April 3, 2009
This is another in our series of WorkCites regarding the COBRA subsidy provisions of the American Recovery and Reinvestment Act of 2009 (ARRA). (See our items for 2/17/09, 3/23/09 and 3/27/09). In this WorkCite, we will describe Notice 2009-27, issued by the Internal Revenue Service (IRS) on March 31, 2009. The Notice contains important information regarding:
Due to the breadth of these issues, we will try to cover only ground that we have not previously covered.
At last, the IRS has provided written guidance on when an employment termination is involuntary. This, of course, is one of the essential criteria for qualifying for the COBRA subsidy. The class of terminations deemed by the IRS to be involuntary is quite broad. Remember, however, that the following rules only pertain to eligibility for the COBRA subsidy. They do not govern similar issues that may arise with respect to general COBRA eligibility, under the Internal Revenue Code, or that are also of interest to other government agencies, such as the Department of Labor.
Here is the principle that employers should use to determine whether an employee’s termination of employment is voluntary (no subsidy eligibility) or involuntary (eligible for the subsidy):
An involuntary termination means 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.
The determination is one of facts and circumstances, or substance over form. How the employer and the employee characterize the termination will not be the dispositive factor on whether the employee is eligible for the COBRA subsidy.
The IRS provides helpful information on whether certain types of termination are involuntary for purposes of the COBRA subsidy.
Who is an Assistance Eligible Individual (AEI)?
The Notice provides further detail regarding who is an AEI for purposes of the ARRA premium subsidy.
It indicates that an AEI’s involuntary termination and loss of coverage must occur between September 1, 2008 and December 31, 2009. However, an AEI’s election of COBRA coverage can occur after that period as long as the resulting COBRA coverage begins during that period.
The Notice also clarifies that an individual can become an AEI more than once. However, if COBRA coverage is based on a qualifying event (other than an involuntary termination) that occurs before an individual’s involuntary termination, the later involuntary termination does not cause the qualified beneficiary to become an AEI. For example, if an employee has a reduction in hours causing a loss of coverage but is subsequently involuntarily terminated, the individual is not an AEI.
The Notice provides that a spouse or dependent child who is not covered before the involuntary termination and is added to coverage during a later enrollment period is not an AEI for purposes of the ARRA premium subsidy. However, there is an exception for a child born to or adopted by an AEI during the period of COBRA coverage.
Furthermore, if an individual does not meet the definition of a qualified beneficiary under federal COBRA rules (e.g., a same-sex spouse or domestic partner), the individual’s coverage is not as an AEI and is not eligible for the ARRA premium subsidy, even though such individual may be covered under a plan by its terms, or as required by state law.
The Notice also provides guidance as to the effect that an offer of retiree health coverage that is not COBRA continuation coverage has on an AEI’s eligibility for the premium subsidy.
Accordingly, employers that sponsor multiple health programs must carefully assess whether such programs comprise a single plan or separate plans under the COBRA rules.
Calculation of Premium Reduction
The Notice clarifies several issues regarding the calculation of the reduced premium that the AEI must pay:
Coverage Eligible for Premium Reduction
The Notice contains new insight on what plans are eligible for the premium subsidy.
Beginning of Premium Reduction Period
The premium reduction applies to the first period of coverage beginning on or after February 17, 2009 for which the AEI is eligible to pay 35% of the premium and is treated as having made full payment. For plans that require COBRA continuation coverage to be paid based on a calendar month, March 1, 2009 will be the first period that could be subject to the premium reduction. The notice clarifies that in such circumstances, an employer may not prorate the premium reduction to the portion of February that begins on February 17, 2009.
If an employer provides health coverage for an individual after the individual’s involuntary termination on the same terms as for similarly situated active employees, the employer is free to choose the beginning date for the premium reduction between two methods:
End of Premium Reduction Period
The notice provides additional details concerning the termination of the premium reduction, such as:
As noted above, an individual may become an AEI more than once. The Notice indicates that, in some cases, an individual who becomes an AEI for a second time is eligible for up to nine months of premium subsidy for each involuntary termination of employment. For example, assume that an individual (i) is involuntarily terminated in April, 2009, (ii) qualifies as an AEI, (iii) becomes eligible for the premium subsidy beginning May 1, 2009, (iv) ceases to be an AEI on September 1, 2009 because group health coverage becomes available through the individual’s spouse, and (v) loses such coverage under the spouse’s plan beginning December 1, 2009 due to the spouse’s involuntary termination of employment. The individual will be eligible for four months of subsidized premiums under the first plan and up to nine months of premium reduction under the second plan.
Eligibility for a second subsidy would also occur where an AEI is involuntarily terminated, elects COBRA, is hired by a new employer after several months, joins that employer’s group plan, is involuntarily terminated again, loses coverage under that plan before December 31, 2009, and elects COBRA under that plan.
Recapture and Waiver of Premium Assistance
Notice 2009-27 provides further details concerning an AEI’s right to waive COBRA subsidies and the obligation of the employer to recapture premium subsidies paid to ineligible individuals.
Extended Election Period
In instances where an AEI was involuntarily terminated between September 1, 2008 and February 16, 2009 and elected self-only COBRA continuation coverage, the spouse and dependents are eligible to enroll during the extended election period, provided that they otherwise qualify as an AEI and were beneficiaries under the group health plan covering the employee on the day before the involuntary termination.
For plans that measure periods of coverage using the date of loss of coverage, as opposed to the calendar month, the Notice contains an explanation and example of how to measure the initial period of coverage following enrollment during the extended election period.
An AEI who (i) may still elect COBRA continuation coverage after receiving a standard election notice before February 17, 2009, and (ii) is also eligible to elect coverage during the extended election period may select which election under which the AEI desires to enroll. This option permits the AEI to choose between COBRA coverage retroactive to the loss of coverage and the period of coverage beginning on or after February 17, 2009 (generally March 1, 2009).
Individuals who enroll in COBRA continuation coverage during the extended election period will not have coverage for expenses incurred between the original loss of coverage date and the beginning date of the new period of coverage, including reimbursements under an HRA.
Eligibility for other group health coverage prior to February 17, 2009 does not disqualify an AEI from paying reduced premiums.
The timing of the initial premium for individuals who enroll in COBRA continuation coverage during the extended election period should be treated the same as standard enrollment after the qualifying event. Plans may not require payment of the first premium earlier than 45 days after an AEI elects COBRA continuation coverage during the extended election period.
Payments to Insurers under Federal COBRA
Insured plans (other than multiemployer plans) that are subject to the federal COBRA provisions may make arrangements with an employer to collect premiums directly from qualified beneficiaries. Under this arrangement, insurers must treat AEIs who submit 35% of the premium as having paid the full premium, even before an employer pays the remaining 65% to the insurer.
When is State Continuation Coverage “Comparable”?
As we have noted in previous WorkCites, the COBRA subsidy also applies to participants in health plans that are subject to certain state “mini-COBRA” laws. However, the subsidy is available only where the state law is “comparable” to the federal COBRA laws. Notice 2009-27 provides guidance on this comparability issue by describing certain differences that will not result in the state program failing to be comparable. Specifically, the state law may contain differences in the following areas:
The Notice reinforces one other concept regarding fully insured plans that are covered by a state mini-COBRA law: The insurer is the only entity that is eligible for the payroll credit, even where the employer collects the AEI’s premium and pays the full premium to the insurer.
We will publish future WorkCites on the COBRA subsidy program as the government publishes more information.
For additional information, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment teams, or the authors. You can also visit our Stimulus Package section for more updates on the American Reinvestment and Recovery Act.