Guidance for COBRA Subsidies Issued

On April 1, the IRS published Notice 2009-27 ("Notice"), providing regulatory guidance regarding the COBRA subsidy provisions that were part of the American Recovery and Reinvestment Act of 2009 ("ARRA"). In addition, on April 2, the DOL revised its Q&As regarding the model ARRA COBRA notices that were published on March 19.

IRS NOTICE 2009-27

How is "Involuntary Termination" defined?

According to the IRS, most terminations can be easily categorized as voluntary or involuntary based on the action and intention of the employer. However, the IRS surprisingly qualifies some terminations, including some employee resignations, as involuntary and accessible to the COBRA subsidy. The IRS has tried to identify some of these situations and explain how it believes these situations should be analyzed. The situations discussed in the IRS guidance are listed below:

Who is an "Assistance Eligible Individual" ("AEI")?

In the Notice, the IRS 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. An AEI's election of COBRA coverage, however, 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. 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. 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.

If COBRA coverage is based on a qualifying event (other than an involuntary termination) that occurs before an individual's involuntary termination, however, 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, although 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 he or she 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 clarifies 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.

What coverage is eligible for the ARRA COBRA subsidy?

The ARRA COBRA subsidy applies to any plan that is considered a group health plan. This includes dental-only and vision-only, and so-called "mini-med" plans. The subsidy applies regardless of whether the employer is covering some of the expenses or whether the employees are paying the full cost of the coverage. The only group health plan that is not covered is a medical flexible spending arrangement.

Retiree health coverage may be treated as COBRA continuation coverage that is available for the premium reduction if the coverage does not differ from the coverage made available to similarly situated active employees.

Individuals who are enrolled in Medicare are not eligible for the premium subsidy despite being eligible for COBRA continuation coverage.

How is the 9-month ARRA COBRA subsidy period determined?

The 9-month ARRA COBRA period is the first 9 months of COBRA coverage. Thus, if the employee's employment terminates on June 15, 2009 and active coverage continues through June 30, COBRA coverage starts on July 1 and the ARRA COBRA subsidy period will run from July 1, 2009 through March 31, 2010.

The subsidy period cannot be manipulated (e.g., it cannot be deemed to be the period from month 9 through month 18). Thus, if the employer is subsidizing coverage for some period of time after COBRA begins, the lower subsidy period counts against the 9 months of ARRA subsidies. Because the ARRA subsidy period runs concurrently with the COBRA period, however, if an employer extends active medical coverage for some period of time after the employee's employment terminates without counting that period against the 18-month COBRA period, the 9 months ARRA subsidy period will not begin until the extended active coverage period ends and COBRA actually starts.

For example, if in connection with an involuntary termination the employer extends active coverage for an additional 3 months, so that the COBRA qualifying event occurs at the end of month 3, and the 18-month COBRA period begins in month 4, the ARRA subsidy period will also not begin until month4. Thus, if the employer is continuing to charge active employee rates during months 1 through 3, and then full COBRA rates for the next 18 months, the ARRA subsidy will be based on the full COBRA rates, and the ARRA COBRA subsidy will begin in month 4.

The IRS also recognizes that the employer may provide additional taxable compensation to the former employee without that additional amount reducing the ARRA subsidy. If the employer normally fully subsidizes COBRA while paying severance, there is no COBRA premium to subsize and the employer cannot recover any amount. By contrast, if the COBRA rate is $1,000 and the employer charges the former employee the full COBRA premium, the employer could pay $350 in additional severance to the former employee each month and still claim the $650 credit from the government.

Can Insurers collect payments directly from AEIs under COBRA subsidy plan?

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 does the ARRA COBRA subsidy period end?

The subsidy period lasts until the premium reduction applies or until the earliest of (1) the first date the AEI becomes eligible for other group health plan coverage or Medicare coverage, (2) the date that is 9 months after the first day of the first month for which the ARRA premium reduction provisions apply to the individual, or (3) the date the individual ceases to be eligible for COBRA continuation coverage.

Can an Assistance Eligible Individual decline the subsidy?

The ARRA subsidy phases out above $125,000 of adjusted gross income for individuals and $250,000 for married couples filing jointly, and is eliminated altogether above $145,000 and $290,000, respectively. Any ARRA subsidy received by the individual whose adjusted gross income exceeds these thresholds will be recaptured by the government as an additional tax.

An AEI may decline the subsidy. An employer may not, however, refuse to provide the premium reduction on account of the recipient's anticipated (or known) income. If an individual wishes to decline the subsidy, he/she must file a permanent waiver of the subsidy.

DEPARTMENT OF LABOR ("DOL") MODEL NOTICE Q&As REVISION

On April 2nd, 2009 the DOL modified its guidance regarding which of the model ARRA COBRA notices that were issued on March 19 should be provided to which individuals. In one of the new examples, the DOL focuses on an individual who incurred an involuntary termination on January 11, 2009, and received a general pre-ARRA COBRA notice on February 22, 2009 (5 days after enactment). The DOL concludes that the individual should receive both the general COBRA notice and the second election notice. The DOL noted that the information from both notices could be combined into a single notice, but stated that it must be made clear to the individual that the individual has 2 separate elections, with different election periods and start dates.

Contact your Huddleston Bolen Labor & Employment Attorney for more information

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