401 Chaos

There is another recent thread that touches on this issue and links to some of the recent guidance. I think the tricky part here is the portion of the instructions sniffles quoted which limits having to distribute the general release to those " who either have not yet been provided an election notice or who were provided an election notice on or after Feb 17, 2009 . . . ." Assume in this case you have individuals who the employer considers to have voluntarily terminated prior to Feb. 17th. Assume also that they were previously provided a general COBRA release (presumably without ARRA language). In this case, the instructions seem to say you should not have to send these individuals any notice because they were not considered involuntarily terminated (so no second election notice) AND they already received a General Release (so no need to send an updated General Release). Even though it seems you might avoid having to provide notices to these individuals (again assuming they previously received the required general release), I think the better approach--at least with respect to individuals experiencing a termination of employment (whether voluntary or involuntary) as a qualifying event--is, as the DOL rep adivsed, to nonetheless provide notices so they can appeal / challenge the employer's voluntary termination classification. For those individuals who experienced some qualifying event other than a termination (death, divorce, etc.) and previously received a general release, seems there is probably sufficient guidance not to send any notice to these folks without much risk to the employer.

Masteff, Thanks. I think that's probably right. Contrast the disability situation with one where an individual just stops showing up for work. No formal resignation by the employee and no sick leave or disability or other approved leaves--they just don't show up. At some point the employer will take official action to terminate their employment. I suppose it is debatable over what action terminates the relationship (the individual's failure to show or the employer actually terminating them) but it seems the employer has arguably involuntarily terminated the individual in that case because the employer takes final formal action. As I read the guidance, however, the individual should not be considered to have been involuntarily terminated for subsidy purposes because the individual was not willing to work. As a result, seems the language there is useful in some cases--no reason somebody that just quits on their own should get the subsidy simply because the employer is the one that takes the final formal action terminating the relationship. I agree though that disability is a bit of a different / special case and, as previously noted, think the specific guidance in Q&A-4 probably overrides the more general rule.

Afraid I don't have an answer but I've got to say that I too have puzzled a bit over the guidance in question 4 and how to reconcile that with the "willing and able to perform" portion. I agree that Q&A 4 suggests that termination following a failure to return from disability (either expressly by the employer or as a result of a resignation by an employee in anticipation of termination by an employer) would appear to be an involuntary termination. However, from a policy standpoint that seems a bit difficult to really reconcile. These disability terminations are not the typical situations the subsidy was presumably intended to address--i.e., situations where somebody willing and able to work is terminated (or basically forced to terminate employment) by the employer in a down market. Part of me questions why an employer's decision to terminate an employee who fails to return to work after an extended period due to serious disability is really any different from a voluntary vs. involuntary termination perspective than cases involving death. In both cases, the employer is left without a willing and able worker and presumably would not have terminated employment but for the individual's failure to report to work due to death or disability. Some of this probably stems from the fact that death is an independent COBRA qualifying event and so is clearly outside of the ARRA subsidy provisions whereas disability is not in itself a COBRA qualifying event and so must tie into a termination of employment. Before ARRA, the hard part with disability seemed to be figuring out when a termination of employment occurred (as a result of disability) and when COBRA would start but plans did not really have to worry whether termination was voluntary versus involuntary. I think the guidance here may really be read to say that the IRS is willing to provide a more generous / employee friendly interpretation of involuntary termination in disability cases than it might otherwise have adopted. Sorry if that raises more questions than it answers or stirs the pot more but I guess my general point is, as was noted before, it may not really be necessary to try and reconcile the two Q&As if the IRS seems to have provided some pretty clear guidance on disability terminations.

See the presentation around 1 hour and 14 minutes in for the general discussion jpod references. They are pretty clear that a reduction in hours in itself is not an involuntary termination of employment (unless it goes all the way to zero hours) and thus would not itself trigger the subsidy.

Basically yes as I understand the rules at least for those eligible as of enactment. For those becoming eligible at a later date, it is basically the first 9 months of coverage starting at that later date. I suppose the rule (at least per the guidance) could technically be summarized as the first 9 months from the later of (i) beginning of COBRA continuation coverage, or (ii) date of ARRA enactment. Keep in mind though that the subsidy could terminate before the maximum period (i.e., before the first 9 months) upon individual's eligibility under other group health plan or Medicare or end of COBRA continuation period (which might include a variety of reasons such as end of regular COBRA or employer's termination of all group health plans).

