COBRA Premium Reduction Guidance — What Do We Do Now?
HEALTH AND WELFARE BENEFITS
- 2009 Health and Welfare Plan Compliance Checklist
- GINA Interim Final Regulations Issued — Wellness Programs Impacted
- READY, SET, COMPLY! — New HIPAA Security Breach Notification Rules Require Prompt Action by Covered Entities
- Update on Discretionary Clauses in Disability Insurance Policies in California and Their Impact on ERISA Plans
- Significant HIPAA Changes Imposed by the American Recovery and Reinvestment Act of 2009
- Ninth Circuit Denies Petition for Rehearing En Banc in Golden Gate Restaurant Association v. City and County of San Francisco
- Children's Health Insurance Program Reauthorization Act of 2009 — Impact on Group Health Plans
- New COBRA Subsidy Available Under Stimulus Package
- Massachusetts Issues Final Regulations Establishing Minimum Creditable Coverage Standards
- Ninth Circuit Holds San Francisco Health Care Security Ordinance is Not Preempted by ERISA
- New Genetic Nondiscrimination Act Creates Restrictions for Health Plans, Insurers and Employers
- New Leave Entitlements for Military Reasons Added to Family and Medical Leave Act
- Ninth Circuit Lets San Francisco Health Care Security Ordinance Take Effect
- IRS Issues New Proposed Section 125 Cafeteria Plan Regulations
- Recent Court Decision Paves Way for Coordination of Retiree Health Benefits with Medicare Benefits — AARP v. EEOC
- New Rules for HSAs
- Final Regulations on HIPAA Nondiscrimination Provisions and Wellness Programs
- New Guidance on the Use of Electronic Payment Cards for Health FSAs, HRAs and DCAPs
- Supreme Court's Sereboff Opinion Clarifies "Equitable Relief" Under ERISA
- Continuing Notice Obligations Under Medicare Part D
- Section 125 Plan 2½ Month Grace Period: Participants’ Bonus and Administrators’ Bane
- CMS Issues Final Regulations
on Medicare Part D - HIPAA Portability Regulations Finalized
- Medicare Prescription Drug, Improvement and Modernization Act of 2003: Retiree Prescription Drug Coverage
- The Working Families Tax Relief Act of 2004: Changes to Tax Rules for Health and Accident Coverage and to Other Employee Benefits
- Recent Guidance on Health Savings Accounts
- Discretionary Clauses in Disability Insurance Policies Ruled Illegal in California
- California Repeals Senior COBRA Program
- The U.S. Department of Labor Issues Final Regulations Regarding COBRA Notices
- Ninth Circuit Holds that Health Plan Reimbursement and Subrogation Provisions are Enforceable Under State Law
- Getting Serious About Security:
Final HIPAA Security Regulations - Health Savings Accounts — the New Tax-Favored Vehicle for the Payment of Health Care Expenses
- Electronic Cards Permitted for Health Flexible Spending Accounts and Health Reimbursement Arrangements
- California Mandates Pay or Play Health Coverage
- Supreme Court Reverses Ninth Circuit’s Adoption of the Treating Physician Rule
- IRS Permits Reimbursement for Certain Non-Prescription Medicines and Drugs
The April 18, 2009 deadline for distributing the notice describing the new COBRA premium reduction and COBRA extended election period available under the American Recovery and Reinvestment Act of 2009 ("ARRA") has passed, and many employers and plans will begin receiving and administering requests for the premium reduction over the next few weeks. Both the Internal Revenue Service ("IRS") and Department of Labor have issued helpful guidance on how to administer these new COBRA rights since the enactment of ARRA on February 17, 2009, including the IRS's Notice 2009–27 (the "Notice"). This article discusses some of the major issues raised in the Notice, including its guidance on what constitutes an "involuntary termination" and the interplay of the premium reduction and coverage provided in connection with a severance policy or plan. (For a detailed discussion of the ARRA premium reduction and the second COBRA election period, please also see our article on the ARRA premium reduction in our February 2009 issue.)
Background Qualified beneficiaries who would be eligible for the new premium reduction but for the fact they do not have COBRA coverage as of February 17, 2009, may elect COBRA during a special 60-day extended election period that plans must provide for no later than April 18, 2009. According to ARRA, employers and plans that must front the portion of the cost of COBRA that is not paid by AEIs may be reimbursed for such cost by claiming a credit against the employer's payroll tax liability using the new quarterly Form 941.
