Following his five-day “hold” on the passage of the Temporary Extension Act of 2010 (TEA), Senator Jim Bunning finally relented earlier this week. The Senate quickly passed the bill, and President Obama signed the legislation on March 2. In addition to extending federal unemployment insurance benefits, TEA extends and expands the COBRA premium subsidy program, thereby allowing Congress additional time to negotiate a longer extension of the subsidy benefits.
The COBRA premium subsidy program, which was introduced in the American Recovery and Reinvestment Act of 2009 (ARRA) and was extended and expanded last December by the Department of Defense Appropriations Act, 2010 (the DOD Act), expired after February 28, 2010. TEA:
- Extends the window of program eligibility for another month; and
- Expands the class of individuals eligible for assistance to include a new subset of former employees.
COBRA Subsidy Extension Provisions Under TEA
The COBRA subsidy extension provisions of TEA are generally effective immediately. However, as noted below, some provisions are retroactive to the effective date of the original COBRA subsidy program under ARRA.
Extension of Eligible Class
Under TEA, the window for determining eligibility for program participation has been extended by one month. The revised program will apply to individuals who lose their group health plan coverage due to an involuntary termination of employment through March 31, 2010, as opposed to the February 28, 2010 deadline under ARRA and the DOD Act.
TEA also expands the definition of “assistance eligible individuals” (AEIs) to include former employees whose COBRA eligibility was caused by a reduction in hours and who subsequently experience an involuntary termination. Under previous iterations of the COBRA subsidy program, these former employees were not eligible for the subsidy because their COBRA eligibility was not triggered by an involuntary termination of employment. However, these former employees now will fall into a new group of AEIs if they meet both of the following requirements:
- They have a COBRA qualifying event due to a reduction in hours between September 1, 2008 and March 31, 2010; and
- They have an involuntary termination of employment between March 2, 2010 and March 31, 2010.
Extension of Subsidy Period
Although TEA extends and expands COBRA subsidy program eligibility, it does not extend the duration of the subsidy itself beyond the current 15-month period or general COBRA coverage eligibility beyond the customary 18-month continuation period.
Special Election Period
Under certain circumstances, plan administrators and other applicable entities must provide AEIs a new opportunity to elect COBRA coverage.
- If an AEI’s COBRA qualifying event is an involuntary termination of employment during March 2010, the normal COBRA election period and process will apply.
- If an AEI had a reduction in hours which is followed by an involuntary termination and the AEI elected and continued COBRA coverage following the reduction in hours, no additional election period is required.
- If an AEI had a reduction in hours and did not elect COBRA coverage (or elected coverage but discontinued it) and then has an involuntary termination of employment between March 2 and March 31, 2010, the involuntary termination will be a new “qualifying event” and will trigger a new round of COBRA notices. However, notwithstanding the new qualifying event, the AEI’s period of COBRA coverage (usually 18 months) will be deemed to have commenced upon the reduction of hours, not upon involuntary termination.
For example, an employee has a reduction in hours on October 31, 2009, triggering COBRA eligibility on November 1, 2009. He fails to elect COBRA coverage on a timely basis, and is later involuntarily terminated on March 15, 2010. In this example, March 15th is deemed to be a new qualifying event, triggering a new round of COBRA notices and sign-up opportunities. However, the employee’s general COBRA eligibility period will have commenced on and date back to November 1, 2009.
TEA requires plan administrators and other appropriate entities to provide new COBRA subsidy notices to AEIs within 60 days following the date of an AEI’s involuntary termination. These notices should be similar to those provided to other AEIs but should include information on the details of the special rules created by TEA.
Employer Payroll Tax Liability
Under current law, employers are at risk for improper payroll withholding when they make an incorrect determination regarding an AEI’s eligibility for the COBRA subsidy. TEA minimizes the risk of payroll tax liability by providing a safe harbor for those employers that maintain proper documentation and attest to the involuntary nature of the termination. However, such employers must base their decisions on a reasonable interpretation of the provisions under ARRA, the DOD Act, TEA and other related administrative guidance.
Penalties for Non-Compliance
Despite creating a safe harbor for employers regarding payroll tax withholding, TEA exposes employers to increased penalties for violations of ARRA. TEA creates a civil penalty of $110 per day when a COBRA subsidy is not provided within 10 days of receipt of an agency determination that an AEI is eligible for the subsidy program. This penalty may be assessed in addition to other penalties under ERISA and the Internal Revenue Code.
The passage of TEA creates new classes of separated employees who may be eligible for (a) renewed coverage under COBRA, and (b) premium assistance under the COBRA subsidy program.
- Employers will need to comply with these changes and notify applicable AEIs immediately.
- Employers should begin to track those employees who have obtained COBRA rights as a result of a reduction in hours so that appropriate notices can be sent if those employees are later involuntarily terminated during March 2010.
- Employers should continue to track these employees because the COBRA subsidy program may be further extended.
McGuireWoods will publish future WorkCite articles on the COBRA subsidy program as the government publishes further guidance and as new information unfolds regarding additional extensions and expansions of the program.