IRS Releases Further Guidance on the COBRA Premium Assistance Subsidy

On March 31, 2009, the Internal Revenue Service (“IRS”) released Notice 2009-27 providing extensive guidance on a number of different areas regarding the COBRA assistance premium subsidy under the American Recovery and Reinvestment Act of 2009 (“ARRA”).  The Notice contains a brief background explanation with fifty-eight (58) questions and answers.  In the Notice, the IRS addresses these following areas:

• What is an involuntary termination?

• Who is an assistance eligible individual?

• How is the COBRA premium assistance subsidy determined?

• What coverages are eligible for the COBRA premium assistance subsidy?

• When does the COBRA premium assistance subsidy begin to apply?

• When does the COBRA premium assistance subsidy end?

• How does the recapture of the COBRA premium assistance subsidy work?

• How does the special enrollment right under ARRA work?

• Who collects the COBRA premium assistance subsidy for those insured plans that are subject to state continuation coverage?

The following explanation will review the important new information provided in each area specified above.

What is an involuntary termination?

Events that would be considered an involuntary termination: Any event will qualify as an involuntary termination if it causes an individual to lose his or her job as a result of “an independent exercise of the unilateral authority of the employer.”  Such termination must not be the result of an employee’s implicit or explicit request. The determination of whether a termination is involuntary is based on all facts and circumstances.  The following events will be considered to be an involuntary termination:

• An employer’s failure to renew an employee’s contract for services at the end of the contract term;

• An employee’s termination for good reason or cause;

• An employee’s layoff, furlough or other suspensions of employment resulting in a loss of health coverage;

• An employee’s termination resulting from his or her absence from work due to illness or disability;

• An employee’s reduction of hours followed by his or her voluntary termination;

• An employee’s retirement if he or she left with the understanding he or she would be terminated;

• An employee’s voluntary termination, if he or she had reasonable knowledge he or she would be terminated;

• A lockout initiated by the employer;

• An employee’s termination in return for a severance package where the employer indicates after the offer period a number of employees will be terminated; and

• An employee’s resignation as a result of a material change in the geographic location of employment for him or her.

Events that will not be considered an involuntary termination: The following events will not be considered involuntary:

• Any events that cause a loss in coverage and eligibility for COBRA but does not result in an employee’s termination of employment.  These events include a divorce or a dependent child ceasing to be a dependent child or the death of an employee or absence from work due to illness or disability.

• Work stoppage resulting from a strike initiated by employees or their representatives.

• An employee’s reduction of hours without a voluntary termination of employment.

Who is an assistance eligible individual?

An individual will be considered assistance eligible individual if he or she is a qualified beneficiary under COBRA as a result of an involuntary termination that occurred on or after September 1, 2008 and on or before December 31, 2009 and he or she elects COBRA coverage.

An individual will be not considered an assistance eligible individual if:

• the involuntary termination occurs before September 1, 2008 or after December 31, 2009, even if the loss of coverage occurs on or after September 1, 2008; and

• the individual’s involuntary termination occurs no later than December 31, 2009, but the loss of coverage occurs after December 31, 2009.

When does a loss of coverage occur for the purpose of the COBRA premium assistance subsidy if an employer provides health coverage to an involuntarily terminated employee on the same terms as for similarly situated active employees after termination?  It will depend on if the employer treats such coverage as deferring the loss of coverage or as part of its obligation to provide COBRA coverage.  If the employer treats such coverage as deferring the loss of coverage, then for purposes of the COBRA premium subsidy, the loss of coverage (and eligibility for Federal COBRA) will be considered to occur when such coverage ends.  If the employer treats such coverage as part of its obligation to provide COBRA coverage, then the loss of coverage is considered when such coverage is first provided.

For an individual to be considered assistance eligible individual, he or she must be covered by a plan that is subject to COBRA coverage requirements under ARRA.

If an individual qualifies, he or she can be an assistance eligible individual more than once.  The individual is entitled to nine (9) months of the COBRA premium assistance subsidy at each occurrence.

How is the COBRA premium assistance subsidy determined?

The COBRA premium assistance subsidy is based on the amount of the COBRA premium that an individual is required to pay.  If the premium charged to the assistance eligible individual is less than the maximum COBRA premium, such amount is used to determine the assistance eligible individual’s 35 percent share.  In determining the amount paid by the assistance eligible individual, payments made on behalf of the individual by another third party (other than the employer) are taken into account and taken into consideration as amounts paid by such individual.  Such other third parties can include a parent, guardian, State agency or charity.

The premium assistance subsidy only applies to the portions of the premium attributable to COBRA coverage for those who are qualified beneficiaries.  A qualified beneficiary will include a spouse or dependent child who was covered at the time of qualified event or a dependent child born to or adopted by the covered employee during the COBRA period.  Any spouse or child added to coverage during the COBRA period will not be considered to a qualified beneficiary.  Lastly, a domestic partner will not be considered a qualified beneficiary.

In determining what portion of the COBRA premium is eligible for the subsidy, the amounts paid for coverage for one or more individuals who are assistance eligible individuals will be allocated first and then the cost of covering non-assistance eligible individuals.  If the cost of covering a non-assistance eligible individual does not add to the cost of covering the assistance individuals, then the cost of covering the non-assistance eligible will be zero and the subsidy will apply to the entire COBRA premium.  If the cost of coverage a non-assistance eligible individual adds to the cost of covering the assistance eligible individual, this incremental cost is ineligible for the subsidy.

