COBRA Could Take a Painful Bite Out of Small Businesses

Business owners must notify terminated employees by April 18

By Penny Wise

The recession is already taking a bite out of many small businesses, and thanks to the Obama administration and Congress, the recent American Recovery and Reinvestment Act of 2009 (the stimulus package) contains a provision that will make this bite even more painful. Businesses that provide employees with a group health plan and have or plan to terminate or lay off at least one employee are caught in a convoluted policy that only Congress could design.
The Consolidated Budget and Reconciliation Act of 1985 (COBRA) was modified by the stimulus package, creating a 65% federal subsidy for the cost of health benefits for up to 9 months for former employees who lose group health plan coverage between September 1, 2008 and December 31, 2009 due to an involuntary termination of employment. While the subsidy applies to employees who have lost or will lose their jobs between those dates, the subsidy did not begin until March 1, 2009.
“I think it can put a real strain on borderline companies,” said Steve Sahlein, co-president of Rockville, Md.-based American Institute of Professional Bookkeepers, about the new COBRA provision in the stimulus package. “It can choke a company’s cash flow.”
The new COBRA law requires employers to track down and get notice to laid-off employees by April 18, 2009 to offer the subsidy, determine if these former employees are interested in using the 65% government subsidy, determine if they are eligible for the subsidy, and enroll them in the program.
When an employer receives payment of 35% of the monthly premium from the former employee, the employer is required to pay the health insurance company the government’s 65% share of the premium for coverage, even if the business does not have the cash to make the payment.
The employer will be reimbursed for the government’s 65% of the premium through a reduction in payroll taxes on the quarterly Form 941. If the employer’s payroll tax liability is less than the 65% payment made on behalf of the government, the employer will have to wait for up to 60 days after filing its quarterly Form 941 to be reimbursed by the Internal Revenue Service, which will administer the subsidy. The IRS will not pre-pay the employer for the government’s share. If the employer needs to borrow money to pay the government’s 65% subsidy, the borrowing costs will not be reimbursed.
Business owners who have terminated or laid-off at least one employee between September 1, 2008 and February 17, 2009 should get in contact with their accountant and/or payroll provider immediately to determine if this part of the stimulus package applies to their business, so they can meet the April 18 notice deadline.
Not to worry, the small business owner is only obligated to pay the government’s 65% share upfront for 9 months ¾ if his or her business lasts that long in this economy. This modified COBRA plan may make terminated employees feel better, but it very well could be terminal for some small businesses.


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