Now in his early 50s, Julian had been planning for a future retirement. Last year he saw his retirement accounts shrink by nearly 40 percent, along with his other financial assets. Then, unexpectedly, he received a layoff notice last month. Besides the obvious financial concerns, Julian worries about maintaining his family's health insurance coverage.

Since 1985, newly unemployed workers like Julian have been entitled to continue their group health insurance for a time―at their own expense. It's referred to as COBRA, or the COBRA continuation rules. The recent American Recovery and Reinvestment Act of 2009 has enhanced these rules to benefit terminated workers. 

According to COBRA, employees (and dependents) covered under an employer's group health insurance plan could continue their same insurance coverage for at least 18 months after their employment was terminated. Employees had to be notified of their rights to elect the extended coverage within 14 days.

These rules only applied to employers with at least 20 employees, and the terminated employee had to pay for the extended coverage―but at no more than the cost of the premium plus a two percent administrative fee.

Provisions of the American Recovery and Reinvestment Act of 2009 enhance the COBRA continuation rules that extend health care coverage for terminated employees.

COBRA Premium Subsidy
Under the new Act, qualified persons will receive a premium subsidy of 65 percent for the first nine months of COBRA coverage. In other words, the qualifying person (or another person or entity paying on his or her behalf) is only responsible for 35 percent of the cost of the premium and administrative fee. Flexible spending accounts under cafeteria plans are excluded from this provision.

To qualify, you must be eligible for COBRA continuation coverage at any time between September 1, 2008 and December 31, 2009. You must have been involuntarily terminated during this period and must also elect COBRA coverage.

A qualified person for COBRA purposes can also include the terminated person's dependent, if the dependent was also covered by the insurance plan before the termination. Such a dependent can independently elect COBRA and independently receive a subsidy.

Premium subsidies are not taxable; they are excluded from the recipient's gross income.

The 65 percent subsidy is ultimately paid by the government, not the employer. Employers are reimbursed for the difference between the full premium amount and the amount actually paid by the terminated worker or other qualified person. They are allowed to take a refundable credit on Form 941 to reduce their quarterly employment tax liability or, alternatively, they can apply to the IRS to have the money refunded.

Premium Subsidy Recapture Provision
The Act includes a recapture provision for premium subsidies provided to high-income taxpayers.

If your modified adjusted gross income exceeds $125,000 ($250,000 for married couples filing joint returns) for any year during which you, your spouse, or any dependent receives a subsidy for COBRA continuation coverage, the subsidy is subject to a phased-in recapture. The entire subsidy is subject to recapture for incomes of $145,000 ($290,000 for married couples).
If you're subject to the recapture provision, your federal income tax liability for the year of the subsidy will be increased by the amount of the subsidy subject to recapture.

Termination of Eligibility for the Subsidy
If you become eligible for coverage under another group health plan―excluding certain plans with limited coverage, such as dental-only or vision-only plans―you are no longer eligible for a premium subsidy.

You must notify the plan that provides the subsidized coverage in writing, or you are subject to penalty. The penalty is equal to 110 percent of any premium subsidy you receive after your eligibility ends.