If the assistance eligible individual changes coverage during his COBRA period, the COBRA premium assistance subsidy will apply to the new premium, even if higher than the original coverage.

What coverages are eligible for the COBRA premium assistance subsidy?

The COBRA premium assistance subsidy applies to any COBRA coverage of any group health plan, except for health flexible spending accounts.  The term group health plan includes vision-only or dental-only plans and “mini-med plans.”  The subsidy is not available to any coverages offered by an employer for non-health benefits not subject to COBRA coverage, such as group term life insurance benefits.

Retiree health coverage may be treated as COBRA coverage eligible for the subsidy if it does not differ from the coverage provided to active employees.  It does not matter that the cost charged to retirees is greater than the amount charged to active employees.

When does the COBRA premium assistance subsidy begin to apply?

The COBRA premium assistance subsidy applies to the first period of coverage beginning on or after February 17, 2009.  This first period of coverage can be a monthly or shorter period, depending on the period with respect to which premiums are charged by the plan.

When does the COBRA premium assistance subsidy end?

The COBRA premium assistance subsidy will apply until the earliest to occur:

• the first day the assistance eligible individual becomes eligible for other group health care coverage or Medicare,

• nine months after the first day of the first month for which the subsidy applies, or

• the date the individual ceases to be eligible for COBRA coverage.

For someone who eligible for other coverage, such eligibility does not take effect for the purposes of ending the period of COBRA premium assistance subsidy until the first date that coverage could have taken effect.  So if a plan imposes a waiting period, eligibility would not take effect until the end of the waiting period and when coverage would have actually begun.

If a retired employee is offered retiree coverage, such coverage can make such individual ineligible for the subsidy if such coverage is offered under a different group health plan than one offered under COBRA.

An employer is not required to refund the COBRA premium assistance subsidy if the individual fails to provide notice that he or she was covered under another group health plan unless the employer otherwise knew of the eligibility for such coverage.

How does the recapture of the COBRA premium assistance subsidy work?

A plan cannot refuse to provide the COBRA premium assistance subsidy to anyone even if his or her income will be high enough so that the recapture of the subsidy will apply.  A plan can only not apply the subsidy after the individual has elected to permanently waive the subsidy or when the period of the subsidy has ended.

An assistance eligible individual may waive the COBRA premium assistance subsidy by providing the plan with a signed and dated notification (including a reference to a “permanent waiver”).  Once an assistance eligible individual makes such a waiver, he or she may not later reverse the election and may not receive the premium reduction for any future period of COBRA coverage in 2009 or 2010.

How does the special enrollment right under ARRA work?

For any employee who as involuntarily terminated during the period from September 1, 2008, through February 17, 2009, any qualified beneficiary who does not have an election for COBRA coverage on February 17, 2009 has a special enrollment right under ARRA to elect COBRA coverage again.  Such new COBRA coverage begins with the first period of COBRA coverage beginning on or after February 17, 2009.  If a plan bases COBRA coverage on calendar months, the individual’s first period of coverage beginning on or after February 17, 2009 is March 1, 2009 and the COBRA premium assistance subsidy applies for premiums for COBRA coverage beginning on March 1.  This does not change even if the plan otherwise requires individuals who lose coverage before the last day of the month and wish to enroll in COBRA coverage to pay a prorata portion for the first partial month of coverage.

For plans that require that COBRA coverage be paid based on a monthly period from the date of loss of coverage, the first period of coverage is the monthly period corresponding to the day after the loss to the day of the following month corresponding to the day of the loss of coverage.  If an individual’s last day of coverage is October 3, 2008, the period of coverage runs from the fourth of the month to the third of the following month and the first period of coverage on or after February 17, 2009 is the period March 4 through April 3, 2009.

This special enrollment right under ARRA also applies to those individuals who are eligible for the COBRA premium assistance subsidy but still has an open COBRA coverage period.  This means such individual have a choice.  They can elect COBRA under the original election period and have coverage retroactive or instead elect and pay for COBRA coverage under the special election period under ARRA and have COBRA coverage apply for coverage periods on or after February 17, 2009.

The special enrollment period under ARRA only applies to those plans subject to federal COBRA and does not extend to state continuation coverage.  Each state has to make a decision whether to apply this special election period under ARRA.

If at the time of the special enrollment period under ARRA, a special enrollment right under HIPAA under an individual’s spouse’s plan has expired and the individual does not have a right to enroll in that plan until the next open enrollment, such individual will not be treated as being eligible for other group coverage until the next open enrollment.

The first premium payment for coverage under the special enrollment period under ARRA is due no earlier than 45 days after the date on which the election of federal COBRA is made.

Who collects the COBRA premium assistance subsidy for those insured plans that are subject to state continuation coverage?

The only person entitled to be reimbursed for COBRA premium assistance subsidy is the insurer providing the coverage under the group health plan.

Are there any other areas discussed in the notice?

In the background discussion of the notice, the IRS makes the following comments:

• The COBRA premium assistance subsidy will be treated as an employee contribution to the group health plan.

• Any amount of the COBRA premium assistance subsidy recaptured because of an individual’s income will be treated as increase in the individual’s Federal income tax liability.