For Immediate Release: March 2009 Contact: Lisa R. Nelson, Esq. (858) 875-3017 lisan@barneyandbarney.com COBRA Subsidy: Answers for Employers The American Recovery and Reinvestment Act of 2009 (ARRA) provides a subsidy to certain individuals who are eligible for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation health coverage, or similar coverage under state law (e.g., Cal-COBRA). These Assistance Eligible Individuals (AEI) are required to pay only 35% of the COBRA premium. The employer will subsidize the remaining 65% and recover that 65% subsidy by taking the subsidy amount as a credit on its Quarterly [Payroll] Tax Return- IRS Form 941. Below are some of the questions Barney & Barney/Saylor & Hill received during the Webinars on this topic hosted February 26-27, 2009 by Lisa R. Nelson, Esq., Director of Compliance & Regulatory Affairs at Barney & Barney/Saylor & Hill, and Alfred (Mike) Fowler, Esq. Answers reflect Barney & Barney/Saylor & Hill s current understanding of the new law and is not intended as legal advice. Employers should consult with their legal counsel for guidance regarding compliance with the new law. ELIGIBILITY Q: Are spouses and dependents eligible for the COBRA subsidy? A: Yes. Any COBRA qualified beneficiary of the covered employee is also eligible for the subsidy, even when the employer does not ordinarily contribute toward any dependent premium. Q: Is my domestic partner or same-sex spouse eligible for the subsidy? A: No. ARRA is a federal regulation. Pursuant to the Defense of Marriage Act (DOMA), domestic partners and same-sex spouses are not entitled to federal COBRA or the federal COBRA subsidy. Q: If the employee was involuntarily terminated in August of 2008 but becomes eligible for COBRA on or after September 1, 2008, is the employee eligible for the subsidy? A: No. The employee must be involuntarily terminated on or after September 1, 2008 and before December 31, 2009. This rule also applies to severance packages. If the employee was terminated before September 1, 2008, but the severance package provided benefits for a period of time resulting in loss of coverage after September 1, 2008, the employee is not subsidy eligible. The involuntary termination date is the key date. Q: Is failing a drug test gross misconduct? A: Yes. Involuntarily terminated employees who were terminated due to gross misconduct, often arising to illegal behavior, are not COBRA or COBRA subsidy eligible. Q: Is an employee who was laid-off eligible for the subsidy? A: Yes. Involuntary termination includes lay-offs if for an indefinite or substantial amount of time. Q: Are teachers laid-off for the summer eligible for the subsidy?
A: Maybe. Teachers who are not offered benefits during the summer (regardless of whether the employer or the employee pays the entire cost) are only subsidy-eligible if the teacher does not return at the beginning of the next school year as a result of an involuntary termination or non-renewal of their contract. Teachers who voluntarily leave are not eligible for the COBRA subsidy. Q: Are employees suffering a reduction in hours eligible for the subsidy if the reduction resulted in a loss of eligibility for the group health plan? A: No. There has to be an involuntary termination in order to be subsidy eligible. Q: What if the employer goes out of business? A: If the group health plan terminates as a result of the business closing or Chapter 11 Bankruptcy/Liquidation, there is no COBRA or COBRA subsidy entitlements. If, however, the business is acquired, merged or a subsidiary of a parent company, the COBRA and COBRA subsidy obligations are passed along to the other company if any of the other companies offer a group health plan to any of their employees. Q: If an employee on FMLA leave does not return to work due to disability, is that an involuntary termination? A: Yes. Q: If an employee is not on FMLA but is on disability and a current COBRA participant, are they eligible for the subsidy? A: Yes. Any current COBRA participant beginning disability on or after September 1, 2008 and before January 1, 2010, which renders them unable to work, may be eligible for the subsidy. Q: Who determines whether an employee qualifies for the COBRA subsidy? A: The employer (or insurance carrier for small employers) will make the initial determination as to COBRA subsidy eligibility. If the employee disagrees with that determination, he or she may submit a review of a denial of treatment as an assistance eligible individual to the DOL. The DOL has 15 business days after receipt for the application to make a determination. Q: How does the employer determine when someone is no longer eligible for the subsidy? A: The COBRA participant is required to send notification to the COBRA administrator or employer when they are no longer subsidy eligible. Failure to properly notify may result in a penalty payment to the IRS of 110% of the 65% premium subsidy. ELIGIBLE PLANS Q: Does the employer provide the subsidy if the employer offers voluntary dental and vision that is 100% employee paid? A: Yes. The subsidy applies to all medical, dental, and vision plans. Flex Spending Accounts (FSA) are excluded. Q: Does the subsidy apply to supplemental plans such as long-term disability? A: No. EMPLOYERS Q: Do small employers (fewer than 20 employees) have to pay the subsidy? A: No. Small employers are responsible only for sending the COBRA subsidy notices. After the notices are sent,
