Additional Guidance Regarding COBRA Premium Subsidy

Model Notices and Deadline for Extended Election Period Notice

Group health plan administrators must provide individuals who are, or could be, assistance eligible individuals ("AEIs") with a written notice of the COBRA changes made by the American Recovery and Reinvestment Act of 2009 ("ARRA"). The DOL has released model notices for this purpose, including Full General, Abbreviated General, and Extended Election Period Notices. The model notices, and additional DOL guidance on which individuals should receive each notice, can be found on the DOL Web site at: http://www.dol.gov/ebsa/COBRAmodelnotice.html. Note that the Extended Election Period Notice must be provided by April 18, 2009.

Notice 2009-27

The IRS has issued further guidance on the COBRA premium subsidies required by ARRA. This article describes the key provisions of that guidance (Notice 2009-27).

Involuntary Termination of Employment

One of the most important features of Notice 2009-27 is its guidance concerning what constitutes an "involuntary termination of employment." This definition is crucial because the COBRA premium subsidy is required only if there is an involuntary termination of employment.

Generally, an involuntary termination of employment is a severance from employment because of the independent exercise of the employer's unilateral authority to terminate an employee's employment, if the employee was willing and able to continue working and did not implicitly or explicitly request the termination. Examples of involuntary terminations of employment include:

• Termination by the employer for cause. (Termination for gross misconduct is not a qualifying event under COBRA, however.)
• An employer's unilateral suspension of an employee's employment, including a layoff (with or without recall rights), a temporary furlough, or a lockout initiated by the employer.
• An employee's resignation or retirement in lieu of termination by the employer.
• An employee's voluntary acceptance of a severance package, if the employer indicated that some employees who did not accept the severance package would be terminated.
• An employer's failure to renew an expired employment contract, if the employee was willing and able to continue working under a new contract with similar terms.
• An employee's resignation for good reason because of a material negative change imposed by the employer. This may include, for example, an involuntary reduction in the employee's hours of employment or a material change in the geographic location of employment.
• A member of the armed services being called up for active duty.
• An elected official's failure to be reelected, or loss of eligibility to run for office because of term limitations.
• An employer's ending of an employee's employment while he or she is absent as a result of illness or disability.

In addition, if an employer's action results in loss of health coverage prior to, and in anticipation of, an involuntary termination of employment, such as a reduction in hours in anticipation of a layoff, the action causing the loss of coverage (e.g., the reduction in hours) is disregarded when determining whether the involuntary termination is the qualifying event for COBRA coverage purposes.

Certain Events Are Not Involuntary Terminations of Employment

Certain events are not considered involuntary terminations of employment for purposes of the COBRA premium subsidy. Examples of events that are not involuntary terminations of employment are:

• An employee's absence from work because of illness or disability.
• The employee's death.
• A work stoppage resulting from a strike initiated by employees or employee representatives.
• A reduction in an employee's hours of employment, without a complete suspension of employment. If the employee loses group health coverage because the employer reduces his or her hours, but not in anticipation of an involuntary termination, a subsequent involuntary termination will not be considered a COBRA qualifying event, and the employee will not be eligible for the premium subsidy.

Assistance Eligible Individuals

Generally, an AEI is a qualified beneficiary who becomes eligible for COBRA coverage because of an involuntary termination of employment after August 31, 2008, and before January 1, 2010, and who elects COBRA coverage. Both the termination of employment and the eligibility for COBRA coverage must occur during that period. The COBRA election may be made after the end of the period, however, as long as it is timely under the general COBRA rules.

Example 1: John is involuntarily terminated on December 1, 2009, and his group health coverage ends on December 31, 2009. John is not an AEI because he will not become eligible for COBRA coverage until January 1, 2010.

Example 2: Mary is involuntarily terminated on November 25, 2009, and her group health coverage ends on November 30, 2009. Mary becomes eligible for COBRA coverage on December 1, 2009, and makes a timely election of COBRA coverage on January 15, 2010. Mary is an AEI.

