By Thomas I. Kramer
Readers of our February 16, 2009 eAlert know that the stimulus bill, formally titled the American Recovery and Reinvestment Act of 2009 (now known as ARRA), provides a subsidy for continuation coverage in certain cases and opened a window that would permit certain qualified beneficiaries who are not on COBRA coverage to elect such coverage. That eAlert, like the series of roundtable seminars we held last month, was based on our best guesses about how the Internal Revenue Service and Department of Labor would interpret ARRA.
The DOL issued guidance late last month and again last week; the IRS issued guidance last week. This eAlert updates what we have previously stated about ARRA. It will first review the ARRA changes and then discuss the guidance provided in IRS Notice 2009-27, in the DOL’s FAQs and model notices and then note potential new Oregon legislation affecting state continuation coverage.
ARRA permits certain qualified beneficiaries to get continuation coverage by paying 35% of the applicable premium for the coverage. Here are the basic requirements to qualify for the subsidy:
- It is available only to qualified beneficiaries who lost or lose coverage due to involuntary termination of employment between September 1, 2008 and December 31, 2009.
- It is available for periods of coverage starting after February 17, 2009 (March 2009 and later months, in most cases).
- It is available for up to nine months.
- It ends when the qualified beneficiary becomes eligible for coverage by Medicare or another group health plan (other than a plan providing only dental or vision coverage or a health FSA or most HRAs) or fails timely to pay his or her reduced share of the applicable premium.
Who pays the remaining 65% of the applicable premium (and takes the tax credit for doing so) varies with the type of plan involved:
- For collectively-bargained multiemployer health plans, the plan makes up the premium and takes the tax credit.
- For single-employer and non-collectively-bargained association plans that are either subject to federal COBRA or self-insured, the employer makes up the premium and takes the tax credit.
- For single-employer and non-collectively-bargained association plans that are subject only to state continuation coverage, the insurer makes up the premium and takes the tax credit.
Plan administrators must give qualified beneficiaries written notice of the availability of the premium subsidy and warn them of their obligation to give timely written notice of the availability of other coverage that may cut off the premium subsidy.
ARRA also requires group health plans subject to COBRA to offer a new or extended election window to qualified beneficiaries who lost coverage due to involuntary termination between September 1, 2008 and February 17, 2009 but who either did not timely elect COBRA continuation coverage or who dropped such coverage.
Questions Answered by IRS Guidance
- Plan administrators must give eligible individuals written notice of the new or extended election window, which must last 60 days from the date of the notice.
- COBRA coverage elected during the special election period begins with the first “coverage period” starting on or after February 17, 2009 (March 2009, in most cases) and does not extend the maximum COBRA continuation period based on the original qualifying event.
- If a qualified beneficiary elects COBRA coverage during the special election period, any gap in coverage between the date of the qualifying event and March 1, 2009 is disregarded for purposes of applying any preexisting-condition limit to the qualified beneficiary.
The IRS Notice is too long to summarize here, so we will focus on those items that were different from our initial impressions.
Many questions we received related to the definition of involuntary termination of employment, and much of the IRS Notice focused on that question. Here are the points that caught our eyes:
- The employer’s failure to renew a contract, if the employee is willing and able to continue to work for the employer at that time, is an involuntary termination.
- A voluntary termination for good cause is treated as an involuntary termination. Good cause is a material negative change in the terms of employment. A significant reduction in hours or a material change of worksite (neither is defined) could be good cause for this purpose.
- A voluntary termination or retirement in the face of an involuntary termination to come, or even the threat of unspecified layoffs in the employee’s department, is treated as an involuntary termination.
- Even a temporary reduction in hours to zero is treated as an involuntary termination.
- An employer’s termination of an employee who is medically unable to return to work is an involuntary termination, but the employee’s failure to return, without employer action to terminate the employee, is not an involuntary termination.
- Going on strike is not an involuntary termination, but an employer-initiated lockout is.
- Termination for cause is an involuntary termination (but no subsidy for federal COBRA coverage is available in the event of termination for gross misconduct).
ARRA provides the premium subsidy to “assistance eligible individuals” or “AEIs.” Here are the clarifications of that term that surprised us a bit:
- We knew that a person is an AEI only if the qualifying event was an involuntary termination of employment, but we only suspected that employer action, such as a reduction in hours, in anticipation of involuntary termination would be disregarded in determining AEI status.
- For a person to be an AEI, both the involuntary termination and the loss of coverage must occur between 9/1/08 and 12/31/09.
- A person can become an AEI more than once, if he or she loses coverage during the relevant period more than once due to involuntary termination of employment, and the premium subsidy may be up to nine months long for each such qualifying event.
- Only qualified beneficiaries who lost coverage due to the involuntary termination, and newborn or newly adopted children added to coverage by the qualified beneficiary, are AEIs. Other family members may be added to COBRA coverage, but without the premium subsidy.
- The term “qualified beneficiary” is defined exclusively by COBRA and not state law. So even where domestic partners must be offered continuation coverage (as in Oregoninsured plans not subject to COBRA), they are not eligible for the premium subsidy.
