Cobra subsidy extension

DFN: Critical help during ‘transition’. Having insurance is the number two concern ‘you’ have when you’re not working (#1 being not having a job).

Special Study: How the Temporary Extension Act of 2010 affects the COBRA premium subsidy rules

On Mar. 2, the President signed into law H.R. 4691, the “Temporary Extension Act of 2010” (the Act), which, among other provisions extends the COBRA continuation premium subsidy for one month and makes a number of other clarifying and substantive changes to it. This Special Study provides an overview of the changes in the Act affecting the COBRA continuation premium subsidy.

Overview of COBRA Premium Subsidy

Sec. 3001, Division B, of the American Recovery and Reinvestment Act (ARRA, P.L. 111-5 ) created a temporary 65% COBRA premium subsidy in response to a major recession that added millions to the unemployment rolls and would have left many without health insurance coverage because they couldn’t afford to pay COBRA premiums on their own. P.L. 111-118 (12/19/2009) extended the maximum subsidy period from 9 to 15 months and also increased the eligibility period through Feb. 28, 2010 (see Federal Taxes Weekly Alert 12/24/2009).

COBRA continuation premiums are paid and the government subsidy is applied as follows:

(1) An individual qualifying as an AEI pays 35% of the amount he would have to pay for COBRA continuation coverage if he were not an AEI.

(2) The “person to whom the premiums are payable”—in most cases the employer, but in some cases the health plan—pays the other 65% of the COBRA continuation premium.

(3) The “person to whom the premiums are payable” is reimbursed by way of a federal payroll tax credit for advancing 65% of the AEI’s COBRA continuation premium.

The COBRA subsidy is tax-free but may have to be recaptured (i.e., repaid) at tax-time if the recipient’s modified adjusted gross income for the year of receipt exceeds $125,000 ($250,000 in the case of a joint return).

Extended Window of Eligibility for COBRA Premium Subsidy & Expanded Definition of Qualifying Event

To be eligible for the COBRA premium subsidy, an individual must be an “assistance eligible individual” (AEI). Under pre-Act law, this is any qualified beneficiary if:

· (Condition 1) The qualified beneficiary becomes eligible for COBRA continuation coverage because of a qualifying event occurring in the period beginning Sept. 1, 2008 and ending Feb. 28, 2010.

· (Condition 2) The qualifying event giving rise to a beneficiary’s eligibility consists of the involuntary termination of the covered employee’s employment during the Sept. 1, 2008 through Feb. 28, 2010, period.

· (Condition 3) The qualified beneficiary elects COBRA continuation coverage.

A qualified beneficiary includes, among others, (a) the covered employee if his coverage under the group health plan ends because of termination (other than gross misconduct) or reduction of hours of employment; and (b) a person who was a beneficiary under the group health plan either as the spouse or dependent child of the covered employee.

New law: The Act extends the eligibility period and also expands the definition of a qualifying event for COBRA subsidy purposes.

Expanded eligibility period. The Act extends the eligibility period in Conditions (1) and (2), above, through Mar. 31, 2010. (ARRA Division B, Sec. 3001(a)(3)(A), as amended by Act. Sec. 3(a))

RIA observation: Thus, employees (and their families) who lose group health coverage because of the employees’ involuntary termination during March of 2010 will be entitled to a 65% COBRA premium subsidy. Under pre-Act law, they would have had to pay the entire COBRA premium in order to stay insured under the former employer’s group plan.

RIA observation: The extenders bill currently being considered by the Senate (the “American Workers, State, and Business Relief Act of 2010”) would extend the 65% COBRA premium subsidy to apply for involuntary terminations through the end of 2010.

Expanded definition of qualifying event. For periods of coverage beginning after Mar. 2, 2010 (the enactment date), the Act provides that a qualifying event for purposes of Conditions (1) and (2) above, includes a reduction of hours followed by an involuntary termination of employment during the Sept. 1, 2008 through Mar. 31, 2010, period. (ARRA Division B, Sec. 3001(a)(3)(C), as amended by Act. Sec. 3(b)(1)(A))

New Election for Those Terminated After a Reduction in Hours

To be eligible for the COBRA subsidy, an AEI must first and foremost be eligible for COBRA continuation coverage because of a qualifying event during the statutory time period (see discussion above). The AEI must timely elect COBRA continuation coverage under the regular procedures (in general, the election period ends on the later of 60 days after the qualifying event or 60 days after the person receives notice under Code Sec. 6980B(f)(5)(A)) or under special election procedures that apply under transition rules.

