect COBRA coverage as a result of involuntary termination of employment between September 1, 2008, and December 31, 2009.

Although the subsidy is government-provided, employers generally must administer it. And that could prove to be tricky. The discussion below answers some questions that may arise.

What coverage periods are affected?

The premium subsidy applies to periods of coverage beginning after February 16, 2009 (e.g., on March 1 for a plan that charges for COBRA coverage on a calendar-month basis). The subsidy ends after nine months, when the individual becomes eligible for other group coverage or Medicare, or when the maximum period of COBRA coverage ends, whichever occurs first.

How is the 65% subsidy paid?

After receiving 35% of the otherwise required COBRA premium from an eligible person, the employer is responsible for paying the remaining 65% of the premium. The IRS will treat the 65% premium payment as a payment of payroll taxes by the employer.

How do employers take credit for their subsidy payments?

Credits are claimed on employers’ payroll tax returns (quarterly Form 941 or annual Form 943 or 944). The amount an employer pays as a premium subsidy (65%) during the quarter is treated as having been deposited on the first day of the quarter. The IRS will apply the amount against the employer’s deposit requirement and will not assess a failure-to-deposit penalty if the employer chooses to reduce its deposits during the quarter by the amount of the subsidy. The premium subsidy and the related employer credit apply only after the individual has paid his or her 35% share of the premium.

Does the credit have to be claimed in the same quarter the subsidy is paid?

The credit generally could be claimed on Form 941 for a later quarter in the same year, if desired.

What is the special grace period?

The special grace period for electing COBRA coverage applies to individuals involuntarily terminated from September 1, 2008, through February 16, 2009, who refused COBRA coverage when it was offered or elected COBRA but later dropped the coverage. These individuals have until 60 days after the plan provides them notice (the notification deadline was April 18, 2009) to elect COBRA and take advantage of the premium subsidy. The coverage elected during this special election period begins with the first period of coverage beginning on or after February 17, 2009.

Does the premium subsidy apply to a self-insured group health plan?

The subsidy requirements do apply to self-insured plans subject to COBRA. Basically, employers with self-insured plans must provide subsidized coverage to eligible individuals who pay 35% of the otherwise required premium.

Is the COBRA subsidy taxable income to recipients?