Can Your Company Cover the Cash Flow Needed for COBRA Under the Stimulus Plan?

As part of the recently approved federal stimulus bill, eligible terminated employees can obtain a 65% discount on COBRA coverage. COBRA allows former employees to continue their health insurance coverage for up to 18 months after separation with their company.

The problem here lies with the company, who must pay the 65% premium (the employee pays the other 35%) and then get reimbursed through a payroll tax credit. The up to three-month reimbursement wait can leave a solid cash flow problem for businesses who may already be experiencing “down” time.

Depending on how many “separated” employees elect COBRA coverage under the 65% discount program, may mean that some businesses may not be able to pay the premiums. This backlash could actually cause companies to lay off even MORE employees, freeze salaries, or begin eliminating or downsizing health benefits for regular employees who remain with the company…all for the sake of being able to pay the premiums.

Employers were required to mail out COBRA notices to eligible employees–who have been laid off since September 1, 2008–by April 18th, 2009. Those who fail to notify are subject to fines of $110 per day per former employee. This regulation affects companies with 20 or more employees. The coverage is retroactive until March 1, 2009.

How the new COBRA rules work:
• The federal government will provide a 65 percent subsidy for up to nine months of the COBRA premium retroactive to March 1 for certain terminated employees.
• To be entitled to the subsidy, employees must have been involuntarily terminated between September 1, 2008, and December 31, 2009, and must be eligible for COBRA.
• A special election period exists for individuals involuntarily terminated on or after last September 1 who had not elected COBRA. They will have 60 more days after receiving the notice to elect coverage, which is retroactive to March 1 if they lost their jobs before then.
• The employer pays the 65 percent on the employee’s behalf and is then reimbursed through a payroll tax credit. Large companies may be reimbursed either weekly or monthly, but smaller employers must file for the credit with their quarterly payroll taxes.
• The employee must pay 35 percent of COBRA before the employer can request reimbursement of the other 65 percent. Employers that do not charge the full COBRA premium will not be entitled to reimbursement of 65 percent of the maximum COBRA premium. (SOURCE: Workforce Management – April 13, 2009)

For more information, click here. For IRS information on COBRA, click here.

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About The University of Scranton SBDC

The University of Scranton SBDC provides no cost small business consulting services that are tailored to fit the needs of small business clients of Bradford, Lackawanna, Monroe, Pike, Susquehanna, Tioga, Wayne & Wyoming Counties. The center offers confidential individualized assistance designed to identify and address the problems of small business owners as well as individuals interested in establishing a business. The program is jointly funded by the US Small Business Administration, Pennsylvania Department of Community and Economic Development and The University of Scranton.
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