IRS Issues Guidance on COBRA Premium Subsidy IRS Notice

Transcription

1 April 8, 2009 IRS Issues Guidance on COBRA Premium Subsidy IRS Notice On March 31, 2009, the Internal Revenue Service (IRS) issued much anticipated guidance on the COBRA premium subsidy provided under the 2009 Stimulus Bill IRS Notice (the Notice), which is available at: irs.gov/pub/irs drop/n pdf. It provides a substantive overview of the new law as well as a series of 58 questions and answers addressing a multitude of issues that have arisen since the Stimulus Bill was signed into law on February 17, This alert addresses the IRS position on the following topics: How does the premium subsidy work? Who is responsible for the upfront cost of the premium subsidy? When is an insurance company responsible for the upfront cost of the premium subsidy? What is Involuntary Termination? Who is an Assistance Eligible Individual? How do you calculate the premium subsidy amount? What types of coverage are eligible for the premium subsidy? When does the premium subsidy period begin and end? How does the extended election period work? How are high wage earners affected by the premium subsidy? Background On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), which included provisions related to COBRA continuation coverage. Under ARRA, certain involuntarily terminated individuals are entitled to a 65 percent reduction in the premium amount they would otherwise be required to pay for continuation coverage under their group health plan. Individuals who both involuntarily terminate employment between September 1, 2008, and December 31, 2009, and are eligible to elect COBRA continuation coverage at some point during that period are entitled to a 65 percent reduction in premiums if they indeed elect COBRA coverage. The premium subsidy is available for a maximum of nine months for each involuntary termination that occurs between September 2008 and December This subsidy became available as of the first period of coverage beginning on or after February 17, The period of coverage is defined by each individual group health plan, but in most cases the first period of coverage to which ARRA applies is March 1, Eligibility for the premium subsidy ends if the individual becomes eligible for coverage under any other group health plan or for Medicare benefits. Under ARRA, an employer may allow Assistance Eligible Individuals to elect different coverage from the coverage the individual was enrolled in immediately preceding the involuntary termination. If the employer chooses to give employees a choice of coverage, the terminated employee would have a minimum of 90 days following notification of the option to elect among the various benefits 1

2 IRS Issues Guidance on COBRA Premium Subsidy IRS Notice the employer provides active employees. Under this provision, Assistance Eligible Individuals are only permitted to elect to enroll in coverage whose cost is equal to or less than the cost of coverage they were enrolled in at the time of termination of employment. ARRA also provides an extended election period for certain individuals that terminated on or after September 1, 2008; however, the extended election period only applies to individuals who either (a) did not have a COBRA election in effect on February 17, 2009; or (b) had a COBRA election in effect on February 17, 2009, but elected lesser coverage than they were otherwise entitled to elect. Former employees who elected the maximum allowable coverage are not entitled to an extended election period. Assistance Eligible Individuals have an additional 60 days following notification of their extended right to elect coverage to request coverage and receive the premium subsidy. On March 19, 2009, the Department of Labor issued model notices that employers are required to provide to qualified COBRA beneficiaries no later than April 18, The model notices and other important information from the Department of Labor can be found at: dol.gov/ebsa/cobra.html. The 60 day extended election period does not begin until the appropriate notice is distributed to eligible individuals. How Does the Premium Subsidy Work? The premium subsidy will follow this basic process: Employee involuntarily terminates employment and becomes eligible for COBRA as a result of a loss of coverage Employee elects COBRA Employee pays 35 percent of monthly COBRA premium Employer provides the additional 65 percent of the COBRA premium Employer reduces the amount of payroll taxes it remits to the federal government in an amount equal to the total premium subsidy cost it fronted Employer files quarterly Form 941, disclosing on Line 12 the amount of withholding tax offset by the premium subsidy 2

