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COBRA—What’s New

COBRA—What’s New. BAN February 2010 Peter J. Marathas, Jr. pmarathas@proskauer.com 617.526.9704. Agenda. ARRA Extension Pending Legislation Penalties for COBRA Violations. ARRA Extension.

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COBRA—What’s New

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  1. COBRA—What’s New BAN February 2010 Peter J. Marathas, Jr.pmarathas@proskauer.com617.526.9704

  2. Agenda • ARRA Extension • Pending Legislation • Penalties for COBRA Violations

  3. ARRA Extension • Existing COBRA rules continue to operate as is, subject to possible premium subsidy for certain qualified beneficiaries • This presentation will assume a basic understanding of how COBRA and the basic ARRA rules work • Focus will be on those new provisions enacted or changed by the ARRA extension

  4. ARRA Extension • Overview of ARRA, as amended • Original ARRA (enacted Feb. 17, 2009) • Subsidizes 65% of the COBRA premiums for up to 9 months of COBRA coverage due to employee’s involuntary termination of employment and loss of coverage between Sept. 1, 2008 and Dec. 31, 2009 • Only for “assistance-eligible individuals” (AEIs) • AEI pays 35% and “person to whom premiums are payable”, typically, the employer, receives 65% as a credit against federal payroll taxes • ARRA extension (enacted Dec. 19, 2009) • Continues 65% subsidy for up to 15 months total • Based on involuntary termination qualifying events through Feb. 28, 2010 (not based on when loss of coverage occurs) • Transition rules for those who otherwise exhausted original 9-month period before Dec. 19, 2009

  5. ARRA Extension • Available Guidance • Government publishes guidance on special websites devoted to information on the COBRA premium subsidy: • IRS information is posted at:http://www.irs.gov/newsroom/article/0,,id=204505,00.html • DOL information is posted at:http://www.dol.gov/ebsa/COBRA.html • CMS information (concerning state continuation coverage rules) is posted at:http://www.cms.hhs.gov/COBRAContinuationofCov/ • IRS Notice 2009-27 includes Q&A on many important ARRA issues • DOL published model notices and election forms revised for ARRA extension rules

  6. Assistance-Eligible Individuals (AEIs) • As originally enacted: • Any qualified beneficiary (QB) if • Eligible for COBRA coverage at any time between Sept. 1, 2008 and Dec. 31, 2009 • Elect that coverage, and • The qualifying event (QE) was covered employee’s involuntary termination of employment during that same period • As modified by ARRA Extension: • Any qualified beneficiary (QB) if • QE occurs at any time between Sept. 1, 2008 and Feb. 28, 2010 • Elect that coverage, and • The QE was covered employee’s involuntary termination of employment during that same period

  7. Assistance-Eligible Individuals (AEIs) • Ex-employees, spouses and dependent children who lose coverage due to an involuntary termination could each be AEIs • Although AEIs are limited to those affected by an employee’s involuntary termination, all QBs need to be notified of subsidy rules as a general matter • Separate transition notices (described below) need to be provided to existing AEIs as of Oct. 31, 2009 or to those QBs affected by a termination of employment (voluntary OR involuntary) on or after Oct. 31, 2009 • Existing COBRA notices are not “bad” as long as they include ARRA information without the extension; however, new notices still need to be provided to transition QBs

  8. Assistance-Eligible Individuals (AEIs) • Special Case: QE occurs before Dec. 31, 2009 but COBRA doesn’t start until 2010 • Under original ARRA rules, no subsidy • e.g., QE occurs on Dec. 15, 2009 and plan provides coverage through Dec. 31; COBRA begins Jan. 1, 2010 • Under ARRA extension, subsidy applies • As long as the QE (involuntary termination of employment) occurs at any time through Feb. 28, 2010, subsidy applies even if COBRA coverage starts after Feb. 28, 2010

  9. Assistance-Eligible Individuals (AEIs) • What about non-QBs, like domestic partners? • Non-QBs can be covered under a covered employee’s COBRA coverage • However, they are not treated as AEIs, even if they are eligible for state law continuation coverage • Bifurcate premium amount based on IRS Notice 2005-50 (see below) • If no incremental cost to add non-QB, then full subsidy available • If there is incremental cost to add non-QB, then subsidy applies to the total premium charged minus incremental cost for covering non-QB

  10. Assistance-Eligible Individuals (AEIs) • Involuntary termination – See Notice 2009-27 • Nothing has changed due to ARRA Extension • IRS standard for “involuntary”: • Severance from employment • Unilateral exercise of employer’s right to terminate • Not due to employee’s implicit or explicit request • Where employee was ready, willing and able to perform services • Exception for gross misconduct • Includes “call-up” to the military • “Good reason” quits? Yes. • Employees offered a “package” in advance of layoffs? Yes. • What about employees hired for limited periods? IRS view is that reaching the end of the contract is involuntary if employee wants to renew and employer does not

