COBRA & Transportation

Last week President Obama signed the American Recovery and Reinvestment Act, a.k.a. the stimulus package. My fellow blogger, Marc Tracy, neatly summarized the impact of the major provisions of the legislation on small business in his post, What’s In the Stimulus.  

But buried amongst the $787 billion package were two benefit provisions of value to employers and employees, those currently employed and those recently laid off:

1. Changes to COBRA, which affects employees that have been terminated,

2. Increased transit benefits under Section 132 of the Internal Revenue Code.

Let's take a closer look.

Changes To COBRA

COBRA is the acronym for 1986's Consolidated Omnibus Budget Reconciliation Act, which mandated health benefit continuation provisions. COBRA permits certain former employees, retirees, spouses, former spouses, and dependent children to continue health care coverage at group rates. This coverage, however, is only available when coverage is lost due to certain specific events. As the U.S. Department of Labor explains in a helpful FAQ page, those "qualifying events" include a reduction in employment hours as well as termination--voluntary or involuntary--for reasons other than "gross misconduct". In other words, if you are a victim of the economy or your company's specific travails rather than your own personal behavior, you and your beneficiaries tend to be eligible.

There are two parts to the COBRA aspect of the stimulus:

1. Reduced Premiums. Help will be provided to struggling families trying to pay their COBRA benefits. The government will provide a 65% premium reduction to those people who are currently receiving COBRA health care coverage. 

2. Re-Enrollment. Recently terminated employees will have the ability to re-enroll in health insurance under COBRA even if they had declined coverage in the past. Many did not continue their health care coverage because they couldn’t afford it--but perhaps those reduced premiums will make it easier for them.

Increases in Commuter Transit Benefits

The commuter transit benefit is one that we recommend to our clients when it fits with their work force. It’s a way employers can help employees put more dollars in their paychecks at no--zero!--additional expense. In fact, tax savings are available to both employers and employees.

So what is it, and how does it work? It’s an oft-forgotten program that allows employers to offer employees the opportunity to pay for certain transportation expenses on a pre-tax basis under Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century.

Pre-tax means before income taxes and FICA taxes (payroll). What does that mean? It means that pre-tax benefits effectively increase take-home pay. And these benefits are also valuable to employers because the employer avoids paying its share of FICA on this income!

Qualified transportation expenses generally include payments for the use of mass transportation (e.g., train, subway, bus fares), and for parking. Amounts are indexed to inflation: for 2009, the maximum amount that can be excluded from an employee's income for mass transit and van pool use is $120 per month, and the amount that can be excluded for qualified parking is $230 per month.

And there’s one more goodie. While Section 132 benefits are similar to the pre-tax flexible spending accounts available for medical expenses and dependent care under Section 125, there’s one important difference. The transportation benefit does not include a "use it or lose it" penalty, as required with medical/dependent care flexible spending accounts.

Under the stimulus package, effective March 1, 2009, employees may reduce their salary or receive up to $230 per month for transit passes and transportation in a commuter highway vehicle. This is the same monthly limit as currently allowable for parking expenses. The increased limit for transit passes and transportation in a commuter highway vehicle is set to expire December 31, 2010.

Neither of these changes may not seem like a ton in the context of a law that costs over three-fourths of a trillion dollars. But every little bit helps. 

Jerry Kalish is founder and President of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. He blogs at The Retirement Plan Blog and can be reached at jerry@nationalbenefit.com.


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