Legislation introduced in the House of Representatives by Rep. Joe Sestak (D-PA) would extend the subsidy and make those laid off from Jan. 1, 2010 through June 30, 2010 eligible.

Under the proposed bill, the subsidy would be provided for up to 15 months.

Currently, the subsidy is available for up to nine months for people who lost their jobs after Sept. 1, 2008 — and it won’t be available to employees laid off after Dec. 31, 2009.

Without an extension, people who began collecting the subsidy March 1 — when it first became available — will lose it at the end of November.

Here’s why: The COBRA credit must be claimed during the tax year in which the subsidy was paid – not later, IRS officials reminded participants of a recent industry partners conference call. During year-end when Finance Departments are often at their craziest, tasks like this often drop off the to-do list.

Remember, too, that if taking the credit resulted in an overpayment, Payroll claims that amount on the 941’s line 12a – again, during the same calendar year the subsidy was paid. Then, that overpayment may either be:

• refunded, or

• carried forward to the following quarter, even if the subsequent quarter is in the following tax year.

Employers should refer to the updated Form 941 instructions before reporting their COBRA subsidy payments.

You’ll find more info here.

In three new Q&As recently posted to its Web site , IRS says former employees who fail to notify their plans that they’re no longer eligible for the subsidy should “self-report” that they’re subject to the infamous Section 6720C penalty. To blow the whistle on themselves, terminated employees can call the agency at 800-829-1040.

They’ll certainly pay for their “crime”: The penalty is equal to 110% of the subsidy provided on the individual’s behalf after he or she became eligible for the other coverage (e.g., the person got a new job) or Medicare.

In addition, employees should also immediately notify their health plans – in writing – that they’re no longer eligible for the subsidy, and begin paying the full tab for COBRA coverage. Employers can help them along by providing the last page of DOL’s model notice (www.dol.gov/cobra), which includes a form to notify a plan that a terminated employee’s no longer eligible for the subsidy.

Everyone can play cops & robbers
Even those who aren’t receiving a COBRA subsidy can still play informant. Anyone who suspects someone may be improperly receiving the subsidy can blow the whistle by completing Form 3949A and sending it to IRS.

For those who are really into it, IRS posted informant procedures in “How Do You Report Suspected Tax Fraud Activity?”

But few predicted just how popular the 65% subsidy would be. In fact, the nation’s COBRA rolls have doubled since the subsidy took effect, according to a new Hewitt Associates report.

From March 2009 through June 2009, the average monthly COBRA enrollment rate for eligible Americans was 38% – compared to a 19% monthly enrollment rate from September 2008 through February 2009.

Many wondered whether the subsidy enacted in February would spur more ex-workers to take advantage of the health coverage. Wonder no more.

The federal subsidy designed to make health insurance more affordable for laid-off workers has led to a doubling in the number of people who have opted to continue their former employer’s coverage. Those workers apparently can do the math and have figured out they’re getting a good deal.

According the the Kaiser Family Foundation, prior to passage of the subsidy, the average family was stuck paying about $1,000 a month for continued coverage under COBRA. The post-subsidy premium for the same family: $377 a month.

HR consultant Hewitt Associates analyzed COBRA coverage at 200 companies with 8 million employees and reports:

• From March through June of this year, monthly enrollment rates for eligible workers averaged 38%.
• From September 2008 through February 2009, the enrollment rate was a only about 19%.

With unemployment at a 25-year high — and no signs of a quick rebound in the job market — employers and HR offices should expect the coverage bubble to expand.

Analysts at The Segal Company, an HR consulting firm, point out that ex-workers under COBRA coverage tend to make more health claims, possibly because those people want to cram in as many services as they can while they have coverage.

Result: Companies that carry a lot of COBRA coverage may see their premiums go up.

Which sectors?
As you might expect, the biggest users of the subsidy program are workers from industries with the most widespread layoffs. For example, companies in the manufacturing industry saw an 800% increase in enrollments since the subsidy was enacted. Enrollments rose from 7% (Sept. 2008 through Feb. 2009), to 59% (March 2009 through June 2009).

Sign-ups for those who worked in the construction, leisure and retail industries tripled for the same period. The number of those taking advantage of the subsidy from the aerospace and defense; business services; food and beverage; media, and pharmaceuticals industries more than doubled for the same period.

Click here for an industry breakdown of COBRA enrollments.

If you haven’t heard of the Internal Revenue Service’s  “6720C” penalty, you will soon — and so will ex-employees who don’t follow the rules when accepting COBRA.

And it’s something you’ll want to be sure you mention to ex-employees who are taking COBRA.

In a conference call with reporters, the IRS just announced that — under the 6720C provision –  terminated employees who accept a COBRA subsidy will end up paying a price if they don’t adhere to strict eligibility rules.

Not only will they lose their health insurance, but they’ll also face a penalty for 110% of the subsidy if they’re later offered insurance coverage from another company or plan, and fail to inform their former employer.

The penalty was designed to help recapture subsidy payments (and then some) from people who accept the help but don’t qualify, IRS’ Joe Tiberio said in the  conference call.

