Congress and the Obama Administration took a bold and important step to making health insurance available and affordable for Americans. The stimulus bill, ARRA*, provides a 65% subsidy from the federal government for COBRA health insurance payments for up to nine months. These payments will go a long way in helping unemployed people maintain access to healthcare and avoid financial ruination from the high cost of health insurance or paying for needed healthcare without having insurance.
A Template for National Health
The effectiveness of these measures need careful watching because this strategy may end up being the template for a national insurance program where employees, employers, private insurers and the government are each picking up a piece of the tab for providing insurance to employed people. In its present form, employees still do not have freedom to find the best or cheapest plan to suit their needs. What the employee gets still depends on employer choices that can be as antithetical to finding good plans as selecting expensive coverage without any employer contribution from a brother-in-law who is an insurance broker to selecting a cheap plan that does not cover preventive care for children, mammograms for women, etc.
Businesses Are Protected
There is a lot of ill-informed moaning about how these the subsidized COBRA payments will discourage employers from hiring new workers. Congress went to some lengths to make sure that businesses are held harmless in providing the subsidy to former employees, so the requirement that these people are continuing to have access to coverage is not a valid reason to forego hiring needed workers.
The company is responsible for making the difference between the COBRA payment and the full cost to the insurance company, but gets to offset this against its current employer tax deposits. Since the company still gets to collect a 2% premium on top of the COBRA payment of the ex-employee, the company should be just fine, assuming it has the cash flow and/or banks come to their senses about lines of credit. If will be interesting to see how the government addresses issues like premiums that exceed payroll taxes in the regulations.
More Help for Unemployed Workers
A special 60 day window beginning February 12, 2009 is open to let folks who have already become unemployed and did not elect COBRA because of the cost choose to take coverage on a subsidized basis or who elected it and had to then drop the coverage. Another bit of good news is that people in really dire circumstances will not have the subsidy counted as income for purposes of other assistance programs such as Food Stamps or Medicaid.
Why High Income People May Elect to Take the Subsidy
At the other end of the spectrum, it also should be noted that if a person’s adjusted gross income exceeds $145,000 ($290,000 if filing jointly) in the year that one receives assistance, the entire amount of subsidy paid in the year will be added to income taxes due for that year. (There is a phase out of the subsidy between $125,000 and $145,000 ($250,000 and $29000 for joint filers.) Even if this is likely, the taxpayer will probably be better off taking the subsidy than waiving it because if income does not meet the threshold. The subsidy is not a refundable credit. So take it when it is available because a “do over” is not available when the income tax return is filed — at least not now.
Where Congress Fell Short in Tax Cuts
What Congress did not take into account is that many people will meet the COBRA payments by making withdrawals from whatever is left of their 401k accounts and pay a 10% penalty on top of the income tax on the funds. (The effective cost of COBRA is not 35% for these tax payers, but 38.5%. This matters in the 10th month when there is less money to continue COBRA payments without a subsidy. IMHO, it would have been better to drop the penalty for COBRA payments (and mortgage payments) as we did for people who lived in states affected by Katrina and Rita, even if they did not have a loss from one of the hurricanes!)
*American Recovery and Reinvestment Act of 2009 signed by President Obama on February 17, 2009.
IRS regulations require me to advise you that any federal tax advice in this communication was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.