An AEI must have been covered under the group health plan on the day before the involuntary termination (or be a child born to or adopted by a covered employee during a period of COBRA coverage). Individuals added during open enrollment or special enrollment periods are not AEIs. In addition, AEIs are limited to covered employees and their spouses and dependent children, as defined by federal law. Other covered dependents (such as domestic partners) are not eligible for premium assistance under ARRA, even if the plan provides continuation coverage for those dependents, either voluntarily or pursuant to state law requirements.

In addition, a plan must actually be subject to COBRA or state law continuation coverage for covered individuals to be AEIs. The premium reduction and the employer payroll tax credit are not available if an employer is not required by law to provide COBRA or state continuation coverage.

Premium Reduction

Under ARRA, an AEI can be required to pay up to 35 percent of the premium for COBRA coverage. Notice 2009-27 clarifies the premium amount used to calculate the AEI's 35 percent share under various circumstances.

• If the group health plan charges the maximum permitted COBRA premium (102 percent of the cost of coverage), the AEI's share is 35 percent of that amount, and the premium subsidy is 65 percent of that amount.
• If the group health plan charges less than the maximum permitted COBRA premium, the AEI's share is 35 percent of the amount charged, and the premium subsidy is 65 percent of that amount. In order to maximize the premium subsidy and tax credit, a plan may increase the AEI's COBRA premium, up to the maximum permitted premium. The employer may, but need not, make a separate taxable payment to the AEI to make up for the increased premium.
• If COBRA coverage for one or more AEIs also covers one or more non-AEIs, the amount paid is allocated to the cost of the AEIs' coverage first and then to any additional cost of covering the non-AEIs. If there is no additional cost for covering the non-AEIs, the premium reduction applies to the full premium paid. If there is an additional cost for covering the non-AEIs, that additional cost is not subject to the premium reduction.
• If an AEI receiving COBRA coverage changes benefit options during an open or special enrollment period, and the new benefit option has a higher premium, the AEI's share is 35 percent of the increased premium.

Extended Period for Electing COBRA

Under ARRA, if an AEI became eligible for COBRA because of an involuntary termination that occurred before February 17, 2009, the AEI is entitled to an extended period to elect COBRA. The extended election period is available only if the AEI is entitled to COBRA under federal law, and does not apply if the AEI's continuation coverage is required only under a state law. A state may, however, impose a similar extended election period. The Oregon Insurance Division has asked the Oregon legislature to add such an extended election period.

Notice 2009-27 addresses the situation in which an AEI has COBRA election rights under both the generally applicable COBRA rules and the special ARRA extended election period rules:

• The AEI may elect COBRA under the generally applicable COBRA rules. In this case, COBRA coverage is retroactive to the loss of coverage and no premium assistance is available for coverage periods beginning before February 17, 2009.
• Alternatively, the AEI may elect COBRA coverage under the ARRA extended election period. In this case, the AEI may elect and pay for COBRA coverage for periods beginning on or after February 17, 2009.

When Does an Employee Have a "Loss of Coverage" for ARRA Purposes?

Eligibility for a premium subsidy under ARRA depends, in part, on when an individual becomes eligible for COBRA coverage. The date of COBRA eligibility depends on when the individual's "loss of coverage" occurred.

Some employers continue to provide group health coverage to involuntarily terminated employees on the same terms that apply to active employees, typically as part of a severance package. Under Notice 2009-27, the "loss of coverage" date in these situations depends on how this extended coverage is treated for COBRA purposes:

• If the employer treats the extended coverage as COBRA coverage, then the loss of coverage occurs when the employer starts providing the extended coverage.
• If the employer treats the extended coverage as deferring the start of the employee's COBRA period, then the loss of coverage occurs when the extended coverage ends.

