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Wednesday, October 6, 2010

IRS Provides Guidance on COBRA Premium Assistance


The large numbers of laid-off workers are electing to continue their health care coverage under COBRA, but COBRA continuation coverage can be expensive, and many laid-off workers are struggling to pay the premiums.

The economic stimulus package — the American Recovery and Reinvestment Act of 2009 (ARRA) — helps eligible laid-off workers to hang on to their health coverage. It provides for the federal government to subsidize (for up to nine months) 65% of the premium otherwise payable by certain laid-off workers and their families who elect COBRA coverage.

On April 2, the IRS issued Notice 2009-27, which provides answers to many of the questions employers and employees have regarding the COBRA premium assistance program.

Who’s eligible?

The new premium assistance rules apply to employers subject to federal COBRA rules, to the Federal Employees Health Benefits Program (FEHBP) and to smaller employers covered by one of the state “mini-COBRA” laws — in other words, nearly every employer with a group health plan.

Premium assistance is available to assistance-eligible individuals (AEIs). Generally, AEIs are employees who:

  • Are involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009 (or their qualified beneficiaries),
  • Are eligible for COBRA coverage at the time of termination during that period, and
  • Elect COBRA coverage.

Individuals who qualify for COBRA coverage for a reason other than involuntary termination (for example, voluntary resignation, reduction in hours or divorce) aren’t eligible. Also, the assistance is reduced when an AEI’s modified adjusted gross income (MAGI) exceeds $125,000 ($250,000 for joint filers) and eliminated for AEIs whose MAGI exceeds $145,000 ($290,000 for joint filers).

ARRA also provides an extended election period to give laid-off employees an opportunity to continue their health coverage at the reduced rate. Suppose, for example, that Jim was laid off on Oct. 1, 2008, and declined (or terminated) COBRA coverage. Under ARRA, Jim can elect premium-assisted COBRA coverage within 60 days after receiving notice of the extended election period. This option is available for group plans subject to federal COBRA and for the FEHBP, but not for plans covered by a state mini-COBRA law.

Impact on employers

COBRA premium assistance became available for the first period of coverage beginning on or after Feb. 17. For most health plans that meant employers and their COBRA administrators had to scramble to comply with the new rules starting on March 1, with little government guidance.

In addition to the usual COBRA notices, ARRA requires health plans to provide notice of the availability of premium assistance and the option to enroll in different plan coverage within 90 days (if the employer offers this option).

An AEI who pays 35% of the premium otherwise required for COBRA coverage is deemed to have paid the full amount of the premium. Employers — or, in some cases, insurers or multiemployer health plans — are reimbursed for the remaining 65% through payroll tax credits.

Highlights of the IRS guidance

Notice 2009-27, which is presented in a question and answer format, provides guidance on several key questions, including:

What’s involuntary termination? According to the IRS notice, involuntary termination means “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.”

Whether a termination is involuntary depends on the facts and circumstances rather than how the employer and employee characterize the termination. Examples of involuntary terminations include:

  • Failure to renew a contract if the employee was willing to execute a new contract with similar terms and continue providing services,
  • Voluntary termination for good reason (for example, if the employer causes a material negative change in the employment relationship),
  • Layoff with a right to recall, or a temporary furlough,

Termination for cause, except for “gross misconduct,”

  • Resignation because of a material change in the geographical location of employment, and
  • Voluntary termination in exchange for a severance package, if the employer indicates that a certain number of employees will be laid off following the offer period.

The following situations generally aren’t considered to be involuntary terminations:

  • Reduction in hours, unless it causes the employee to resign for “good reason,”
  • Retirement, unless the facts indicate that the employer would have terminated the employee if he or she hadn’t retired,
  • Strike-related work stoppages, except in the case of an employer-initiated lockout,
  • An employee’s absence from work because of illness or disability, unless the employer terminates the employee during the absence, and
  • An employee’s death.

Who’s an AEI? The IRS guidance clarifies that premium assistance isn’t available if an involuntary termination occurred before Sept. 1, 2008, even if the individual is still receiving COBRA coverage after ARRA’s enactment.

Also, both the involuntary termination and the loss of health care coverage triggering COBRA eligibility must occur during the eligibility period (Sept. 1, 2008, through Dec. 31, 2009). For example, if Jane is involuntarily terminated before Dec. 31, 2009, but the loss of coverage occurs in 2010, she isn’t an AEI. This scenario may occur if health coverage is included as part of a severance package. Bear in mind that an AEI can elect COBRA coverage after the end of the eligibility period, so long as the coverage begins during that period.

The IRS notice clarifies that an individual can become an AEI more than once. But if COBRA coverage is based on a qualifying event other than involuntary termination, the fact that an employee later is involuntarily terminated doesn’t cause a qualified beneficiary to also become an AEI. For example, Ken’s wife, Emma, is enrolled in her husband’s health plan. As a result of divorce, Emma elects COBRA coverage. On Dec. 1, 2009, Ken is laid off from his job. In this situation, Ken is entitled to COBRA premium assistance; Emma isn’t.

Which types of coverage are eligible? Premium assistance is available for COBRA coverage under any group health plan other than a flexible spending arrangement (FSA) provided through a Section 125 cafeteria plan. This includes vision-only, dental-only and “mini-med” plans, regardless of whether the employer pays a portion of the cost for active employees.

It also includes health reimbursement arrangements (HRAs) that qualify as FSAs but aren’t provided through a cafeteria plan. Retiree health coverage qualifies so long as it doesn’t differ from coverage made available to similarly situated active employees.

When does premium assistance end? Generally, reduced premiums are available until the earliest of 1) the date an AEI becomes eligible for other group health plan coverage (with certain exceptions) or Medicare coverage, 2) nine months after the first day of the first month for which the premium assistance provisions apply, or 3) the date the individual ceases to be eligible for COBRA coverage. The guidance provides, among other things, that:

  • If a new employer’s health plan imposes a waiting period, the premium assistance ends on the first date following completion of the waiting period, regardless of whether the AEI enrolls in the plan,
  • Eligibility for an HRA that qualifies as an FSA doesn’t end the premium assistance,
  • Reduced premiums may continue after Dec. 31, 2009,
  • An involuntarily terminated employee’s death doesn’t disqualify his or her spouse or dependent children from reduced premiums, and
  • An individual who becomes an AEI a second time is eligible for up to nine months of reduced premiums for each involuntary termination.

In addition, Notice 2009-27 provides guidance on calculating the premium assistance, determining the beginning of the premium assistance period, applying the extended election period and several other issues.

Know the rules

As the unemployment numbers increase, so will the number of people who turn to COBRA to extend their health care coverage. All employers should familiarize themselves with ARRA and Notice 2009-27 and be sure that they have policies and procedures in place to comply with the new COBRA premium assistance rules.

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