To illustrate how it works:

• Let’s say former employee Fred gets laid off and accepts a COBRA subsidy valued at $5,000 to continue his insurance.
• Six months later, he’s offered coverage from a new employer but decides to keep his current policy intact because it’s less expensive.
• His former employer finds out about the insurance  and contacts IRS.
• Fred not only can lose his insurance, he must pay $5,500 — $5,000 to repay the subsidy amount plus the $500 additional penalty.

While Tiberio admits IRS doesn’t expect to frequently apply this penalty, it’s good news for struggling companies still carrying a lot of former workers on their insurance plans. By letting terminated employees know about the potential penalty when they sign up for coverage, you’ll not only save your company’s resources, but maybe also help employees already down on their luck resist the temptation of insurance fraud.

Always an exception
It’s important to note that not everyone who accepts the subsidy but isn’t eligible will be penalized. For example, the 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, don’t qualify for the subsidy at all. In these cases, the subsidy amounts will be recaptured when the former employee files a personal tax return (Form 1040).

Roughly one-third of U.S. employers offer currently domestic partner benefits, whether for opposite-sex partners, same-sex partners or both.

Regardless of your company’s policies – or your personal beliefs – it’s important to know how these benefits (or the lack thereof) are affected by federal and state regs.

Here’s a rundown of how COBRA, flexible spending accounts, HIPAA, FMLA and tax regulations affect these benefits:

COBRA

Currently, there’s no federal requirement for employers to offer COBRA to an employee’s domestic partner who loses coverage due to what would otherwise be a qualifying event. However, many employers choose to do so, anyway.

Be careful if you choose not to offer COBRA to domestic partners. You’re not necessarily in the clear legally. State insurance laws often vary from their federal equivalents.

Flexible spending accounts

In most cases, an employee’s flexible spending account (FSA) money may not be used to reimburse health care for a same-sex domestic partner, even if you do provide other domestic partner health benefits.

Reason: The IRS has ruled employer-sponsored health benefits are exempt from taxable income only if domestic partners (same or opposite sex) are legally considered spouses or dependents under state law.

Fifteen U.S. states plus the District of Columbia give tax-favored status to opposite-sex common-law marriages. Sixteen states that lack common law marriage statutes will grant tax-favored status to couples who register as common-law partners in other states.

The tax on healthcare expenses for partners that can’t get tax-favored status in your state is determined by your average local market cost for a domestic partner’s health coverage.

One case where FSAs might be used for same-sex partners: The partner meets criteria under the Working Families Tax Relief Act (WFTRA). Under WFTRA, the partner must live with the employee for more than half the year and receives more than half his or her support from the employee.

HIPAA

Domestic partner benefits are something of an anomaly under federal HIPAA regulations. In the first place, HIPAA protects the portability of employee health coverage. But domestic partner benefits aren’t necessarily portable if an employee changes jobs. It all depends on whether the new employer offers such coverage, and on state insurance laws.

On the flip side, if your organization’s health plan (like most) is covered under HIPAA, the act’s non-discrimination rules apply to domestic partners to the same extent that a spouse or dependent covered under your plans would be.

Example: If you offer domestic partner health benefits and have a wellness program in which an incentive for undergoing a health risk assessment is available to employee’s spouses, you can’t exclude the domestic partner from receiving the incentive.

As for HIPAA’s privacy rules for protected health information, it works the same for domestic partners as for anyone else covered on your health plan.

FMLA

Family leave under federal FMLA only may be taken to care for a spouse, child or parent with a serious health condition.

The regulations define spouse as “a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides, including common law marriage in States where it is recognized.”

In other words, an employee’s right to take family leave depends entirely on whether the relationship holds the legal status of a common law marriage (for opposite sex partners), civil union (for same sex partners) or same-sex marrage (in Massachusetts).

Taxes

Unlike typical benefits for spouses and dependents, domestic partner benefits are subject to both federal and state tax as a form of compensation, according to the Partners Task Force for Gay and Lesbian Couples.

In terms of administration, however, benefits such as paid bereavement leave tend to work the same in terms of their tax treatment.

In most situations, employers are required to honor the full coverage period – most, but not all. Here’s a rundown of three of the most common cases when it’s OK to end coverage early, and reduce some administrative overhead.

1. Person doesn’t keep up with payments

COBRA participants are required to pay your full monthly charge (typically 102% of the premium). If they don’t come up with the money, you can end their coverage. But there are limits.

Underpayments of less than $50 or 10% of the premium are not enough to terminate COBRA on the spot. Instead, your HR/benefits department must:

• notify the ex-employee in writing about the shortfall, and
• allow him or her 30 days to send in the balance due to avoid cancellation.

If the participant still doesn’t make good, you’re in the clear to cut off COBRA coverage. Also, it’s good practice to specify that the check must arrive at your company within 30 days, not just be postmarked by the due date.

Under the terms of the feds’ COBRA subsidy, terminated employees can get a 65%  defrayment of the premium cost  for up to nine months. The subsidy applies only to people who lost (or will lose) their jobs between Sept. 1, 2008, and Dec. 31, 2009.

