Guest Article

(From the September 20, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

COBRA Premium Subsidy - Employers May Want to Review Their Compliance One Last Time

Employers and plan administrators may want to review their COBRA premium subsidy compliance one last time before running the program out. To be eligible for the subsidy, an individual must have lost coverage on account of an involuntary termination of employment between September 1, 2008 and May 31, 2010. However, changes in the law, time-specific notice requirements, and "special election" rights may be leaving well-intentioned employers and administrators on the hook for inadvertent noncompliance. The IRS and Department of Labor recently updated certain on-line compliance aides, tying together the subsidy provisions as they were ultimately extended and modified through the Continuing Extension Act of 2010, which offers help in this regard.

The COBRA premium subsidy - originally enacted with the American Recovery and Reinvestment Act of 2009, and thereafter extended and modified by the Department of Defense Appropriations Act of 2010, the Temporary Extension Act of 2010, and the Continuing Extension Act of 2010 - enables individuals who lost group health plan coverage as a result of an involuntary termination of employment during the period September 1, 2008 through May 31, 2010 to purchase COBRA coverage at a subsidized rate. For up to 15 months, an assistance-eligible individual is permitted to pay only 35 percent of the COBRA premium, with the remaining 65 percent paid though an employer tax credit.

As the COBRA premium subsidy was extended, various technical changes were made, including the expansion of the maximum subsidy period from nine to 15 months (under the Department of Defense Act), the recognition of an involuntary termination as a trigger event when it follows a reduction-in-hours qualifying event (under the Temporary Extension Act), and the elimination of the requirement that an individual's COBRA coverage must begin before the cut-off date to be eligible for the subsidy (under the Department of Defense Act). New notices and new election periods were required as the serial legislation was enacted.

DOL Updates

A new Fact Sheet dated August 26, 2010 addresses individuals whose subsidy period is about to expire. Updated FAQs also address the expiration of the subsidy period but, more significantly for employers and plan administrators, they provide numerous examples that illustrate the applicable notice and election requirements. As the FAQs make clear, the notice requirements are quite specific and depend on the particular factual situation. For example, an individual who lost coverage but did not elect COBRA coverage when she experienced a reduction in hours in September 2009 would nonetheless be entitled to a COBRA election when she was later laid off in April 2010 - and will have at least 60 days from the date the election notice is provided to her to make the COBRA election. See Q&A 15 & 17. Employers or administrators who failed to provide proper and timely notices may, therefore, still have individuals with current rights to elect COBRA coverage and claim the subsidy under their plan.

IRS Updates

The IRS likewise updated its COBRA Q&A on Administration and Eligibility to reflect the various changes in law regarding the premium subsidy. Several answers were updated, including Q&A AE-2, which clarifies that as a result of the Department of Defense Act an individual can be eligible for the subsidy with regard to COBRA coverage that begins after May 31, 2010, as long as the involuntary termination occurred no later than May 31, 2010. For example, an individual whose involuntary termination occurred on May 31, 2010 and whose COBRA coverage began on June 1, 2010, or later, may still qualify for up to 15 months of the premium subsidy. Q&A AE-38. Or, an individual whose involuntary termination occurred on May 31, 2010, and who received a severance package that includes six months of continued health coverage after which the COBRA continuation period begins, may qualify for up to 15 months of the premium subsidy beginning with the first month of COBRA coverage. Q&A AE-48.

The Q&A also expands on Notice 2009-27 and addresses when a termination of employment will be considered involuntary for purposes of the employer claiming a payroll tax credit for the COBRA premium subsidy. Q&A AE-25 explains that if the employer determines, based on a reasonable interpretation of the American Recovery and Reinvestment Act, that the qualifying event is an involuntary termination of employment, the event will be so deemed by the IRS for purposes of determining whether the employer is eligible for the payroll tax credit. However, the employer must maintain supporting documentation that the qualifying event was an involuntary termination that occurred during the applicable period, including an attestation by the employer for each employee whose involuntary termination is the basis for the subsidy.

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, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.