Thanks. I'm not sure I fully follow the discussion with respect to those individuals in Category B so we may be saying some of the same things. I do agree with the general comment that individuals with a qualifying event other than involuntary termination between 9/1/08 and ARRA who received a general COBRA notice apparently need not necessarily receive any additional notice. That does seem consistent with the DOL web presentation (which I admit I haven't had a chance to listen to in its entirety but did listen to partially over the weekend). Note the caveats discussed in the hypotheticals during the web presentation though around minute 59:00. My previous comments were aimed primarily at ensuring that those individuals who encountered a termination of employment (whether voluntary or involuntary) were given notice of the subsidy provisions and an ability to apply for the subsidy by virtue of appealing a decision of the employer that the individual's termination was voluntary and thus the individual was not an AEI and not eligible for a subsidy. Based on the presentation discussion, it seems that an employer technically need not provide any additional notice to an individual that separated from service during the 9/1/08 - 9/16/09 if they previously received a COBRA notice, are not currently enrolled in COBRA, and the employer considers the individual to have voluntarily terminated employment. If, however, that same individual actually could or would be considered by the government to have involuntarily terminated, then the individual would be an AEI and thus would be entitled to receive an Extended Election notice. As a result, it seems there is some risk with the employer making a unilateral call on the voluntary versus involuntary nature of termination and not sending the Extended Election notice to individuals with a qualifying event tied to a separation from service. I believe the government generally feels those individuals, particularly those with constructive discharge or buy-out arguments, etc. where there is a gray area, should have the ability to challenge the employer's interpretation of a voluntary termination. The presenter touched on this and indicated that the IRS is to come out with additional guidance on what constitutes involuntary termination that may be helpful. Otherwise, the presenter indicated it would not be unreasonable for employers to "cast a wide net" with notices (particularly the Second Election notices) and send to all qualified beneficiaries (or maybe at least all with Qualifying Events tied to terminations of employments) to be sure no potential AEI is missed. The employer and individuals could sort out individual situations / qualifications for actual subsidies on a case by case basis but the employer would be sure to have provided all Second Election notices to all potential AEI by the April 18th deadline. As a result, it seems to me a reasonable approach may be for plans to consider sending the Second Election notice to all indivdiuals who prevously received a regular notice and had a termination of employment as a qualifying event from 9/1/08 through 2/16/09 (regardless whether the employer deems termination to have been voluntary or involuntary). I suppose in cases where it is absolutely clear that termination was voluntary this might be skipped but the less clear, the better the reason for sending. The notice could be clarified, if desired, to explain that the subsidy only applies to those who had an involuntary termination and the employer considers them to have been voluntarily / involuntarily terminated and thus eligible / ineligible. Based on the presentation and revised guidance it does seem unnecessary to be that cautious and send Second Election notices to those with qualifying events other than a termination (reduction in hours, disability, etc.).

It's a bit of a mess, I agree, but I agree with jpod and think that is generally a logical process given the model notices. If the employer is comfortable somebody is an AEI and second election notice applies, then it is appropriate to send that on to them since it provides actual election info. However, if there are individuals that the employer does not feel were involuntarily terminated (and thus are not AEIs), the DOL feels strongly those individuals should have the ability to "appeal" the employer's classification. Thus, those individuals need to be informed of possible rights as AEIs and their ability to request a subsidy as an AEI. If a former employee challenges / appeals and is determined to be an AEI, then they will then get the second election notice but it does not make sense to send that to somebody who is of questionable AEI-status. I guess I am still at a loss though why employers would necessarily have to send out to participants encountering a qualifying event that does not involve a termination of employment (or death or disability). I can see where things get murky if there was a termination that may or may not have been "voluntary" but if you have just had your hours reduced I would think it hard to argue that as some sort of involuntary termination. Sometimes I think it might have actually been less confusing if they had released yet another model general notice aimed specifically at those individuals who experienced a qualifying event on or after Sept. 1, 2008 and are not deemed to be an AEI by their employer. Of course, I think plan sponsors could prepare something of a customized notice or letter for folks in this category rather than just sending the general notice if they desired.