No money changes hands. People who qualify for the subsidy will pay their employers for 35% of the coverage costs each month, for up to nine months. If an employee continues with COBRA after the nine months, the payment goes up to full cost.

2. Beneficiary moves out of coverage area

This depends on your health plan’s coverage policy, but if a COBRA participant moves to an area outside the provider network, you may be able to terminate his or her eligibility.

The rule: If your plan offers any kind of coverage the participant can use in his or her new location, it’s the ex-employee’s call whether to continue or end COBRA. This includes health plans that cover out-of-area emergency services and referrals to specialists based in other locales.

But if there are no out-of-network provisions in your health plan, it’s legal for you to terminate coverage once you verify the change of locale.

Even so, many employers err on the side of caution and give the ex-employee the option of keeping COBRA and returning to the in-network area for medical treatments. Few people opt for this arrangement, and usually wind up being taken off the COBRA roll of their own accord.

3. Medicare enrollment

You can terminate COBRA for ex-employees once they’re entitled to Medicare benefits. But your company needs to be careful.

For COBRA purposes, federal courts have ruled “entitlement” means the ex-employee has actually enrolled in Medicare. Simply turning age 65 isn’t enough.

There’s a good chance your company is carrying people who shouldn’t even be on your health plan.

It’s estimated that two-thirds of employers spend an extra 5% to 15% by carrying ineligible people on their health plan rolls.

The problem usually springs up when your insurance company continues to charge you for enrollees who are no longer eligible for coverage but were never removed from the list of enrollees.

The issue often goes undetected until you initiate the steps needed to find and fix it. Insurance companies have no incentive to do anything about it. It’s not costing them money, after all. It’s costing you.

The usual suspects

There are four main groups of people who often manage to fly under the radar and remain covered under your plan even when they’re ineligible:

• ex-employees
• current employees who’ve changed from full- to part-time status
• divorced employees’ ex-spouses, and
• older dependent children.

Each category has its own set of challenges to fix, but that can be done with relatively little pain.

Track ex-worker coverage

Without knowing it, your company may still be paying for doctor’s visits made by ex-employees.

This doesn’t mean former employees who accept COBRA, paying 102% of the premium each month to keep their coverage and offset your administrative costs.

Rather, the concern here is to spot freeloaders, whose insurance cards were never canceled, while your firm continues to foot the bill. This problem happens more often than you may think.

Some firms generously offer to carry certain ex-employees for a certain period of time and then forget to cancel their coverage. But more often, it’s a clerical error by the insurer that goes undetected.

Be certain there’s someone at your company who tracks when people’s coverage period ends: both on the active rolls and on COBRA.

Ask Payroll about part-timers

Depending on the eligibility rules in the plan documents of your health policy, an employee who scales back on his or her hours may become ineligible for coverage under your health plan.

If that’s the case, ask Payroll to run periodic reports on the enrollment status of the folks whose hours have recently dropped. Remember: COBRA applies. But you needn’t pay for part-timers’ ongoing coverage.

Employees slow to report divorce

It’s an unpleasant fact of modern life: half of marriages end in divorce. Unfortunately, there’s often a spill-over effect on an employer’s health plan after a divorce. Employees often fail to notify their employer about an impending divorce.

As a result, after the divorce, the firm continues to pay for coverage for the ex-spouse. There are two tactics that can help minimize this problem.

1. The “empathetic” approach: Pledge complete confidentiality.
2. The “hardball” tactic: Add a spousal surcharge to employees’ monthly contributions, which greatly increases the odds of prompt reporting of a divorce.

Are you obligated to offer COBRA if a divorce is reported to you well after the fact? If you learn of the qualifying event within 60 days after the divorce date, you must send a COBRA notice. Beyond that, it’s not your firm’s responsibility to offer COBRA if the employee doesn’t report it.

The DOL just posted on its Web site the form –  “Application for Review of Denial of COBRA Premium Reduction.” (To see the form, go to www.dol.gov/ebsa/COBRA/main.html). The appeal form, available both to former employees and their eligible family members, can be completed online or filled out on paper and mailed or faxed to the agency.

DOL is telling applicants to include anything they think would help review the application, such as the COBRA election notice, insurance card, paystubs showing deductions for health benefits, and any documents detailing the date/circumstances of the termination and denial of premium reduction. The online version makes appeals easy — and probably more common — by walking applicants through the process screen by screen.

Check your denials
The availability of this form makes it critical that you reject for a COBRA subsidy only those terminated employees you’re certain don’t  qualify — otherwise, you may hear from DOL. Remember, the subsidy only applies to those meeting these requirements:

• be eligible for continuation coverage under COBRA or a state law that provides comparable continuation coverage (for example, so-called “mini-COBRA” laws) at any time during the period beginning 9/1/08 and ending 12/31/09
• elect continuation coverage (when first offered or during the additional election period), and
• have a qualifying event for the continuation coverage that is the employee’s involuntary termination during the period beginning 91//08 and ending 12/31/09.