Example 1: John is involuntarily terminated on October 10, 2009, and his last day of group health plan coverage would normally be October 31, 2009. The employer provides a severance package that includes employer-paid health coverage for six months after John's termination (November 1, 2009, through April 30, 2010). If the employer treats the employer-paid coverage as delaying the beginning of John's COBRA period, John's loss of coverage date is April 30, 2010. In this case, John is not an AEI because he will not become eligible for COBRA by December 31, 2009. John's 18-month COBRA period will begin on May 1, 2010 (if the plan measures the maximum coverage period from the date of loss of coverage, not the date of the qualifying event).

Example 2: If, in the above example, the employer treats the employer-paid coverage as part of its obligation to provide COBRA coverage, John's loss of coverage date is October 31, 2009. In that case, John could be an AEI because he will become eligible for COBRA as of November 1, 2009. John's 18-month COBRA period will begin on November 1, 2009 (if the plan measures the maximum coverage period from the date of loss of coverage, not the date of the qualifying event).

An employer's "treatment" of extended coverage as COBRA coverage or regular plan coverage must be consistent with, and reflected in, the applicable plan documents. In addition, the timing of the COBRA notices must be consistent with this treatment.

Retiree Coverage

If an AEI is eligible for retiree coverage, the ARRA premium subsidy is available only if the retiree coverage is the same as the coverage available to similarly situated active employees and the premium for the retiree coverage is not more than the maximum amount allowed under COBRA (although the plan can charge a higher premium for retiree coverage than for active employee coverage). In this case, the retiree coverage will be treated as COBRA coverage for purposes of the subsidy.

If an AEI has a choice between COBRA coverage under one group health plan and non-COBRA retiree coverage under a different group health plan, the AEI is generally not eligible for a premium subsidy under ARRA. There is an exception if the involuntary termination occurred before February 17, 2009, and the period for electing the non-COBRA retiree coverage ended before February 17, 2009. If an AEI has a choice between COBRA coverage and non-COBRA retiree coverage under the same group health plan, he or she will be entitled to the premium subsidy if he or she elects the COBRA coverage.

Health Reimbursement Arrangements

Notice 2009-27 also addresses how health reimbursement arrangements ("HRAs") are treated under ARRA.

• Premium subsidies are available for COBRA coverage under all HRAs.
• In general, eligibility for a premium subsidy ends if the AEI becomes covered under any other group health plan. If an AEI who is receiving a premium subsidy becomes covered under an HRA, the premium subsidy will end unless the HRA is a flexible spending account as defined in Code Section 106(c).
• If an AEI elects COBRA coverage under an HRA during the extended election period, the HRA is not required to reimburse expenses that were incurred after the loss of coverage and before the first period of coverage beginning on or after February 17, 2009.

Employer Payroll Tax Credit

An AEI's eligibility for the COBRA premium subsidy ends if he or she becomes eligible for coverage under another group health plan or Medicare. If an AEI in that situation fails to notify the employer and continues paying the reduced COBRA premium, the employer is not required to refund the tax credits it receives for continuing to subsidize the ineligible AEI's premiums unless it knew the AEI was eligible for the other coverage.

Premium Assistance for High Income AEIs

A plan may not decline to provide premium assistance to an AEI based on the AEI's income, unless the AEI provides a signed and dated notification to the employer that permanently waives his or her status as an AEI.

Comparable State Continuation Coverage

The ARRA premium reduction applies to state law continuation coverage that is comparable to COBRA. To be comparable to COBRA, the state continuation coverage must be substantially similar to the coverage provided under the group health plan, or substantially similar to the coverage provided to similarly situated beneficiaries. The state coverage must also be provided at a maximum monthly cost that is based on a specified percentage of the group health plan's cost of providing the coverage.

State continuation coverage may have qualifying events, qualified beneficiaries, maximum premiums, and periods of continuation coverage that differ from their counterparts under COBRA. These differences will not prevent the state coverage from being comparable for purposes of the ARRA premium subsidy requirements.

If a fully insured plan is subject only to state continuation coverage requirements, the insurer is the only entity entitled to receive payroll credits for the premium subsidy. Therefore, unless future guidance is provided, if the employer collects the reduced premium from an AEI and pays the full premium to the insurer, the employer cannot recover the difference through a payroll credit.