A reduction in hours is treated as a qualifying event for COBRA continuation coverage purposes. Under IRS guidance, a reduction in hours is treated as an involuntary termination for COBRA premium subsidy purposes, but only if the reduction is a material negative change in the employment relationship for the employee.

Evidently, there was some concern under pre-Act law for COBRA continuation coverage for workers who (1) were hit by a reduction in hours, (2) did not make a timely COBRA continuation election (or made the election and later dropped COBRA continuation coverage (e.g., because it was too expensive), and (3) are ultimately involuntarily terminated.

New law. For periods of coverage beginning on or after Mar. 2, 2010 (the enactment date), the Act provides COBRA continuation election relief for affected individuals. Affected individuals is the term used in this Special Study to describe those who are AEIs on the basis of a qualifying event consisting of a reduction of hours occurring during the Sept. 1, 2008 through March. 31, 2010 period, followed by an involuntary termination of employment occurring on or after Mar. 2, 2010. For affected individuals who didn’t make (or made and later discontinued) an election for COBRA continuation coverage on the basis of their reduction in employment, their involuntary termination on or after Mar. 2, 2010 is to be treated as a qualifying event for COBRA continuation purposes. The period of their COBRA continuation coverage is determined as though the qualifying event were the reduction in hours of employment. (ARRA Division B, Sec. 3001(a)(17), as added by Act. Sec. 3(b)(1)(B)) The Act further provides that affected individuals will not be required to make a payment for COBRA continuation coverage for the period between their reduction in hours of employment and their involuntary termination. (ARRA Division B, Sec. 3001(a)(17)(A)(iii), as added by Act. Sec. 3(b)(1)(B)) Rules similar to the special rules relating to pre-existing conditions that applied under ARRA Sec. 3001(a)(4)(C) are to apply to affected individuals. (ARRA Division B, Sec. 3001(a)(17)(A)(iv), as added by Act. Sec. 3(b)(1)(B))

New notice requirement for plan administrators. Administrators of health plans (or other entities) are directed to provide additional notification to affected individuals notifying them of their new election opportunity. (ARRA Division B, Sec. 3001(a)(17)(B), as added by Act. Sec. 3(b)(1)(B))

Other Changes for COBRA Subsidy Rules

The Act makes these additional clarifying and substantive changes to the COBRA subsidy rules:

· Under pre-Act law, the COBRA premium subsidy applies until the earliest of these three events: (1) the first date that an assistance eligible individual (AEI) becomes eligible for other group health plan coverage or Medicare coverage; (2) the date that is 15 months after the first day of the first month for which the ARRA premium reduction provisions apply to the individual; or (3) the date that the individual ceases to be eligible for COBRA continuation coverage. Effective Mar. 2, 2010, the Act revises the second event, above, to be the date that is 15 months after the first day that the ARRA premium reduction provisions apply to the individual. (Act. Sec. 3(b)(3))

· Effective Mar. 2, 2010, Act Sec. 3(b)(4) provides that a plan sponsor or health insurance issuer may be hit with civil actions to enforce a determination by the government that an individual was wrongfully denied COBRA premium assistance, and that the government may levy a $110 per day penalty for failure to comply with the government’s determination.

· Effective as if included in ARRA, Act Sec. 3(e) provides that the qualifying event for an individual is deemed to be involuntary termination of the covered employee’s employment if: (1) based on a reasonable interpretation of ARRA Sec. 3001(a)(3)(C) of division B, and administrative guidance relating to it, an employer determines that the qualifying event with respect to COBRA continuation coverage for an individual was involuntary termination of a covered employee’s employment, and (2) the employer maintains supporting documentation of the determination, including an attestation by the employer of involuntary termination with respect to the covered employee.

Source: Federal Tax Updates on Checkpoint Newsstand tab 3/4/2010

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