The premium subsidy probably should affect how employers structure severance pay plans and separation agreements.
- The employer’s payment of all or part of a qualified beneficiary’s COBRA premium reduces or eliminates the employer’s right to the take the tax credit provided by ARRA.
- The employer’s payment of taxable severance pay, however, even if used by the qualified beneficiary to pay his or her subsidized COBRA premium, does not interfere with the employer’s right to take the tax credit.
The premium subsidy applies to almost all health plans required to offer continuation coverage. This includes health reimbursement arrangements but not health flexible spending accounts that are provided through a cafeteria or flexible benefits plan.
The Notice gave a bit of guidance regarding policing access to the premium subsidy:
- The employer is not required to refund the tax credit for subsidized coverage claimed by an ineligible person unless the employer knew the person was not eligible for the subsidy.
- If a qualified beneficiary waives the subsidy (because his or her adjusted gross income is expected to be too high), he or she may not later change and claim the subsidy.
- The employer may not deny the subsidy to a person because the employer believes the person’s AGI will be too high for him or her to be entitled to retain the subsidy.
- The DOL will have an expedited appeal process for qualified beneficiaries denied the subsidy. For public-sector plans not subject to ERISA, the Department of Health and Human Services will provide this appeal process.
The IRS guidance regarding the special election period offered a few surprises, including the following:
DOL FAQs and Model Notices
- If a qualified beneficiary eligible for the special election elected and kept COBRA coverage for himself or herself, but not for the spouse or dependents who had been covered at the time of involuntary termination, the spouse and dependents are eligible for the special election.
- If the spouse and dependents were not covered at the time of involuntary termination, they are not eligible for the special election (or the premium subsidy), though the qualified beneficiary may be able to add them to his or her COBRA coverage at open or special enrollment.
- A qualified beneficiary eligible for the special election who became eligible for other group coverage before February 17, 2009 but is not on such coverage is still eligible for the special election if the chance to enroll for the other coverage ended before 2/17/09.
- The special election applies to HRAs but not health FSAs offered under a cafeteria plan.
As noted above, plan administrators are required to give written notice of the premium subsidy and the special election opportunity, and the DOL has now issued four
model notices that may be used for this purpose. Here is why there are four model notices:
- The “General Notice” announces the premium subsidy. It is for all qualified beneficiaries with qualifying events that occur between 9/1/08 and 12/31/09, unless a different notice below applies.
- The “Abbreviated General Notice” may be given, instead of the longer General Notice, to qualified beneficiaries who are already on COBRA coverage now due to qualifying events that occurred after 8/31/08.
- The “Additional Election Notice” is for qualified beneficiaries who lost coverage due to a termination of employment that occurred between 9/1/08 and 2/16/09.
- The “Alternative Notice” is for qualified beneficiaries who are eligible for state (nonCOBRA) continuation coverage.
All of the DOL model notices are intended to be used instead of the plan’s regular COBRA notices and election forms. We have prepared two sample
notices that may be customized by employers and used to supplement their existing continuation coverage notices, which are available to clients and friends of BSJW upon request.
The DOL model notices highlight two troubling issues in ARRA itself about who should get the notices, and the DOL’s new FAQs on its website are explicit about these points:
Potential New Oregon Legislation
- The DOL is taking the position that the special election notice is to be given only to COBRA qualified beneficiaries who the employer believes were involuntarily terminated from employment. This is consistent with the wording of ARRA, but we think it may create some fiduciary risks for plan administrators. Accordingly, we suggest that administrators give the notice as well to qualified beneficiaries who lost coverage due to a voluntary termination of employment, so that they may appeal the denial of a special election, if they believe their termination really was involuntary.
- The DOL also is taking the position that the premium subsidy notice appears to be set up to be given to all qualified beneficiaries, even if their qualifying event was something other than termination of employment (like death, divorce or a dependent losing eligibility). Here again, this is consistent with the wording of ARRA, but it makes no sense to us. It seems more sensible to send this notice only to qualified beneficiaries whose qualifying event was voluntary or involuntary termination of employment. The cautious employer might send the notice to all qualified beneficiaries with a warning that the premium subsidy is not available unless the qualified beneficiary’s qualifying event was involuntary termination of employment.
Oregon-insured medical plans that are not subject to COBRA may be required by current law to offer up to six months of continuation coverage to eligible individuals. 2009 House Bill 2433 would extend that to nine months, presumably for insurance contracts issued or renewed in Oregon on or after the date the Governor signs the bill, assuming it passes (which we’re told is likely).
As noted above, the special election window is not required for plans not subject to COBRA. If HB 2433 passes as drafted, it would authorize the Oregon Insurance Division to require such a special election window for Oregon-insured plans.
Please review the “Employer Action Steps” at the end of our February 16, 2009 eAlert in light of the additional guidance described above. As ever, please feel free to contact us if you have questions or comments about these new rules, or any other employee benefits issues.