What is the COBRA premium subsidy, and who is eligible?

As part of the American Recovery and Reinvestment Act of 2009 (ARRA), workers (and their covered dependents) who are involuntarily terminated from employment on or after September 1, 2008, and before January 1, 2010, are eligible for a temporary COBRA premium subsidy. The subsidy, equal to 65 percent of the COBRA continuation premium, applies to premiums for months of coverage beginning on or after February 17, 2009. This allows assistance-eligible individuals to pay only 35 percent of their COBRA premiums to receive continuation coverage (and be treated as paying the full amount).

Individuals terminated for gross misconduct may not receive the subsidy. Also, coverage under a health flexible spending account does not qualify.

Elimination of subsidy for high-income individuals. For individuals with modified adjusted gross income (AGI) over $125,000 ($250,000 for joint filers), the benefit of the subsidy begins to phase out because the individual's taxes will be increased by a percentage of the subsidy received. When modified AGI exceeds $145,000 ($290,000 for joint filers), the benefit is completely eliminated-the individual's taxes will increase by the full amount of any subsidy received. The income thresholds also apply to the taxpayer's spouse or dependent(s) during the taxable year.

Individuals who are certain that their income level bars their entitlement to the subsidy may avoid this recapture tax by making a permanent election waiving their right to the subsidy. They must notify their employer of their election. (Note: For individuals who do not have high incomes, the subsidy is not added back as a tax, nor is it included in gross income.)

Agency guidance. The IRS issued Notice 2009-27, which contains 58 questions and answers about the COBRA premium subsidy. The guidance covers numerous issues including involuntary terminations, assistance eligible individuals, calculation of the premium reduction, coverage eligible for the premium reduction, the beginning and end of the premium reduction period, and the extended election period. The notice can be viewed at http://www.irs.gov/pub/irs-drop/n-09-27.pdf .

In addition, both the Labor Department and the IRS provide COBRA premium subsidy information on their respective websites. Check them out at:

• http://www.dol.gov/ebsa/COBRA.html ; and

• http://www.irs.gov/ .