The American Recovery and Reinvestment Act requires small business owners to consider and implement multiple changes to their tax withholding, reporting, and record-keeping procedures for employees.

Here's a rundown of HR-related provisions that made the final cut in the stimulus bill:

COBRA Subsidy

COBRA allows workers who have their health benefits to continue coverage through the group plan for up to 18 months. Historically, the cost of COBRA continuation coverage is borne 100 percent by the employee.

The new law provides for a 65-percent subsidy of certain employees’ COBRA premiums for nine months. The subsidy will be available to any employee involuntarily terminated (with exceptions, like gross misconduct) from employment between September 1, 2008, and December 31, 2009.

But the government won't write checks to former employees to cover the 65-percent subsidy. Employers will have to absorb the cost, and then apply for a credit against payroll taxes to recover the funds.

The employee would remain responsible for the other 35 percent of the COBRA premiums. Employers will have to amend their COBRA notices to include information about the availability of this subsidy.

Importantly, this subsidy is to be applied retroactively. Employees who were involuntarily terminated on or after September 1, 2008, but before the enactment of the stimulus bill, and who did not previously elect COBRA coverage, must be given an additional 60-day window to elect COBRA and benefit from the subsidy. If an employee elects COBRA after receiving the new notice, coverage would begin on February 17, not on the date of the actual termination.

Companies with 20 or more employees (COBRA's coverage limit) must heed these changes. COBRA notices need to be amended for the remainder of 2009, and any employee involuntarily severed between September 1, 2008, and February 17, 2009, will have to be notified of the subsidy.

Contact your health insurance carrier for more information on exactly how this will work.

Note: The ARRA also includes a provision allowing group health plans to offer a variety of COBRA coverages, so former employees may be able to choose a policy different from the ones you offer current employees. The law also requires that you include information about the subsidy in your COBRA notices.

Making Work Pay Tax Credit

This is the tax-cut part of the legislation. Rather than getting the tax cut in a lump sum as in the past, most eligible people will get it gradually--a little less will be withheld from each paycheck for federal income tax. Generally, single taxpayers will get an additional $400 per year in the 2009 and 2010 tax years. Married couples that file jointly will get $800 per year.

The Internal Revenue Service has published new tax-withholding tables that incorporate the credit and has asked employers to start using them no later than April 1. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010.

The IRS says the new withholding tables, along with other instructions related to the new tax law, will be incorporated in the new Publication 15-T, which will be posted to the IRS Web site and mailed to more than 9 million employers in mid-March. The IRS has requested that employers start using the new tables as soon as possible but not later than April 1.

Employees are not required to make changes to W-4 forms but be prepared to help employees figure out whether they need to make further withholding adjustments.

Many higher-income taxpayers will see little or no change in their take-home pay. That's because the Making Work Pay credit is phased out for a married couple filing a joint return whose modified adjusted gross income (AGI) is between $150,000 and $190,000 and other taxpayers whose modified AGI is between $75,000 and $95,000.

Unemployment Compensation

This provision allows high unemployment states to provide up to 13 to 20 weeks of additional extended benefits to workers who run out of federal funded unemployment benefits. Currently, there are 20 to 33 weeks of benefits for workers who run out of their state unemployment, so this plan, if adopted by the states, would provide additional weeks of federally funded benefits. States need to qualify for the funding, based on the level of unemployment.

The law uses financial incentives to encourage states to give cash benefits to new categories of unemployed workers, including people in training programs, those looking for part-time work and people who leave their jobs for a “compelling family reason,” such as domestic violence or the illness of an immediate family member. Some states already offer such generous eligibility guidelines.

Funding for additional unemployment compensation will come from the U.S. Treasury, not the Federal Unemployment Tax Act surtax that all employers pay.

Since unemployment compensation systems differ from state to state, expect some confusion as implementation plans firm up.

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