  11. Assistance-Eligible Individuals (AEIs) • Appeal rights – No change due to ARRA Extension • Ex-employee may challenge employer determination re: involuntary termination by appeal to DOL (or CMS for state mini-COBRA laws or Federal/state employees) • DOL/CMS has 15 business days to resolve the issue • DOL/CMS review is de novo and entitled to deference in court • Right to appeal is independent of any ERISA claims process • Cannot require that QB exhaust ERISA claims process • If issue is one of eligibility, plan probably cannot require exhaustion anyway • DOL/CMS programs are available on line • If DOL needs more information from employer, DOL requires response within 2 business days • Therefore, employers should retain adequate readily available records

  12. Exception for high income individuals • High income individuals (based on modified adjusted gross income (AGI)) must give back any subsidy received • No subsidy if modified AGI exceeds $145,000 (single filers)/$290,000 (joint filers) • Phase out if modified AGI is between $125,000 and $145,000 for single filers, or $250,000 and $290,000 for joint filers • Modified AGI is AGI with an add back for certain foreign income/income from US possessions • High income individuals have to repay subsidy on their Form 1040 • High income individuals are still AEIs and may still claim a credit • They just have to repay it when they file their returns

  13. Who gets the credit?The “person to whom COBRA premiums are payable” • Only three possible entities are entitled to the payroll tax credit: • Multiemployer plan • A multiemployer plan is entitled to the credit • Employer • If subject to Federal COBRA OR partially/fully self-insured • Covers most situations • Insurer • Applies only if not in 1. or 2. above and the plan is fully insured • Typically – insured small employer plans (under 20 employees) and insured church plans • Even though employer/multiemployer plan may be entitled to a 65% credit for Federal COBRA, any insurer (if plan is insured) will still want payment in full • Employer/multiemployer plan has to “front” the money to the insurer • Need to consider payment arrangements with insurers

  14. Calculating the subsidy • Subsidy is 65% of the premium for COBRA coverage that AEI would otherwise have to pay, including the 2% COBRA administrative fee • Subsidy does not apply to extended, non-COBRA coverage • E.g., employer gives 6 months at active rates PLUS 18 months of COBRA; subsidy applies after the 6 month period is over • ARRA Extension Issue • Employer gave non-COBRA extension due to involuntary termination that began in 2009 and was to last into 2010 • Under original ARRA, this would mean no subsidy; under ARRA extension, subsidy could apply • If 2009 COBRA notices didn’t include ARRA information (because original ARRA wouldn’t apply), those notices became noncompliant due to the new law • New ARRA notices must be provided

  15. Claiming the payroll tax credit • 65% subsidy is claimed as a payroll tax credit • Offsets FICA/income tax withholding • Credit can be claimed only after receipt of AEI payment, not before • ARRA extension credits for “transition period” of Dec. 2009 (perhaps part of Nov. 2009) apply in 2010 when AEI pays the 35% (or gets a refund of the overpaid COBRA premium) • Consult IRS FAQs for latest technical rules on Form 941 filing

  16. Claiming the payroll tax credit • Employers need to keep records documenting: • Information on the receipt, including dates and amounts, of the AEI’s 35% share of the premium • For insured plans, copy of invoices or other supporting statements from insurance carrier and proof of timely payment of the full premium to the insurance carrier • For self-insured plans, proof of the premium amount and the coverage provided to AEIs • Attestation of involuntary termination, including the date of the involuntary termination, for applicable covered employee

  17. Claiming the payroll tax credit • Proof of each AEI’s election of COBRA coverage on account of an involuntary termination of employment occurring at any time during the period from September 1, 2008, to February 28, 2010 • A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed for each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals • Other documents necessary to verify the correct amount of reimbursement

  18. Duration of subsidy • Available for 15 months of COBRA continuation coverage • Originally this was 9 months • No subsidy for periods before ARRA effective date • “Periods of coverage” on or after Feb. 17, 2009 • Generally, March 1, 2009 unless plan sells coverage by the day • Relevant for ARRA extension transition period (explained below) • Subsidy ends if: • AEI is eligible for other group health coverage (other than excepted coverage), or Medicare, even if other coverage is more expensive than COBRA coverage with the subsidy • COBRA maximum period is reached • COBRA coverage is lost (e.g., due to nonpayment; other coverage; termination of all employer plans)

  19. Duration of subsidy • AEI must notify plan of any other available coverage or Medicare • DOL provided a form for notifying plan of other coverage • Penalty of 110% of subsidy received for failure to notify unless failure is due to reasonable cause and not willful neglect • Note: AEIs who were close to the end of the 9-month ARRA subsidy period in November/December 2009 might have identified other coverage to be effective January 2010 • Once they have to start paying the full COBRA cost, they look for the “other coverage,” particularly if it is cheaper • Make sure to communicate to AEIs who exhaust their 9-month original ARRA period and seek to add a subsidy under the ARRA extension transition period that the subsidy is lost if other coverage is available

