COBRA Changes: Implementing the New COBRA Subsidy and How it Impacts Severance Packages

COBRA Changes: Implementing the New COBRA Subsidy and How it Impacts Severance Packages

TuesdayApril 7, 20092:00 - 3:00 p.m. Eastern

Audio Access: 1-888-296-1938 Access Code: 805973

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Speakers

Stacy Barrow, CounselBoston Office [email protected]

Mary Turk-Meena, PartnerCharlotte Office [email protected]

Russ Sizemore, PartnerCharlotte Office [email protected]

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Today’s webinar topics include:

Updates on the latest agency guidance When is a termination of employment involuntary?

Discussion of issues raised by the model notices

Should employers continue to subsidize COBRA as part of severance packages?

Practical thoughts on addressing lingering questions

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Webinar Start Time

Login open at 1:55 pm Eastern Presentation begins at 2:00 pm Questions from Audience at 2:50 pm Please submit your questions via the CHAT option in your Webex browser.

Audio Access: 1-888-296-1938 Access Code: 805973

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Did You Know? K&L Gates’ Employee Benefits, ESOPs and Executive Compensation Practice Includes over 35 full-time employee benefits lawyers located across the world

Includes over 100 lawyers in related fields of employment law, tax, health care law, corporate mergers and acquisitions and public policy

Our clients include plan sponsors, plan trustees, investment managers and third-party administrators

We have assisted many clients in implementing consumer-driven health plans, handling employee benefits issues in corporate transactions and structuring executive agreements and executive benefit programs

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Did You Know? K&L Gates has more than 120 labor and employment lawyers, from Anchorage to Los Angeles and Boston to Miami, and in Asia and Europe

Over the past five years, K&L Gates has handled the labor and employment aspects of over 100 major acquisitions or divestitures

Each year we advise more than 1,000 clients of all sizes, representing virtually every industry sector

K&L Gates has handled employment litigation and related disputes in 45 of the 50 United States

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COBRA Subsidy

Created by American Recovery and Reinvestment Act (ARRA)

Provides federal subsidy of 65% of cost of COBRA continuation coverage for assistance eligible individuals (AEIs)

Subsidy extends for up to 9 months

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Affected Coverage

“COBRA continuation coverage” under ARRA defined as: All employer-sponsored group health plan coverage subject to federal COBRA except health flexible spending arrangements (“Health FSAs”)

State “mini-COBRA” coverage Continued coverage under health plans maintained by the federal government or a state government

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Who Is An Assistance Eligible Individual (AEI)?

Any COBRA qualified beneficiary (QB) who: Is eligible for COBRA:

Between September 1, 2008 and December 31, 2009

Because of an employee’s involuntary termination of employment that occurs between September 1, 2008 and December 31, 2009, and

Elects COBRA

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QB must be covered by the plan on the day before the involuntary termination Exception: a child adopted by or born to a covered employee during the COBRA period

QB is: Covered employee Covered spouse Covered child

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QB is not Domestic partner Spouse or dependent child added through open enrollment or special enrollment

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Paying the COBRA Premium

AEI must pay 35% of COBRA premium charged to AEI Can include 2% COBRA administrative fee

Subsidy is available for remaining 65% of COBRA premium charged to AEI

Subsidy does not apply to any portion of COBRA premium paid by employer

Subsidy does not apply to extended, non-COBRA coverage

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EXAMPLE 1 – Extended active coverage Facts

Employer continues active coverage for 6 months following involuntary termination THEN offers 18 months of COBRA at full COBRA rate

Result Subsidy does not apply to the 6 months of active coverage

Beginning in month 7 a full 9 months of subsidy-eligible COBRA coverage is available

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EXAMPLE 2 – Less than full COBRA premium is charged

Facts Full COBRA premium (including 2% admin fee) = $1,000/month

Employer charges $500/month for COBRA coverage Result

AEI pays $175/month for COBRA coverage (35% of $500)

Employer is eligible to recoup remaining 65% of COBRA premium ($325)

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EXAMPLE 3 – COBRA premium changes during subsidy period

Facts Full COBRA premium (including 2% admin fee) = $1,000/month

Employer charges $500/month for COBRA coverage for first 3 months of COBRA coverage

Employer charges $1,000/month for COBRA coverage beginning in 4th month

Result AEI pays $175/month for COBRA coverage (35% of $500) for first 3 months and $350/month beginning in 4th month

Employer is eligible to recoup remaining 65% of COBRA premium ($325 for first 3 months; $650 beginning in 4th month)

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EXAMPLE 4 – COBRA covers AEIs and non-AEIs Facts

Covered employee and 1 dependent child (both AEIs) COBRA also covers non AEI (e.g., domestic partner) COBRA premium for self + one coverage = $800 COBRA premium for self + 2 or more = $1,000

Result Premium subsidy applies to $800 (35% of $800 = $280) 100% of difference must be paid for non-AEI ($200) Total COBRA premium due from AEI = $480 Employer eligible to recoup 65% of $800 ($520)