Briefly, ARRA provides for a 65% reduction in the premium otherwise payable for COBRA coverage by certain qualified beneficiaries for coverage periods that commence on and after February 17, 2009 (COBRA months beginning March 1, 2009 for plans that administer COBRA on a monthly basis). The ARRA premium reduction is available for up to nine months to an "assistance eligible individual" ("AEI") who:
Involuntary Termination The Notice also addresses employee-initiated terminations. According to the IRS, such terminations may be considered involuntary if the employee's action is taken in response to an employer action that causes a material negative change in the employee's employment relationship. Such material negative changes may include the employer's reduction of the employee's hours of employment or change in the geographic location of the employee's work location. Thus, if an employee resigns as a result of the employer's reduction of the employee's hours of employment, the employee's termination may be considered to be involuntary. Moreover, the Notice specifies that even if a termination is designated as "voluntary," as a "resignation" or as a "retirement," the termination may be considered involuntary if the facts and circumstances indicate that, absent such voluntary termination or retirement, the employer would have terminated the employee's services, and the employee knew that he or she would be terminated. For example, if an employee accepts a severance or buy-out package, the employee will be considered to have been involuntarily terminated if the employer indicates that a certain number of remaining employees in the employee's group will be terminated after the severance package's offer period. The Notice also clarifies that the death of an employee is not considered to be an involuntary termination. Although the Notice states that a reduction in hours (e.g., a leave of absence) will generally not be considered an involuntary termination, the IRS stated in a recent webcast that an employee who commences a military leave may be considered to be involuntarily terminated for purposes of the ARRA premium reduction.
Because ARRA did not define the term "involuntary termination" for purposes of determining who is eligible for the premium reduction, perhaps the most anticipated guidance expected from the IRS concerned the types of the circumstances that would constitute an "involuntary termination." The Notice defines an "involuntary termination" as "a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." According to the Notice, the determination of whether a termination is "involuntary" is based on all the facts and circumstances. The Notice identifies the following situations as constituting an "involuntary termination" for purposes of the ARRA premium reduction:
Status as an "Assistance Eligible Individual" If an employer wishes to take advantage or the premium reduction for upcoming layoffs, the employer may want to restructure severance benefits so that the termination and loss of coverage occur on or prior to December 31, 2009.
The Notice also includes the following clarifications regarding who may qualify as an AEI:
Calculation of the Premium Reduction and Resulting Payroll Tax Credit The Notice provides the following example regarding COBRA coverage that is subsidized in part by the employer: The Notice further clarifies that if an employer fully subsidizes the cost of an AEI's COBRA coverage, for example as part of a severance package, those subsidized months will count against the nine-month eligibility period that applies to that AEI. Moreover, because the AEIs are not actually being charged anything for COBRA coverage, no payroll tax credit will be available to the employer for these subsidized amounts. The Notice also clarifies that if an employer reimburses an AEI for the subsidized amount he or she must pay for COBRA coverage and the employer excludes that amount from the AEI's gross income under IRC Section 106, the AEI's COBRA payment will be treated having been paid by the employer and no payroll tax credit will be available to the employer. On the other hand, if an employer provides taxable severance monetary benefits to an involuntarily terminated employee but does not pay any amount towards the terminated employee's COBRA coverage, the severance benefit will not be taken into account for purposes of applying the premium reduction. To the extent that continuation coverage includes coverage for individuals who are not qualified beneficiaries (e.g., domestic partners or a new spouse who is enrolled during the COBRA coverage period) or who are not AEIs, the Notice makes clear that the ARRA premium reduction does not apply to such coverage. The Notice states that if the COBRA coverage covers individuals who are not qualified beneficiaries or AEIs, the amounts paid for coverage are allocated first to the cost of covering AEIs and then to the cost of covering non-AEIs. Therefore, if the cost of covering non-AEIs is $0, the ARRA premium reduction will apply to the entire amount paid for the COBRA coverage. However, if the cost of covering a non-AEI adds to the cost of covering AEIs, then the incremental cost is not eligible for the premium reduction.
According to the notice, the premium amount used to determine the 35% share that must be paid by an AEI is the amount that is actually charged to the AEI. Thus, if an AEI is required to pay 102% of the applicable premium for COBRA coverage absent the subsidy, the AEI will only be required to pay 35% of the 102% of the applicable premium. However, if an AEI is charged less than the maximum COBRA premium, for example because the employer pays all or a part of the cost of COBRA, the AEI will only be required to pay 35% of this lower amount. The employer's resulting payroll tax credit is, in turn, 65% of this lower amount. We note that the Notice expressly permits an employer to increase the amount charged for COBRA coverage, subject to the maximum amount permitted under COBRA. For example, if an employer charged a lower COBRA premium prior to enactment of ARRA, the employer may decide to increase the COBRA premium to the maximum amount permitted by COBRA to take full advantage of the ARRA premium reduction.