Based on the accompanying DOL guidance, seems their recommendation is that all qualified beneficiaries incurring a qualifying event since Sept 1 2008 should receive it, not just those involuntarily terminated. That approach, while confusing to folks clearly not eligible, would permit "voluntarily terminated" individuals to appeal their classification and thus exclusion from the subsidy right. The way I read the DOL guidance, that would seem to include individuals with reduction in hours as a qualifying event as well which would seem a bit strange since there would seem to be little chance of them having been terminated if they are still working.

Without giving any thought or study to it, I agree with Peter. As a general matter, ERISA-regulated health plans that purchase group insurance coverage rather than fully self-insure are generally subject to state health insurance laws to the extent they regulate insurance provided under the group policy purchased for the plan. That is to say, ERISA generally does not preempt state insurance laws. I think that can carry over to other federal laws as well such as COBRA. I have, for instance, heard state insurance regulators note that their state continuation coverage laws generally apply to all employers who purchase state-regulated health insurance including large employers who are generally subject to COBRA. Interestingly, I have heard it asserted that when the state laws do not include gross misconduct exemptions it may be possible to argue that individuals who are terminated for gross misconduct and thus may be cut out of COBRA may nonetheless be entitled to continuation coverage under the state laws. In other words, COBRA would only preempt to the extent it is inconsistent with state law and in that case it wouldn't necessarily be inconsistent since the bad actor would only be entitled to one coverage option at the time (i.e., the state continuation coverage and not COBRA coverage). I have no idea whether that is right or not and have never seen it pushed or pursued. Like Peter, I would enjoy seeing the issue litigated as long as it didn't involve me.

I think that raises an interesting issue. Seems there has been some speculation or suggestion by the ARRA COBRA gurus that employers might need to pay more attention to the gross misconduct exception where failing to apply it means that individuals are receiving money from the government they arguably should not be. I think many many employers handle the gross misconduct exception this way--that is just give everybody a chance to elect COBRA--for fear that they may make a mistake or get challenged with respect to their gross misconduct classification. As a practical matter, I cannot really see the regulators having time to drill down and challenge the gross misconduct exceptions (or lack thereof). Seems if they do then it is only fair that, at a minimum, they should provide a more definitive definition or guidance to employers on that point. I suppose employers could always adopt a bifurcated approach and adopt a policy of being more generous and permitting COBRA coverage elections for all, even if there arguably was gross misconduct, but then be stricter with respect to classifying indivuals as ineligible for the subsidy piece due to the gross misconduct exception. That would seem to comply with the general terms of ARRA changes and would presumably allow individuals to challenge the employer's decision as part of the new ARRA appeal process. Perhaps that might be the best way to go as it might result in plans getting better guidance overall as to what the regulators consider sufficient for gross misconduct.

George, many thanks. I had somehow missed the "or" at the end of 6432(b)(2)(A)(iv) on first read. So, seems clear all plans subject to COBRA require employer to act as do all plans which are completely or partially self-insured. That should leave insurers covering non-COBRA governed plans that are fully insured. We too are seeing no immediate activity with respect to insurers taking up this role for small plans subject to state "COBRA" rules.

The only thing I would add is that the COBRA obligations are generally applied on a controlled group basis so if the company that goes out of business is part of a larger controlled group (e.g., an indirect subsidiary of some larger parent company) and some other entity in that controlled group sponsors a group health plan, it is possible that the COBRA obligations of the entity going out of business might shift over to the other group health plan that is part of the controlled group. That, of course, can create real administrative and network challenges, etc. and often comes as a surprise to the other health plan but I think can happen under the COBRA rules. On the other hand, if the entity going out of business is not part of a group and it terminates the plan and all other group coverage for active employees (because it no longer has employees), I think the COBRA obligation ceases as well.

