- The Benefits Game: New COBRA Subsidy Rules Require Notices by April 18, 2009
- May 19, 2009 | Authors: Sarah Lockwood Church; Kristen Belz Ornato; Paul A. Kasicky
- Law Firm: Thorp Reed & Armstrong, LLP - Pittsburgh Office
This is a follow-up to our previous communiqué discussing the new COBRA health care continuation requirements under the American Recovery and Reinvestment Act of 2009 (“ARRA” or “Stimulus Act”) which became law on February 17, 2009, and which made amendments to both the Internal Revenue Code of 1986, as amended (“Code”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
In this update, we describe the recent Department of Labor (“DOL”) model notices issued in connection with the April 18, 2009 notice deadline. In addition, DOL and Internal Revenue Service (“IRS”) officials have provided informal guidance and, recently, the IRS issued Notice 2009-27.
The Stimulus Act provides for a temporary reduction in the COBRA premium that must be paid by Qualified Beneficiaries (i.e. a covered employee, a covered employee’s spouse or dependent child who was covered by the group health plan immediately prior to the qualifying event or by operation of HIPAA’s special enrollment provisions) whose health care coverage is lost as the result of an involuntary termination of employment that occurs on or after September 1, 2008 and before January 1, 2010. These specific qualified beneficiaries are called “assistance eligible individuals” (individually, an “AEI” or collectively, “AEIs”).
This temporary reduction in COBRA premiums (“COBRA subsidy”) is in effect as of March 1, 2009, and imposes specific notice obligations on group health plans.
Both the DOL and the IRS have now provided additional guidance on the COBRA subsidy, as follows:
The DOL recently provided four (4) model notices to assist plan administrators with this notification requirement. One of the four notices is primarily applicable to insurance carriers.
The notices can be found on the DOL's website and, the three notices applicable to employers are detailed below.
While only AEIs are entitled to the subsidy, plan administrators must provide the notices to all Qualified Beneficiaries – not just AEIs. To this end, we would recommend amending the model notices to include information on penalties applicable to individuals who falsely claim entitlement to the subsidy – generally a 110% tax on the amounts received under the COBRA premium assistance subsidy (i.e. the 65% employer cost), or providing a cover letter to the notice that clarifies why the notice has been issued. We anticipate that many individuals will have numerous questions upon receipt of these notices.
General Notice (Full Version). This notice must be sent to all Qualified Beneficiaries, not just AEIs who experience a qualifying event for any reason who either have not yet been provided with a COBRA election notice OR who, on or after February 17, 2009 were provided with a COBRA election notice that did not include information on their rights to the COBRA subsidy.
General Notice (Abbreviated Version). This notice may be sent instead of the General Notice to any Qualified Beneficiary, including AEIs, who elected COBRA continuation coverage and has maintained it.
Notice in Connection with Extended Election Periods. This notice must be sent to all Qualified Beneficiaries, including AEIs, whose COBRA qualifying event occurred before February 16, 2009 who either did not elect COBRA coverage, or who elected but subsequently discontinued the coverage.
Notices must be provided no later than April 18, 2009.
Penalties for Failure to Provide Notices
Failure to provide notice could subject a plan sponsor to penalties of up to $110 per day under ERISA and an excise tax penalty of $100 per day under the Code). The penalty or excise tax applies separately to each Qualified Beneficiary. In addition, individuals may have a cause of action to sue for COBRA coverage and receive the benefits that should have been offered, as well as attorneys’ fees and “other relief.”
In addition to the Notices, the DOL has also issued (and updated) FAQs for both employers and employees.
The IRS has issued its informal guidance in the form of questions and answers, called “COBRA: Answers for Employers:”
These questions are broken down into four separate categories, as follows:
COBRA Questions and Answers: Administration and Eligibility
COBRA Questions and Answers: Form Preparation
COBRA Questions and Answers: Reporting and Documentation
COBRA Questions and Answers: Taxability and Recapture
As noted above, the IRS has also issued Notice 2009-27 which covers a variety of topics including Involuntary Termination, who can qualify as an AEI, the calculation of a premium reduction when employers subsidize COBRA, as well as a variety of additional topics which are briefly summarized below.
Assistance Eligible Individuals
Only those individuals who are COBRA Qualified Beneficiaries may be an AEI. A same sex domestic partner or non-spouse may not be considered an AEI, since they may not be considered a Qualified Beneficiary. And an individual may become an AEI more than once and shall have an independent right to coverage for the maximum subsidy period (i.e. nine months or upon obtaining other coverage or being covered under Medicare).
IRS Notice 2009-27 clarifies that if an individual does not lose coverage in connection with an involuntary termination until after January 1, 2010, then they are not an AEI and are not eligible for the subsidy. Both the involuntary termination and the loss of coverage (i.e. eligibility for COBRA continuation coverage) must occur between September 1, 2008 and December 31, 2009.
However, an AEI’s election for continuation coverage does not have to occur before December 31, 2009, as long as the resulting COBRA continuation coverage begins during that period. For example, if an individual experiences a Qualifying Event due to involuntary termination on November 30, 2009, they would not have to make a COBRA election until at least January 29, 2010 (depending upon when the notice is provided) to elect COBRA coverage.
IRS Notice 2009-27 further clarifies that if an employer provides health care coverage to involuntarily terminated employees on the same terms as for similarly situated employees, then how the employer classifies such coverage for an involuntarily terminated employee will dictate whether the employee will be considered an AEI. If the plan treats this coverage as deferring the loss of coverage for COBRA purposes, then for purposes of the Subsidy, as well as COBRA, the loss of coverage would occur when the employer provided coverage ends. This would be a situation where the maximum 18-month COBRA period begins after the employee-provided coverage ends. If the plan treats such coverage as part of its COBRA obligation, then the loss of coverage for purposes of the Subsidy would occur on the date the employer begins providing the coverage. It is important to note that the loss of coverage may occur earlier, if the employer provided coverage is not the same as the coverage provided to similarly situated employees.
In addition, if an individual’s coverage is lost from September 1, 2008 through December 31, 2009 for a reason other than an involuntary termination, they are not an AEI. For example, individuals losing health care coverage due to a divorce or reduction of hours may be a Qualified Beneficiary entitled to elect COBRA continuation coverage, but would not be considered an AEI entitled to the COBRA subsidy. As noted above, if such an individual receives the COBRA subsidy, they will be subject to a 110% penalty discussed above.
Involuntary Termination of Employment for Purpose of the COBRA Subsidy
Both the IRS and DOL take an expansive view of what constitutes an “Involuntary Termination of Employment” for purposes of the COBRA Subsidy (“Subsidy Termination”). In IRS Notice 2009-27, the IRS indicates that an involuntary termination “means a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment . . . where the employee was willing and able to continue performing services.” According to IRS Notice 2009-27, such things as a layoff (even with recall rights), retirement (if without retirement, the employee would have been terminated), a participation in a window program (if the employer indicates that involuntary terminations will follow the “buy-out”), and ending an individual’s employment status while absent from work for illness qualify as a Subsidy Termination. Furthermore, the notice provides that the IRS considers any voluntary termination in response to a materially adverse change in employment (i.e. a reduction in hours, transfer to another state, or other “good reason” termination) would be considered a Subsidy Termination.
In comparison, the IRS would not consider a reduction in hours a Subsidy Termination unless the reduction in hours means “zero” hours.
It is clear that the COBRA subsidy is a compliance minefield and, to be frank, a moving target. We strongly urge you to work with your benefits attorney/professional in order to make certain that you comply with its provisions and avoid any additional scrutiny from regulatory agencies.