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Paying the Subsidized COBRA Premium

35% premium payment subject to all applicable COBRA premium payment rules, including grace period for payment If 35% not paid in full and on time, COBRA coverage may terminate

Insignificant underpayment rules apply based on the 35% premium payment amount

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Duration of Subsidy

Subsidy is generally available for the first 9 months of COBRA

Subsidy ends when: AEI is eligible for other group health coverage or Medicare

Maximum COBRA duration expires COBRA coverage is lost (e.g., for nonpayment of premium)

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Notification of Other Group Health Coverage

AEI must notify plan of any other available coverage or Medicare Form for notifying employer provided in DOL model notices

Penalty of 110% of subsidy received for failure to notify unless failure is due to reasonable cause and not willful neglect

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Recouping the Subsidy

65% subsidy is recouped as a payroll tax credit Offsets FICA/income tax withholding Credit can be claimed only after receipt of AEI premium payment

Reconciled on Form 941 each quarter If subsidy exceeds tax liabilities, refund is issued

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Who Can Recoup the Subsidy?

There are three entities that can receive the payroll tax credit: Employer

If subject to federal COBRA or partially/fully self-insured

Insurer Applies if plan is fully insured and not subject

to federal COBRA – typically small employer plans (under 20 employees) and insured church plans

Multiemployer plan Multiemployer plans get a direct refund if no

payroll

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Required documentation

1. Information on the receipt, including dates and amounts, of the AEI’s 35% share of the premium

2. 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

3. For self-insured plans, proof of the premium amount and the coverage provided to AEIs

4. Attestation of involuntary termination, including the date of the involuntary termination, for applicable covered employee

5. Proof of each AEI’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage

6. 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

7. Other documents necessary to verify the correct amount of reimbursement

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Recapture of Subsidy for High Income AEIs

High income AEIs must repay all or a portion of subsidy as increased income tax

High income AEI – based on modified adjusted gross income $125,000 for single filer $250,000 for joint filer

Subsidy is reflected as additional income on AEI’s Form 1040

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Recapture of Subsidy for High Income AEIs

Employers (or others claiming payroll credit) do not have to track income

High income AEI may waive subsidy eligibility One-time, permanent waiver Waiver must be in writing

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What Constitutes Involuntary Termination? An employer’s unilateral dismissal of an employee when the employee is otherwise willing and able to work

IRS Notice 2009-27: “An involuntary termination means a severance from employment due to the independent exercise of the unilateral authority of the employer …”

Facts and Circumstances Test: even if a termination is designated as voluntary, when the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee’s services, then the termination is deemed involuntary

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What Constitutes Involuntary Termination?

Includes any employer-initiated, involuntary termination, such as a layoff, furlough, or other suspension of employment, resulting in loss of health coverage

Failure to renew an employment agreement when it expires, if employee was willing and able to continue under terms and conditions similar to those of the expiring contract, will be deemed an involuntary termination

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What Constitutes Involuntary Termination? Examples of “involuntary terminations” include: Performance-based terminations, layoffs, reductions in force

Terminations for “cause” (excluding special instances of “gross misconduct”)

An employee-initiated termination for “good reason,” where employer action causes a “material negative change” in the employment relationship for the employee

Employee resignation as a result of a material change in the geographic location of employment

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What Constitutes Involuntary Termination? More examples of “involuntary termination:”

Mere reduction of hours by an employer is not an involuntary termination. However, an employee’s voluntary resignation in response to an employer-imposed reduction of hours, if the reduction is a “material negative change” in the employment relationship, will constitute an involuntary termination.

Absences from work due to employee illness or disability do not constitute an involuntary termination However, actions taken by employer to terminate an individual’s employment, while the employee is absent from work due to illness or disability will be deemed an involuntary termination (be aware of other statutory considerations).

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What Constitutes Involuntary Termination? Involuntary Terminations would not include: Terminations of employment due to death of employee

Retirements or employee resignations that are fully and unequivocally voluntary (but document these carefully!)

Terminations for “gross misconduct” – for the purposes of Federal COBRA, such a termination would not be a qualifying event and the employee and other covered individuals would not be eligible for COBRA

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What Constitutes Involuntary Termination?

More Examples of “Involuntary Terminations” Does not include a work stoppage as a result of a strike initiated by employees or their representatives

Does include a lockout initiated by the employer

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Appeals

Ex-employee may challenge employer’s determination of AEI qualification DOL has 15 business days to resolve the issue

DOL review is de novo and entitled to deference in court

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Restructuring Severance Programs

Employers might consider re-structuring severance programs Could offer employees additional taxable compensation in lieu of employer-subsidized COBRA premiums

However, if the employer provides a tax-free premium subsidy it is not considered paid by the AEI

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What Coverage Changes are Permitted?