Thanks Oriecat. That makes sense and unfortunately matches what I feared. The Act and lots of discussion do reference insurers being responsible for the premium and having to claim the credit in certain cases. Can anybody explain what those situations would entail? Also, it is my understanding that the second chance coverage and premium subsidy will generally start retroactive back to March 1, 2009. Is this correct? That really does not seem fair to those participants who may not be aware of or know about the opportunity to elect COBRA and get the subsidy until they receive the notice. Even if everbody gets notices out pretty quick, a good portion of March will be gone and participants may have foregone medical treatment or services because they did not realize they could get coverage. Given the extra benefits provided by the changes, perhaps that is fair and this is just intended to help people cover expenses but seems that sort of frustates the purpose of the changes too if one of the 9 months of subsidized coverage includes a period when you did not necessarily anticipate coverage.

Can someone clarify for me who is responsible for paying the subsidy and seeking the tax credit for fully-insured plans subject to COBRA? If I understand correctly, employers bear responsibility for covering subsidy for self-insured plans and that makes sense but what I see about fully insured plans seems to vary. Some seem to say that employers are responsible for covering COBRA subsidy and seeking credit for fully insured plans subject to COBRA rules but maybe not in cases of plans not subject to federal COBRA rules where continuation coverage is via state law. In many cases I see, employers in fully insured plans outsource or directly rely upon the insurer or some COBRA administration branch of the insurer to handle COBRA and receive and process COBRA premium payments. In situations like this, would the insurer then become the one responsible for covering the subsidy and seeking reimbursement or are the situations when that happens much less common? I would think the insurance companies would be going crazy if they thought they would have to forego or front the 65% COBRA piece in many cases. I suppose my question might more succintly be summarized by asking when exactly do insurers bear responsibly for "paying" the 65% premium and seeking the credit. Thanks.

CEB, Thanks for the additional response. That is a helpful suggestion. We've batted the issue around for our state with various family lawyers and there seems to be a range of opinions as to what sort of court documentation (short of final divorce decree) might justify a legal separation. For example, there is thought (and I think some case law support for) that a "divorce from bed and board"--apparently an antiquated and now rarely used form of separation / divorce--constitutes a legal separation even though it is not a final divorce. There is also some thought that court orders enjoining individuals from having certain types of contact with the spouse going forward (e.g., domestic violence / live apart orders) might rise to the level of legal separation but there does not seem to be any consensus on those sorts of situations. One thought we've had given the lack of clarity under our state law was to simply limit the qualifying event to "divorce" but this would seem to me to possibly be prohibited by the COBRA rules unless the Plan Administrator could really determine that there was no possible classification of "legally separated" under applicable state law. Of course, that becomes all the tougher when multiple states are involved. Anybody have thoughts on whether the plan could simply drop the "legal separation" component from the qualifying event list and still comply with COBRA.

I originally posted this on the Plan Correction board but have not received any responses and so thought readers here might have some thoughts / experience on the question below: What is the usual procedure for correcting a 401(k) plan's failure to timely adopt proposed amendments submitted in connection with application for determination letter on continued plan qualification? Here a Cycle A 401(k) plan restatement was timely submitted to the IRS and received a determination letter in early 2008 conditioned on the plan's timely adoption of some minor additional amendments within the period set forth under 401(b). The Plan has not yet adopted the amendments. Can such a failure be corrected under EPCRS's nonamender provisions or does the fact that the plan arguably does not have a valid determination letter impair its ability to rely on EPCRS? Is there some other procedure outside EPCRS for fixing what I would think could be a fairly common slip up but not one I have encountered before? Thanks.

What is the usual procedure for correcting a plan's failure to timely amend in connection with amendments required as part of a Cycle A determination letter? Can such a failure always be corrected under EPCRS or does it depend in part on the nature of the amendments required?

John, Thanks. That's pretty much what we have done in the past (and maybe the best that can be done). The problem comes up when participants see that language and try to drop spouses just because they are separated. In most cases, those sorts of separations in anticipation of divorce do not constitute legal separations. Frankly, even in states that do recognize legal separations as something of a distinct classification, the grounds for that don't seem to be very clear. Anybody used to seeing language that might try and explain or put some parameters on the legal separation requirements so that participants have a bit more of an understanding?