  20. Effective date issues • Original ARRA rules apply to “periods of coverage” on or after Feb. 17, 2009 • If plan sells COBRA coverage by the month, March 1, 2009 • If plan sells COBRA coverage by the day, Feb. 17, 2009 • ARRA extension is applied as if part of original ARRA, subject to transition issues, described below • Applying the rules to “partial” months • General Rule: Subsidy applies to partial months if plan pro-rates coverage for the first partial month and otherwise sells coverage by the calendar month • IRS Notice 2009-27, Q&A-32 • Impact on ARRA Extension • Original 9-month ARRA period expires on Nov. 16, 2009 (if plan sells coverage on a partial month basis) or Nov. 30, 2009 (if plan sells coverage on a monthly basis)

  21. Effective date issues: transition period issues • Two groups of individuals need special notices: • Group 1: AEIs at any time on or after Oct. 31, 2009 or who experience a QE consisting of termination of employment on or after that date • Notify of the ARRA extension changes by Feb. 17, 2010 (within 60 days of Dec. 19, 2009) • If include ARRA extension information as part of regular COBRA notices, this notice would be sufficient; don’t need a separate ARRA extension notice • If a COBRA QE notice does not include ARRA (as amended) information, the notice is not valid and the COBRA 60-day election period has not started • However, pending updated QE notices, if a valid ARRA-compliant COBRA notice was provided and all that was missing was the ARRA extension information, the original notice should be sufficient for this purpose; but ARRA extension information still needs to be supplemented

  22. Effective date issues: transition period issues • Two groups of individuals need special notices: • Group 2: Individuals who did not timely pay the full COBRA premium during their “transition period” or who paid the full premium for that period (without the subsidy) • These individuals need to be notified within 60 days of the first day of the transition period of their right to pay a subsidized premium or get a credit for overpayments on their transition period coverage • Transition period defined as: • Period of coverage that begins before December 19, 2009, and • To which the ARRA subsidy would have applied at the 15-month extension been applicable (i.e., the period after the end of the original 9-month ARRA period) • Effectively, this is December 2009 for most plans (those that sell monthly coverage) or from November 17, 2009 through December 18, 2009 for plans that sell coverage on a partial month basis • Only applies to coverage after the expiration of the original 9-month period

  23. Effective date issues: transition period issues • Group 2, continued: Individuals who did not timely pay the full COBRA premium during their “transition period” or who paid the full premium for that period (without the subsidy) • Based on the definition of transition period, notice to this group of individuals is due • By January 16, 2010, if transition period began November 17, 2009 (original 9 months ran on November 16, 2009) • By January 30, 2010, if transition period began December 1, 2009 (original 9 months ran on November 30, 2009)

  24. Effective date issues: transition period issues • Notice Differences • Timing: • Group 1 AEIs need notice by Feb. 17, 2010 (or during the normal COBRA period if the timing of the QE would allow for notice to be later) • Group 2 individuals need notice by either Jan. 16, 2010 or Jan. 30, 2010, depending on the applicable transition period • Purpose of the notices: • Group 1 notice is “informational”; ARRA extension does not currently apply to this group • Group 2 notice is essential to allowing individuals to exercise their rights for the transition period of coverage (generally coverage for December 2009; possibly for part of November 2009)

  25. Effective date issues: special election rights • Special election right for Group 2: • If exhausted the original 9 months of coverage in Nov. 2009, the individual has a right to retroactively pay the subsidized premium if he or she could benefit from the extended premium subsidy • To qualify: • Individual had to be covered under COBRA coverage “immediately preceding such transition period” AND • Individual has to pay the subsidized premium by the later of Feb. 17, 2010 (60 days after enactment) or 30 days after notice is provided • Alternatively, if paid full amount, can get a credit for the overpayment under ARRA general rules • Credit toward subsequent premiums as long as it can reasonably be expected to be used within 180 days of the overpayment • Otherwise, overpayment must be reimbursed to the individual within 60 days of receipt

  26. Effective date issues: special election rights • Special election right for Group 2: • Switching Benefit Options • What if an individual decided not to pay for December 2009 because of exhausting the 9-month period and also did not elect anything for open enrollment beginning January 1, 2010? • Once they pay retroactively under ARRA extension for December 2009, their payment is timely • Therefore, they are entitled to coverage for January 2010 pursuant to plan terms and procedures for applying open enrollment to QBs • What if an individual exhausted 9 months on November 30, 2009, paid for December 2009 and then elected a cheaper level of coverage beginning January 2010 because of expectation of higher (non-subsidized premium)? • Check plan terms; but individual is likely stuck with the cheaper level of coverage

