Human Resources News & Insights

Obama stimulus package contains 6 big paperwork changes for you

Here’s a rundown of what you’ll have to do differently post-stimulus.

1. Implement new withholding tables. The “Making Work Pay” tax credit means Payroll will begin withholding less federal income tax from workers’ pay, probably in June. The average American worker will see about $13 more per weekly paycheck in 2009, and about $9 more in 2010. The credit, which amounts to 6.2% of earned income up to $400 for single taxpayers ($800 for marrieds) begins phasing out at $75,000 ($150,000 for marrieds). Those who don’t get the credit through payroll can also claim it on their personal tax returns.

Nonresident aliens don’t qualify for this credit – only employees with valid Social Security Numbers.

It’s still unclear how companies should handle new hires who may have already received a portion of the credit from a previous employer.

2. Begin new reporting duties on Form 941. To help workers who are involuntarily terminated from work, the government’s now offering to subsidize 65% of COBRA premium payments. Here’s how it’ll work: Once an employee pays his or her 35% share, the company must then front the rest of the money. The employer will pay the insurer directly, then claim the amount as an offset against payroll tax liabilities. Payroll will report any subsidies made and take the offset on an updated Form 941 the IRS will soon release.

Employers will have to pay the premiums for up to nine months for workers (and their families) who are involuntarily terminated between 9/1/08 and 12/31/09. Anyone who was terminated after the 9/1/08 start date and the date’s enactment but didn’t take the coverage because of the expense has 60 days to elect COBRA and take advantage of the subsidy.

Employees with an annual income of $125,000 ($250,000 for families) don’t qualify for this assistance.

This provision will take effect with the first COBRA payment period – March 1st, for most employers. Form 941 reporting will also likely be effective for first quarter 2009.

3. Increase reporting to your higher-ups. You may have to more carefully track the wages of certain employee populations. Under the new law, businesses can claim a work opportunity tax credit equal to 40% of the first $6,000 wages paid to employees in nine particular groups (e.g., unemployed veterans, “disconnected” youth between the ages of 16 and 25 who are not in school, etc.).

4. Change the amount of tax-free transit benefits. Under the new law, employers can offer employees $230 a month, tax free, in parking and transit benefits for 2009. Previously, there were different dollar amounts allowed for each benefit.

5. Process more Forms W-5. In 2009 and 2010, the stimulus package increases the Earned Income Tax Credit for working families with three or more children to 45% of the family’s first $12,570 of earned income. The bill also increases the start point of the phase-out for married couples filing jointly by $1,880. As a result of these changes, more workers may submit Forms W-5 to receive the credit. Look for revised Advance Earned Income Tax Credit tables in Publication 15, Circular E.

6. Process more Forms W-4. Other employees may need to fill out a new Form W-4 to adjust their withholding in light of changes to federal income tax withholding (e.g., the ATM patch) and other tax credits (e.g., first-time home buyer credit). Watch for revised withholding tables and additional guidance.

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  1. Angela Borin says:

    How Obama’s Stimulus Package Affects Us

  2. My company doesn’t have to worry about the Cobra reimbursement. Since we are small (13 employees), we offer the Extention of Coverage Act, which is not covered by the Cobra reimbursement. This part of the stimulus only benefits employees that were laid off from medium and large companies. Needless to say, the employees I had to lay off last week are disappointed by this oversight (or mistake). I hope I am wrong about this. If so, someone please correct me.

  3. I have not heard that this only affects larger companies, but I wold like to know also. We have around 30 full time and 70 part time employees, still small.
    My question is if this 65% Cobra reimbursement applies to employees fired for poor performance or violating company policy, theft, etc. I thought it was probably only for laid-off employees.

  4. Sandy,
    It applies to anyone terminated involuntarily except for gross misconduct. Those terminated for gross misconduct aren’t even eligible for COBRA itself, hence they are not eligible for the subsidy. Gross misconduct is extremely hard to prove though, so unless the ex-employee was caught red handed and arrested for whatever he/she did they are probably eligible for both COBRA the subsidy.
    What I’ve seen so far states that employers with under 20 employees, Church plans and of course the Federal government are exempt. Go figure.

  5. According to the infromation I’ve received, it does include small companies who don’t offer Cobra. It includes companies with fewer than 20 employees under State Continuation laws for employees who have left involunatarily (not if they quit)

  6. Sharon,

    Your Gross misconduct statment – Say unemployment states that on a descision “Gross Misconduct” that should be proof enough if the state agreed with the employer.

  7. Renee,
    I have yet to see a gross misconduct decision from unemployment here in Colorado but embezzlement or violence, something like that would qualify. By the time we get through the unemployment hearings and appeals here though, the time limit for offering COBRA has already passed. My instructions are to err on the side of caution unless it is VERY clearly GROSS misconduct.
    Hope this helps.

  8. Diana Hunt says:

    Regarding COBRA coverage for the individual who voluntarily terminates, I assume in this case the
    voluntarily terminated inidividual would have to pay full cobra premium + admin costs as it has been
    in the past. I also assume that it would be available for the same time period – 18 months.
    Can any one confirm?

    Also, what about the person who leaves during probationary period – not really a lay off.
    What would the rule be for this situation?


  9. Diana Hunt,
    Voluntary terms are exactly as you stated, 18 months at 102%.
    Most companies have a waiting period before new employees are eligible for insurance that matches the probationary period so anyone who isn’t yet eligible for insurance isn’t eligible for COBRA either. If they are eligible for insurance they would also be eligible for the subsidy as long as their termination wasn’t voulntary or gross misconduct.
    The eligibility period for COBRA is 18 months but the preliminary information I have on the subsidy is that it is only for 9 months.
    Hope this helps.

  10. 35% of what? Is it 35% per month? Or is it 35% of the total amount for 18 months? Please advise

  11. Kerry Fitzgerald, Editor says:

    Cheryl, The 35% refers to the amount a former employee must pay toward the COBRA continuation premium.

    While someone can elect COBRA coverage for 18 months, under this law they’re only eligible for the subsidy for nine months.

    Most policies charge a monthly premium – but even if someone chose to pay for 9 months of coverage (the length of the subsidy) up front, the cost of 35% of the premium would still be the same.

    Hope this helps.

  12. I am a partner in a small payroll service. We do not administer insurance benefits plans for our clients. The problem I see with this new COBRA rule is that it will require us collecting the COBRA offset figures from our clients each quarter. I suspect that getting such information in a timely and correct way will be difficult. The politicians say they are for small business, but these types of regulations are hardest for small business to deal with. We simply don’t have the manpower to comply with all the free labor government expects out of us. In the end I’m guessing that many businesses will fail to properly claim the credit on the 941 and will simply eat the cost.

  13. If you don’t already pay someone to handle COBRA for you, this may be the time to look into it — I see this as something of an administrative nightmare. That said, let’s just hope all this helps the economy so that we still have jobs in 2010!

  14. Dear Kerry,
    How do we make the payment of this 35% stimulus bill? Should the employee pay only 35% of the COBRA premium upfront or should the employer file for reimbursement later? Please explain how this plan is utilized. Any advice would be appreciated. Thanks John.

  15. John:
    I think you adjust your 941. Unless you have less that 20 employees, then the stimulus should be reflected on your bill.

  16. Kerry Isberg says:

    John: The IRS has a lot of info posted on its Web site now about this topic. You can start here:,,id=204505,00.html

    Hope this helps.



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