I understand that COBRA does not define the term "legal separation" for qualifying event purposes. It is also my understanding that the family law rules of many states also do not formally recognize the concept of a legal separation. That is to say, although parties may be "separated" and living apart, they are still viewed as legally married until the final divorce. Although there are some states that may have a classification of "legal separation" or certain forms of divorce like a "divorce from bed and board" that might rise to a "legal separation," that appears to be a minority. Given the confusion over the lack of an express definiton of "legal separation" and participants' status during a usual "separation period" etc., I was curious how many worked with plans that attempted to provide a definition of the term "legal separation" and how such a definition was drafted so that it is broad enough to cover multiple states and still provide some meaningful clarification (e.g., I don't think saying something like "legal separation as may be recognized under applicable state law" really helps much.)

John, Many thanks. All that confirms my thinking as well. I suppose in some cases a participant might leave so early in a pay period that there would not be enough wages earned to offset the flex plan deposit (as well as other applicable deductions, etc. after taxes withheld) so I wonder if there would be any particular ordering or priority as to which deferrals to satisfy first. I have not attempted to research that because, in this situation, the employee will have worked enough of the month to cover applicable salary deductions but just wondering if anybody was aware of any further guidance in a situation such as that. Thanks.

Help. Feel like I should know the answer to this but not sure. We have a flex plan that is set to receive the first 2009 salary deferral contribution with the January 15, 2009 payroll. If a person is terminated prior to January 15th such that they receive some pay for 2009 but not a full pay period check, should the set dollar deferral to the health fsa be made from the partial paycheck the same as normal, should it be adjusted pro rata or should it be canceled altogether? This becomes much bigger issue because if no amounts go into the flex account, presumably the employee would not have a positive account balance for 2009 and I guess arguably would not have to be provided COBRA. Employer here is worried that terminated employee would elect COBRA if offered so that they could take advantage of full year's reimbursement amount with just one month's COBRA deferral. Even if no portion of the partial paycheck would go to the flex plan account (or wouldn't have anything in the account at the time of termination), I worry about not providing the individual COBRA rights in this case. Although the Plan speaks in terms of only offering COBRA if the individual has a positive account balance at the time of termination, the participant here would not have overspent their account--their account balance would simply be zero--no amounts in / no amounts spent. Would appreciate any insight or tips on how have others dealt with this issue. Thanks.

JanetM, Thanks for your response. Let me refine my question a bit: I do not believe there is anything in either the separation pay exemption or short term deferral exemption that demand that participants have no choice as to the time and form of payment (provided the choices all ensure compliance with the exemption). Colleauge was concerned that giving employees a choice between lump sum and installment payments might still run afoul of 409A even if they were exempt. That does not seem to be the case to me, however. Seems if they are exempt, then participants can be given clear choice. (Company had provided choice in RIFs before and wants to do the same in this case.)

Question: For a bare-bones severance plan that provides severance that (1) qualifies for the separation pay plan exception and (2) includes a provision requiring that all amounts be paid out no later than March 15, 2009, would there be any problem in the plan giving participants a choice between (1) receiving a lump sum benefit in early 2009 (prior to March 15th) or (2) receiving 10 weeks of continued pay in weekly installments. I suppose there might be some constructive receipt issues with providing that sort of choice but it is not clear to me that 409A would govern if the severance amounts would be exempt under either or both the separation pay and short term deferral rules.

I believe I recall one of the IRS officials speaking at an ABA or ALI-ABA meeting noting that if amounts will (or I suppose potentially could) be paid out after 2008, the plan underwhich they are to be paid needs to be a written plan in compliance with 409A even if the plan is terminated before 2009.

Not to belabor this too much but wonder if there is any possible argument or way to creatively draft so that you could argue that change in benefit amount (if any) paid upon early retirement arises from a change in the vesting schedule applicable to plan benefits. In that case, the company's exercise of discretion, if any, following early retirement would arguably only work to accelerate the vesting percentage and would not change the time and form of benefit payments. So, the benefits (i.e., certain percentage of annual comp at separation) would always be paid for a fixed period of time commencing upon separation from service. For an extreme example, vested percentage for somebody terminating at ages 61, 62, 63, or 64 would be 0% whereas vested percentage for termination after age 65 would be 30%. In all cases, benefits (if any) would be paid in a series of equal monthly installments for a fixed period commencing with the month following separation from service. If employer excercised discretion to accelerate vesting, could you argue that 409A should not care since discretion is only a vesting change that determies amount of benefits and not time or form of payment? (Of course, i realize here it's all or nothing so there is a big difference in the amount . . .)