Coverage Eligible for the ARRA Premium Reduction
In addition to clarifying that the ARRA premium reduction applies to vision-only and dental-only plans and to health reimbursement arrangements ("HRAs"), the Notice addresses retiree health plan coverage. According to the Notice, if retiree health plan coverage does not differ from the coverage provided to similarly situated active employees (i.e., it is identical) and does not cost more than the maximum amount allowed under federal COBRA (i.e., 102% of the applicable premium), the retiree coverage can be treated as COBRA coverage and covered retirees who qualify as AEIs may receive the ARRA premium reduction.
End of the ARRA Premium Reduction Period With regard to the cut-off due to eligibility for other coverage, the Notice clarifies that if an AEI is eligible for other coverage (e.g., coverage under a spouse's employer's plan) but is not actually able to enroll in the other coverage and have that coverage take effect immediately, the AEI will maintain eligibility for the premium reduction until the first date that the other coverage can take effect. The Notice further clarifies that if an individual is offered COBRA coverage and retiree health plan coverage that is not COBRA coverage, the retiree health plan coverage will not render the individual ineligible for the premium reduction if the retiree coverage and COBRA coverage are offered under the same group health plan, as determined by the instruments governing the coverage. With regard to Medicare, the Notice clarifies that an individual who is currently enrolled in Medicare, but who is eligible to elect COBRA coverage (e.g., because the individual enrolled in Medicare prior to his/her involuntary termination), will not be eligible for the premium reduction. As referenced in the introductory section of this article, employers and plans may claim a payroll tax credit with respect to AEIs who receive the premium reduction. Accordance to the Notice, if an AEI fails to notify the plan of his/her eligibility for other coverage and continues to receive the premium reduction, albeit improperly, the employer or plan will not be required to refund to the IRS the payroll tax credit that it received, unless the employer or plan had knowledge of the individual's eligibility for other coverage or Medicare coverage.
The ARRA premium reduction applies until the earliest of:
Extended Election Period The Notice further clarifies that any COBRA coverage that is elected pursuant to the extended election period begins with the first period of coverage beginning on or after February 17, 2009 (March 1, 2009 for plans that administer COBRA coverage as of the beginning of each month). This means that expenses incurred after the AEI's loss of coverage and before this date (generally, March 1, 2009), are not covered under the resulting COBRA coverage.
The Notice clarifies that if an individual was terminated between Sept. 1, 2008 and Feb.17, 2009, and still has an open COBRA election period as of February 17, 2009, the individual can elect COBRA during the extended election period or during his or her original COBRA election period.
Assistance Eligible Individuals Under the Federal Defense of Marriage Act (DOMA), a spouse does not include a domestic partner. Hence, a domestic partner will never be eligible for the ARRA premium reduction. COBRA does not define the term "dependent child." While "dependent child" is defined in Internal Revenue Code Section 152, that definition is not necessarily applicable to the ARRA premium reduction. In a recent webcast, the IRS acknowledged that the term "dependent child" was not defined in ARRA. Accordingly, we believe that it is reasonable to assume that for the purposes of the ARRA premium reduction the term "dependent child" is determined by reference to the terms of the group health plan.
The Notice clarified that the ARRA premium reduction could not apply to individuals who are not qualified beneficiaries under COBRA. The Notice states that a qualified beneficiary with respect to a covered employee under a group health plan is the spouse of the employee under Federal law or a dependent child of the employee under Federal law if, generally, the spouse or dependent child was a beneficiary under the plan on the day before the qualifying event. (A qualified beneficiary also includes a child who is born to or adopted by the covered employee during the period of COBRA continuation coverage.)
Conclusion
Notice 2009–27 provides welcome guidance to employers and plans on the administration of the new COBRA premium reduction. If you have any questions regarding the premium reduction, please contact our office.
Copyright © Trucker Huss. All rights reserved. This article is published as an information source for our clients and colleagues. The article is current as of the date shown above, is general in nature and is not the substitute for legal advice or opinion in a particular case. In response to new IRS rules of practice, we inform you that any federal tax information contained in this writing cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters in this writing.