New special enrollment option (NOT required) Under COBRA, generally continue coverage in effect at qualifying event (QE) date until next open enrollment

Under ARRA, plan may allow QBs to change coverage to cheaper (lower premium) coverage Does not apply to small-employer plans or church plans subject to State COBRA-like rules

Election made during special 90-day period after notice

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Special Election Period

Rules apply to “periods of coverage” on or after February 17, 2009 If plan offers COBRA coverage by the month, March 1, 2009

If plan offers COBRA coverage by the day, February 17, 2009

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Three groups of potential AEIs on February 17, 2009: Group 1: Those affected by involuntary termination back to September 1, 2008 who are not on COBRA coverage as of February 17, 2009

Group 2: Subset of Group 1 affected by termination close to February 17 (e.g., in December 2008/January 2009)

Group 3: Those affected by involuntary termination back to September 1, 2008 who are on COBRA coverage as of February 17, 2009

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Special election period for Group 1: Group 1 AEIs may elect the subsidy at any time after February 17, 2009 and before 60 days after notice of the election right I.e., once notified, AEI has 60 days to elect

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Special election period for Group 1: Applies to QBs who never elected COBRA coverage but were involuntarily terminated between September 1, 2008 and December 31, 2009

Also applies to AEIs who elected COBRA coverage due to post-September 1, 2008 involuntary termination but dropped it before February 17, 2009

DOL view is that QBs who terminated COBRA coverage because they obtained other coverage after their initial COBRA election cannot re-elect under the special election period

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Special election period for Group 1: Notice of election period must be provided Within 60 days of February 17, 2009 (by April 18, 2009)

Only to QBs who could be AEIs going back to September 1, 2008

Those who voluntarily quit and received proper COBRA notice before February 17, 2009 do not have to receive this notice

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Special election period for Group 1: If elected, coverage is retroactive to post-February 17, 2009 periods of coverage (generally March 1) Period between QE/loss of coverage and new coverage not treated as a break in coverage for HIPAA purposes

Grace period for payment of premium during special election period is the 45-day period

Not available to small-employer plans/church plans which are subject to State COBRA-like rules

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Special election period for Group 2: Interplay between new COBRA subsidy 60-day election period and regular QE 60-day election period for events occurring in December 2008/January 2009 COBRA election is retroactive to QE date or March 1 (QB may elect)

Subsidy election is not retroactive beyond February 17, 2009

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Special rule for Group 3: AEIs enrolled in COBRA on February 17, 2009 Entitled to be credited with subsidy amount for

first 2 periods of coverage after February 17, 2009 Either refund subsidy to individual and claim a credit for the refund, or

Apply credit to future premium payments within 180 days

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Notice and Documentation for Non-AEIs

Need new QE notices for all post-February 16, 2009 COBRA notices Could use an ARRA insert

New general COBRA/ARRA notice not required for pre-ARRA QEs if valid COBRA election notice was already provided before February 17, 2009

Need notice for those “on” COBRA coverage on February 17 to advise them about subsidy (even though not eligible)

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DOL Model Notices

DOL has provided four model notices Notice of Extended Election Period General Notice – Abbreviated Version General Notice – Full Version Alternative Notice

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DOL Model Notices

Notice of Extended Election Period Sent to individuals who are AEIs and whose QE occurred between September 1, 2008 and February 17, 2009 and who did not elect COBRA coverage, or who elected, and subsequently dropped, COBRA coverage

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DOL Model Notices

General Notice – Abbreviated Version Sent to QBs already on COBRA as a result of a QE that occurred on or after September 1, 2008

Not limited to AEIs

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DOL Model Notices

General Notice – Full Version Sent to all QBs whose QE occurs between September 1, 2008 and December 31, 2009, regardless of the event, unless the QB has received the Notice of Extended Election Period, or

the QB has received the Abbreviated Version of the General Notice

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DOL Model Notices

Alternative Notice Sent if coverage is not subject to federal COBRA but is subject to state law continuation (“mini-COBRA”)

Sent by the insurer

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Notice Content Requirements

COBRA notices are not considered complete unless employee is notified of availability of premium reduction Calculation of 35% must be included in the notice

DOL has established rules for delivery of COBRA notices

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Fines and Penalties

Failure to provide required notice is subject to COBRA notice penalties (up to $110/day)

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American Recovery and Reinvestment Act (ARRA) Available Guidance

CMS, DOL and IRS have published guidance on special websites devoted to information on the COBRA premium subsidy: CMS information (concerning state continuation coverage): http://www.cms.hhs.gov/COBRAContinuationofCov/

DOL information:http://www.dol.gov/ebsa/COBRA.html

IRS information:http://www.irs.gov/newsroom/article/0,,id=204708,00.htmlhttp://www.irs.gov/newsroom/article/0,,id=204505,00.html

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Questions – Please contact us for information

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COBRA Changes: Implementing the New COBRA Subsidy and How it Impacts Severance Packages

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