  27. Effective date issues: special election rights • Special election rights for Group 2: • Importantly: • According to DOL fact sheet, employer is allowed to offer AEIs the ability to switch benefit options back to what they had when they became eligible for COBRA • Different coverage must have the same or lower premiums as the individual’s original coverage in order to retain entitlement for ARRA premium reduction • But, there is no special retroactive election period or legally-mandated open enrollment period on account of the ARRA extension like there was for the original ARRA provisions

  28. COBRA subsidy notice requirements • ARRA already required new QE notices for all post-February 16, 2009 qualifying events – ALL QEs; not just termination of employment • Many plans used an ARRA insert • Now need notices for ARRA extension as well • Could combine information into one revised COBRA notice and provide to all affected individuals • Failure to provide required notice is subject to COBRA notice penalties ($110/day in a court’s discretion) • IRS/DOL view – all QBs for all QEs must be provided with revised ARRA-compliant COBRA notices (including rules on the extension)

  29. COBRA subsidy notice requirements • Who has to provide notices? • Federal COBRA – responsibility falls on ERISA “plan administrator” • State “mini-COBRA” – responsibility falls on insurer • What about COBRA administrator? • Many COBRA third-party administrators or insurers may provide notices as a convenience to plan administrators • Responsibility still falls on plan administrator/employer to make sure third-party administrators are providing accurate notices

  30. COBRA subsidy notice requirements • DOL model notices amended for ARRA extension • General Notice (Full Version) • For use by plans that have not provided a COBRA election notice • Applies to all QEs for the period from Sept. 1, 2008 through Feb. 28, 2010 • Alternative Notice • Model for state law “mini-COBRA” coverage • Again, for events from Sept. 1, 2008 through Feb. 28, 2010 • Premium Assistance Extension Notice • For AEIs as of Oct. 31, 2009 who didn’t continue after expiration of original 9-month ARRA period or who paid full cost for that post-ARRA coverage • For future QEs where notices are not otherwise updated for ARRA extension information

  31. COBRA subsidy notice requirements • DOL model notices – Practical Issues • Are these required to be used “as is”? NO! • At a minimum, modifications are necessary to fill in blanks and to modify for individual circumstances. • Language and layout are potentially confusing for qualified beneficiaries and a simpler approach may be appropriate • Some statements may need further clarification • Does not anticipate possibility of open enrollment issues for December 2009/January 2010 • Keep checking DOL and IRS web sites for updates and more information on notice issues and other rules

  32. Documentation issues • Plan/SPD amendments required? • ERISA was not amended and no statutory provision mandates specific plan language • Nevertheless, best practice is to amend plan to provide for special election periods and subsidy provisions • Consider using SMM instead of amended SPD due to temporary nature of key provisions • Note 1: • Other COBRA provisions amended by ARRA affect duration of COBRA coverage for TAA-eligibles and may require amendment • Note 2: • Stop loss carrier may insist on plan amendment or else newly added QBs may not be covered under literal plan terms

  33. What’s to Come? • Further COBRA subsidy administrative guidance • IRS Guidance • Watch for new FAQs on IRS website, particularly for rules on applying the payroll tax credit • Possible new notice or other official guidance to address substantive issues on eligibility • DOL Guidance • DOL website FAQs likely to be updated • Perhaps an updated Fact Sheet with more detail on the ARRA extension • CMS Guidance • Likely to follow after other agencies provide guidance

  34. Pending Legislation(?) • Congress continues to contemplate • Senate Hiring Incentives to Restore Employment Act (“HIRE Act”)— • Extends ARRA through May 31, 2010 • Provides that those whose QE was reduction of hours followed by involuntary termination would qualify • House Jobs Bill— • Extends ARRA through June 30, 2010 • Increases subsidy to 75% • Adds reduction of hours as QE • February 12: House Majority Leader says Grassley/Baucus HIRE will be watered down and will not include ARRA Extension • The hope is that they will make a decision before February 28, 2010

  35. Penalties for Non-Compliance • IRS Requires Self-Reporting and Excise Taxes for Health Plan Non-Compliance • The Code imposes excise taxes for failure to comply with COBRA, HIPAA, and other federal group health plan mandates. • The IRS has not historically been very active in examining health plans for compliance. • Recently issued IRS final regulations now require employers to self-report violations of these rules and pay related excise taxes, where appropriate under the Code and applicable regulations. • The excise taxes imposed can be steep. For example, violations of COBRA, HIPAA and GINA can result in excise taxes of $100 per day per individual affected. • In order to avoid these excise taxes, compliance with group health plan mandates is key.

  36. Peter J. Marathas, Jr., Esq. BAN Compliance Director pmarathas@proskauer.com 617-526-9704

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