3 Who Is an Assistance Eligible Individual? An Assistance Eligible Individual is an employee who involuntarily terminates and becomes eligible for COBRA coverage any time between September 1, 2008, and December 31, Note: The involuntary termination and COBRA eligibility must both occur within the applicable period. For example, if an employee terminates December 31, 2009, but under the terms of the group health plan is covered through January 1, 2010 the employee is not eligible for the premium subsidy; likewise, if the employee terminated August 31, 2008, and became eligible for COBRA September 1, 2008, the employee is not eligible for the premium subsidy. What Is Involuntary Termination? According to the Notice, Involuntary Termination means, a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee s implicit or explicit request, where the employee is/was willing and able to continue performing services. Based on this definition, whether a termination is deemed to be involuntary is going to be based on the facts and circumstances of the termination itself. For specific examples, please see IRS Notice , Q&As 1 9. The following are examples of what MAY and what WILL NOT result in an involuntary termination: What May Be Involuntary Termination? Lay off with a right of recall or a temporary furlough if there is a reduction to zero hours Employee s voluntary termination in response to employer imposed reduction of hours if the reduction is a material negative change in the employment relationship for the employee Retirement if the facts and circumstances indicate that that the employer would have terminated the employee absent the retirement Material change in the geographic location of employment (materiality of a change in location is based on facts and circumstances) Lockout initiated by the employer Termination following an employee taking a buy out if the employer indicates that following the buy out period, a certain number of employees in the employee s group will be terminated What Is Not Involuntary Termination? Death of the employee Mere reduction of hours if reduction is not to zero hours Termination due to the gross misconduct of the employee Work stoppage as a result of a strike Given the reliance on the termination s facts and circumstances in determining whether it is involuntary, the process can be considerably subjective. To protect employers, the Department of Labor has established a review program that would allow former employees to apply for a determination from the Department that their termination was indeed involuntary. If, after a review of the examples provided by Notice , the employer remains unclear whether the individual is assistance eligible, the best course of action may be to deny the employee s claim for the premium subsidy and require him to seek a determination from the Department of Labor. Employers that unilaterally consider all separations of employment to be categorized as involuntary terminations run the risk of underpaying federal withholding taxes and may be subject to penalties and interest. Who Is Responsible for the Upfront Cost of the Premium Subsidy? ARRA provides that only three parties may be held responsible for the upfront cost of the premium subsidy and, in turn, are eligible for reimbursement: (1) the employer; (2) the insurance company; and (3) the plan. 3

4 When Is the Employer Responsible? An employer is responsible to cover the cost of the premium subsidy if: (a) The employer is subject to federal COBRA laws; or (b) Any or all of the benefits provided under the plan are paid out of the general assets of the employer (i.e., self insured) Note: Based on this recent guidance, the majority of employers will be responsible for the upfront cost of the premium subsidy. Remember, federal COBRA laws generally apply to any employer with 20 or more employees, including most state and local government employers the laws do not apply to plans sponsored by certain church related organizations or the federal government. When Is the Insurance Company Responsible? Generally an insurance provider will be responsible for the upfront cost of the premium subsidy if the benefits subject to continuation coverage are fully insured and offered by a small employer (i.e., fewer than 20 employees) in a state with a mini COBRA statute. If any or all of the benefits provided under the group health plan are self insured, the employer will be responsible for the upfront cost, regardless of whether a particular state s mini COBRA statute would otherwise cover the employer. Note: 36 states currently have some form of mini COBRA statute covering small employers, including both Illinois and Ohio. Michigan law does not contain a mini COBRA provision. When Is the Plan Responsible? In situations where benefits are provided under a multi employer plan (e.g., a multi employer Taft Hartley plan), the plan is required to provide for the upfront cost. How Do you Calculate the Premium Subsidy Amount? The amount applicable to the premium subsidy is the premium amount the employee would otherwise be required to pay if he was not an Assistance Eligible Individual. In other words, regardless of the total cost of the COBRA coverage, the premium subsidy is based on the actual amount of premiums the former employee is required to pay. The amount applicable to the premium subsidy is reduced by any amounts the employer pays under the terms of the plan or a severance agreement. The following example illustrates how to calculate the premium subsidy amount: The total cost of continuation coverage is $1,000 per month. The employer pays for the first $500 and requires individuals electing COBRA continuation coverage to pay the remaining $500 each month. An assistance eligible individual is entitled to COBRA continuation coverage upon the timely payment of $175 (35 percent of $500). The employer covers the remaining 65 percent resulting in a payroll tax credit of $325 (65 percent of $500). What Types of Coverage Are Eligible for the Premium Subsidy? Included: Group health coverage, vision plans, dental plans, health reimbursement arrangements, and mini med plans (medical plan with a defined annual maximum benefit generally below $50,000) Excluded: Flexible spending arrangements provided through a Section 125 Cafeteria Plan Note: Because Health Savings Accounts (HSAs) are not considered group health plans, there is no subsidy available for contributions made on behalf of terminated employees; nonetheless, the premium subsidy is available for the underlying high deductible health plan. When Does the Premium Subsidy Period Begin and End? The premium subsidy is available for nine months or until the individual is eligible to enroll in other group coverage or Medicare and begins the first period of coverage for which the Assistance Eligible Individual is eligible to pay only 35 percent of the COBRA premium. 4

