Dear Workforce: When Does the Income Limitation on a COBRA Subsidy Apply: Before or After Termination?

Dear Workforce:

Does the income limitation on a COBRA subsidy apply to the income level prior to termination or after termination? If it applies to after the deadline, and a lump-sum severance payment is involved, would this severance delay a person’s eligibility for the subsidy?

—Bitten by COBRA, director, labor relations, health care, Rochester, Minnesota

Dear Bitten by COBRA:

The American Recovery and Reinvestment Act (ARRA) created a 65 percent COBRA premium subsidy that is available to help unemployed workers continue their health insurance. Details about how the subsidy works are available online from the Department of Labor. The subsidy is available for COBRA periods beginning after February 17, 2009, and can last as long as nine months. Individuals must have a qualifying event relating to involuntary termination of employment that occurs on or after September 1, 2008, and before December 31, 2009.

The COBRA premium assistance subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.

The income limitation applies to the income received in the same taxable year in which the subsidy is received. So, for example, if the subsidy is received in 2009, but the individual has a modified adjusted gross income for 2009 exceeding $145,000, he/she would not be eligible for the subsidy.

The calculations as to the income limitation are done when the individual completes tax returns for that year. The tax due for that taxable year would be increased by the amount of the premium assistance subsidy that the individual received during the year. A high-income worker can opt out of the subsidy by notifying his or her health plan that they do not want it.

If a worker receives a lump-sum severance payment, the severance payment would not automatically delay eligibility for the subsidy. Employees should be encouraged to carefully examine the terms of any subsidy arrangement, and consult with their attorney or tax preparer to determine whether it would affect their eligibility for the COBRA premium subsidy.

If, for example, the severance payment is all cash, it would likely not affect eligibility for the subsidy, although it could affect the income limitation if it is high enough. However, if the severance payment is expressly to pay for COBRA expenses, it could result in the worker losing eligibility for the COBRA premium assistance subsidy, because an individual cannot receive the COBRA premium assistance subsidy if their employer pays for COBRA.

SOURCE: Kathryn Bakich, senior vice president and national director of health care compliance, the Segal Co., Washington, March 2, 2009

LEARN MORE: An earlier article discusses how the recently enacted stimulus bill will affect COBRA.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.