Liberal take on COBRA extension

February 14, 2010
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Representatives of the U.S. Department of Labor and the IRS participated in a Web seminar during which they provided additional guidance regarding the extension of the COBRA premium subsidy provisions in the Department of Defense Appropriations Act, 2010. Their comments make it clear that both the IRS and Department of Labor are taking a very expansive approach in interpreting the act’s provisions.

The DOD Act provides that an individual whose nine-month COBRA subsidy period expired before Dec. 19, 2009 (the date the act was passed) is entitled to additional time to retroactively pay premiums for the “period of coverage” beginning immediately after the nine-month period expired. Under the DOD Act, an individual in this situation is described as having a “transition period.” The DOD Act provides that an individual in a transition period has until the later of Feb.17, 2010, or 30 days after the date notice of the extension of the premium subsidy is provided to pay the retroactive premiums.

A period of COBRA coverage is generally one month. Therefore, the literal language of the DOD Act only provides that a person whose COBRA subsidy period expired as of Nov. 30, 2009, has additional time to retroactively pay the premium for December 2009 at the subsidized rate without losing coverage.

However, the Department of Labor and the IRS are taking the position that an individual’s transition period starts immediately after his or her nine-month subsidy period ends and continues until the date on which the individual receives notice of the extension of the premium subsidy.

Assume an individual’s nine-month subsidy period expired Nov. 30, 2009, and the individual is not provided with notice of the extension until Feb. 15, 2010. That individual’s transition period runs from Dec.1, 2009, through March 17, 2010 (30 days from Feb.15, 2010). This means the individual will have until March 17, 2010, to retroactively pay the reduced premium for December 2009, January 2010 and February 2010.

Assume an individual’s nine-month subsidy period expires Jan. 31, and the individual is not provided with notice of the extension until Feb. 15. That individual’s transition period runs from Feb. 1 through March 17, 2010, and the individual will have until March 17 to retroactively pay the reduced premium for February 2010.

An individual who receives notice of the extension before his or her nine-month subsidy period would have expired does not get additional time to pay his or her COBRA premiums beyond the normal 30-day grace period for premium payment.

It is possible that a qualified beneficiary who experienced a qualifying event that was a termination of employment in December 2009 received a COBRA election notice that did not include any information regarding the premium subsidy. The U.S. Department of Labor representative stated that any qualified beneficiaries who received such a notice need to get a new complete updated election notice and a new 60-day election period from the date the updated notice is provided.

On the other hand, the representative stated that a qualified beneficiary who received an election notice with incorrect subsidy information could be provided with a supplement describing the premium subsidy rather than receiving a new notice. In this case, it appears that the qualified beneficiary’s 60-day COBRA election period is not extended.

IRS representatives clarified during the seminar that where the qualified beneficiary’s 35 percent of the COBRA premium for coverage in 2009 is paid in 2010 (by qualified beneficiaries in the transition period), the employer must take the payroll tax credit for the remaining 65 percent of the premium in 2010. The credit can’t be taken until the qualified beneficiary pays his/her 35 percent of the premium.

On the other hand, the IRS representative also stated that where a qualified beneficiary paid the full premium in December 2009 (because the nine-month subsidy period expired as of Nov. 30, 2009), the plan administrator should treat that qualified beneficiary as having paid his/her 35 percent of the premium for December 2009, and take credit for the remaining 65 percent of the premium on the Form 941 for the last quarter of 2009. If the remainder of overpayment is credited toward the qualified beneficiary’s 35 percent share of the premium for January and February 2010, the employer would take the payroll tax credit for those months for the first quarter of 2010.


Susan Sherman and Mary Bauman are attorneys in Miller Johnson’s employee benefits practice group in Grand Rapids.


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