5 Note: If under the terms of a plan or severance agreement an employer pays the entire amount of the COBRA premium, those months are deducted from the total nine month eligibility period and the employer is not eligible for reimbursement. For example, pursuant to a severance agreement, an employer pays an Assistance Eligible Individual s entire health premium cost for months one to three following termination the employer considers the three month severance period to be part of the terminated employee s COBRA continuation coverage period. The individual is eligible for the premium subsidy (and the employer is eligible for reimbursement) for months four to nine. The premium subsidy is no longer available beginning in month 10. How Does the Extended Election Period Work? If an employee was involuntarily terminated between September 1, 2008, and February 17, 2009, and did not have an election of COBRA continuation coverage in effect on February 17, 2009, but would have been eligible for the premium subsidy if the election were in effect, that employee is allowed a second opportunity to elect COBRA and receive the premium subsidy. The new election period extends 60 days beyond the date the employee is provided notice of the extended right to elect coverage. Note: The extended election period also applies to an individual who elected self only coverage on or before February 17, 2009, but would have been eligible to elect family coverage. How Are High Wage Earners Affected by the Premium Subsidy? The premium subsidy begins to phase out for individuals with adjusted gross income during the year of coverage greater than $125,000 ($250,000 for joint filers) and is completely phased out for individuals with adjusted gross income greater than $145,000 ($290,000 for joint filers). If an individual is subject to the phase out and receives the premium subsidy, the individual s tax liability for the applicable year is increased by the amount of the premium subsidy received. The law generally provides high wage earners with two choices: 1. Receive the premium subsidy and repay the federal government for the total subsidy received 2. Make a permanent election to waive rights to the premium subsidy* *While an individual is permitted to permanently waive the right to the premium subsidy, there is no obvious reason to do so. The Notice makes it clear that if an Assistance Eligible Individual makes the permanent election to waive the rights to the premium subsidy, the individual may not later reverse the election and may not receive the premium subsidy for any future period of COBRA continuation coverage in 2009 and 2010, regardless of the individual s income in those years. Note: An employer is not obligated to know or calculate an employee s adjusted gross income; in fact, an employer cannot refuse to provide the premium subsidy to an individual simply because the individual s income may be over the limit. What Should Employers Be Doing? Employers should be implementing the ARRA changes by: 1. Making certain the individuals responsible for benefit plan administration within your organization are aware that changes are taking place this includes informing people who work in, or with, human resources, accounts payable, payroll tax, employee accessible websites, tax preparation, etc. 2. Identifying eligible individuals who involuntarily terminated on or after September 1, Determining whether you wish to provide an option for alternative coverage 4. Coordinating with insurance providers, third party providers including payroll services, third party administrators, insurance consultants, and other professional service providers to make certain these new procedures are properly implemented 5. Updating participant notices based on the model notices provided by the Department of Labor and provide notice to all eligible individuals no later than April 18, Updating payroll practices and payroll tax payment procedures to accommodate the subsidy and to secure reimbursement from the federal government Plante & Moran s Employee Benefits Consulting group is prepared to assist employers with the recent guidance as well as help employers identify potential issues and take the steps necessary to ensure compliance. Feel free to call Michael Krucker at or Ed Murphy at with any questions. 5