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(From the April 13, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
In recent guidance, IRS addressed certain "sleeper" issues that will affect administration of the new COBRA premium subsidy. Employers and administrators will need to watch for continuation coverage that is provided as a severance benefit, employer reimbursement of employee COBRA premiums, coverage of individuals who are not assistance eligible, health reimbursement arrangements, and eligibility for retiree medical coverage and coverage under a spouse's employer plan, among others. IRS Notice 2009-27.
Assistance Eligible Individual -- Severance Benefits May Disqualify
Only "assistance eligible individuals" are eligible for the COBRA premium assistance. The Notice defines an assistance eligible individual ("AEI") as an individual who:
Both the involuntary termination and the loss of coverage must occur during the period September 1, 2008 through December 31, 2009 (the "Termination Eligibility Period"). Therefore, where the employer provides severance benefits that include a period of continued health coverage, the question becomes whether the employer treats those severance benefits as COBRA benefits. If not, the beginning of the individual's COBRA coverage occurs at the expiration of the employer-provided severance benefits and -- if that date is after December 31, 2009 -- the individual is not an AEI.
Premium Reduction -- Beware of Employer Contributions and Non-AEIs
The premium used to calculate the 35% and 65% portions to be paid by the assistance eligible individual and the employer, respectively, is the actual COBRA premium that is charged. If the actual premium is less than the maximum 102% of the "applicable premium" that is permitted, then the 35% and 65% shares are based on that lesser, actual premium amount. The Notice explicitly states that a plan that previously charged less than the 102% maximum is permitted to increase the premium as permitted under Treas. Reg. § 54.4980B-8, Q&A-2(b)(1), and the COBRA premium subsidy will then be based on the higher adjusted premium.
The COBRA premium subsidy applies even where the employer reimburses the employees their 35% of the premium as a taxable benefit. However, where the reimbursement is excluded from the employee's gross income (e.g., as an employer contribution to a health plan under IRC § 106), the entire COBRA premium is treated as paid by the employer and no premium subsidy (i.e., payroll tax credit) is available to the employer.
Where the elected COBRA continuation coverage also includes individuals who are not AEIs, the amounts paid for coverage are first allocated to the AEIs. Where there is no additional cost for covering the non-AEIs, the premium reduction applies to the full amount paid for the COBRA continuation coverage. However, if the cost of covering non-AEIs adds to the cost of covering the AEIs, the incremental cost is ineligible for the premium reduction. For example, where an individual is assistance eligible but the spouse and dependent child are not, and the COBRA premium for self-only coverage is $450 while the COBRA premium for self plus two or more coverage is $1,000, the COBRA premium reduction applies only to the $450 premium.
Coverage Eligible for Premium Reduction -- HRAs Are Eligible but FSAs Are Not
The COBRA premium reduction is available for any group health plan that would include a vision-only, dental-only, and a "mini-med" plan, regardless of whether the employer pays a portion of the costs for the active employees. It would also include retiree health coverage, but only if the coverage does not differ from that made available to similarly situated active employees. A group health plan does not include a flexible spending arrangement under a Code § 125 plan. However, it does include a health reimbursement arrangement (HRA).
Reduction Period -- Watch for Spouse's Employer and Retiree Medical Coverage
The COBRA premium reduction applies as of the first period of coverage beginning on or after February 17, 2009 for which the assistance eligible individual is eligible to pay only 35% of the premium and be treated as having made full payment. A plan that requires COBRA continuation coverage to be paid monthly cannot pro rate the month of February 2009. Rather, in that case the premium reduction only applies for March and the following months.
The premium reduction period ends on the earliest of:
An individual who becomes eligible for other group health coverage, but who fails to enroll, ceases to be eligible for the COBRA premium subsidy as of the date the individual is first eligible for the other coverage. For example, the spouse of an AEI (who is also an AEI) begins employment and is eligible to enroll in the employer's group health plan with self or family coverage effective as of the first day of the next month. The spouse elects self-only coverage. The COBRA premium reduction is not available to the AEI as of the first day of the next month because the individual on that date is eligible for coverage under the group health plan of the spouse's employer.
If retiree medical coverage is offered as an alternative to COBRA under the same group health plan, it has no effect on the individual's eligibility for COBRA premium reduction. (Under Treas. Reg. § 54.4980B-2 Q&A-6, all health plans provided by an organization constitute a single group health plan unless the governing instruments make clear that the benefits are provided under separate plans.) However, if offered under another group health plan in connection with an involuntary termination on or after February 17, 2009, the offer of non-COBRA continuation under another group health will render the individual ineligible for the COBRA premium subsidy. (If offered in connection with an involuntary termination on or after September 1, 2008 but before February 17, 2009, the offer will render the individual ineligible only if the period for enrolling extends to at least February 17, 2009.) An individual currently enrolled in Medicare who becomes a qualified beneficiary as the result of an involuntary termination that occurred during the Termination Eligibility Period is not eligible for the COBRA premium subsidy.
Premium Recapture -- Subsidy Is Mandatory Unless a Waiver Is Executed
A plan cannot refuse to provide the COBRA premium subsidy to an individual, even if the individual's income is high enough that the recapture of the premium reduction will apply. The COBRA premium subsidy must be provided unless the individual notifies the plan that he or she has elected a permanent waiver of the premium reduction. An individual can make the election by providing a signed and dated notification (including a reference to a "permanent waiver") to the person who is reimbursed for the premium reduction (e.g., the employer or insurer).
Extended Election Period -- Gaps in Coverage May Occur
An individual who does not have a COBRA election in effect on February 17, 2009 but who would have been an AEI if an election were in effect is allowed a second opportunity to elect COBRA continuation coverage for the period of coverage beginning on or after February 17, 2009. For example, if an employee was involuntarily terminated during the Termination Eligibility Period and elected self-only coverage, notwithstanding that election the employee's spouse and dependent child would be provided a second opportunity to elect COBRA coverage in connection with the termination. If elected, such coverage would begin with the first period of coverage beginning on or after February 17, 2009.
An individual who is involuntarily terminated during the period September 1, 2008 through February 17, 2009 and who still has an open COBRA election is also provided with an extended election. If the individual elects continuation coverage under the original COBRA election, the continuation coverage is retroactive to the date of loss of coverage and the COBRA premium reduction applies beginning with the first period of coverage beginning on or after February 17, 2009. If the individual elects continuation coverage under the extended COBRA election, coverage begins with the first period of coverage beginning on or after February 17, 2009. In that case, expenses incurred in the interim (i.e., after the loss of coverage and before the commencement of the COBRA coverage) will not be covered. For example, in the case of an HRA that allows reimbursement for expenses incurred during the period of coverage, where a qualified beneficiary elects continuation coverage under the extended COBRA election, the arrangement would not be required to reimburse those expenses incurred after the loss of coverage and before the first day of the first period of coverage beginning on or after February 17, 2009.
A plan cannot require payment of the COBRA premium earlier than 45 days after the date on which the COBRA continuation election is made for that qualified beneficiary. Treas. Reg. § 54.4980B-8 Q&A-5(b).
Payments to Insurers -- 35% Premium Must Be Treated as Payment in Full
In the case of an insured plan that is not a multiemployer plan, where the insurer has agreed to collect premiums directly from the employee, the insurer is required to treat the receipt from an AEI of 35% of the premium as payment in full -- even before the employer pays the remaining 65%. Failure to treat the 35% payment as payment in full may subject the insurer to excise taxes under IRC § 4980B(e)(1)(B).
|The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.
Copyright 2009, Deloitte.
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