the insurance carriers will be required to pay the 65% subsidy for AEI. Insurance carriers will receive a tax credit to reimburse them for the subsidies they provide. Q: Do non-profits have to comply with the new law, and if so, how will they be reimbursed? A: Yes. Non-profits must comply. Reimbursement will be a taken as a credit against employee income tax withholdings. Q: Do schools have to comply with the new law? A: Yes. State and governmental plans must comply with the new law. Q: Who pays the subsidy for multi-employer plans (MEWA) or Professional Employer Organizations (PEO)? A: The plan pays the subsidy, not the separate employers. The plan will receive reimbursement in the form of a tax credit against their employment taxes. SUBSIDY TERMINATION Q: In the event the involuntarily terminated employee finds new employment but is not eligible under the new employer s group health plan for 30-90 days, does the subsidy apply? A: Yes. The employee will cease being subsidy eligible once they become eligible for another group health plan or Medicare. If there is a 30-90 day waiting period, the employee is not yet eligible for the other group health plan until that waiting period is completed. Q: How does the subsidy work if the employee has TRICARE (military coverage)? A: TRICARE is not considered a group health plan as it relates to COBRA. Eligibility or participation in TRICARE does not preclude COBRA subsidy. INCOME THRESHOLD Q: If the employee s income exceeds the threshold of $145,000 for part of 2009 but is below $125,000 in 2010, could the employee receive the subsidy? A: Yes. If the employee does not waive the right to the subsidy, the employee is entitled to receive the full subsidy for both 2009 and 2010. The IRS will determine which portion will be paid back in the form of an income tax increase. Any persons receiving the COBRA subsidy making an adjusted gross income of at least $125,000 for individuals or $250,000 for families in the year they received the subsidy, will see an increase in their income tax liability the following April 15 th. If the individual makes more than $145,000, (or the family makes more than $290,000) the entire subsidy amount will be imputed income. The IRS will make these calculations. Employers are not required to take it upon themselves to figure out the adjusted gross income of the COBRA subsidy participants. SEVERENCE AGREEMENTS Q: How will the subsidy work with severances that pay all or a portion of the COBRA premium? A: Subsidy eligible individuals are required to pay 35% of their COBRA premium. If the employer pays 100% of the COBRA premium as part of a severance package, the employee does not have a portion of the COBRA premium in which to subsidize. The employer will still pay 100% of the COBRA premium as the severance agreement stated. If, however, the employer agrees to pay 50% of the COBRA premium and the employee pays 50%. The employer will subsidize 65% of the employee s 50% portion of the premium. For example, a plan charges a COBRA participant $1,000 (including the 2% administrative fee). As part of a severance package, an employer agrees to pay $500.00 of the $1,000 premium. The COBRA participant would be
responsible for paying the $500.00 difference. Under ARRA, the COBRA subsidy participant would pay 35% of the $500.00 or $175.00. The employer is eligible for subsidy reimbursement of 65% based on the employee s $500.00 portion, equating to $325.00. DEPARTMENT OF LABOR JOB POSTERS Q: Does the Department of Labor (DOL) require employers to use the Job Poster published by the DOL? A: The DOL did not formally indicate. However, it is our recommendation to post the fliers at all job sites. EMPLOYER REIMBURSEMENT/TAX TREATMENT Q: How will an employer be reimbursed for the COBRA subsidy that is provided to the eligible individuals? A: The COBRA subsidy amount is reimbursed by being claimed as a credit on the IRS Form 941. The revised form is now available on the IRS website (link below). Employers will insert the credit amount (total subsidy amount provided) on line 12a of Form 941. This amount will offset the amount the employer (or insurance carrier for small plans) will pay for income tax withholdings and FICA taxes. If the employer entitled to reimbursement does not have sufficient payroll taxes from which to recover the amount of the subsidies provided, the Treasury Department will credit or refund the difference in the same manner as if it were an overpayment of payroll taxes. The employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter. Q: Does the subsidy need to be reported on the employee s W-2? A: Yes. The IRS will issue guidance in the next 30-60 days in which W-2 box the subsidy will be reported. Q: Is the subsidy taxable to the individual? A: No. NOTICE Q: Does the employer provide notice to employees who resigned or voluntarily terminated, or just those that were involuntarily terminated? A: The employer must provide notice to all individuals who terminated employment during the applicable time period, and not just to individual who were involuntarily terminated. Q: When is the notice due and are employers responsible for tracking down former employees? A: The notice must be sent out by April 18, 2009. It is safe to use the W-2 addresses you have on the former employee. First-class mail is appropriate. Q: If the employee is involuntarily terminated December 1, 2009, do they receive only 1 month of subsidy? A: No. They will still receive the full 9 months of subsidy. The December 31, 2009 cut-off date is the termination date. The employee must be terminated by December 31, 2009 in order to be eligible for the COBRA subsidy. Q: If the employee was involuntarily terminated September 15, 2008 but did not elect COBRA, can he do so now? A: Yes. Any involuntarily terminated employee, and their qualified spouses and dependents, have another opportunity to elect COBRA if the termination occurred on or after September 1, 2008. Employees have 60- days from receipt of the COBRA subsidy notice to elect under this special enrollment period.
Q: If the COBRA member only has non-core dental/visions coverage, is the employer required to pay the subsidy? A: Yes. The subsidy applies to all medical, dental, and vision group health plans. Q: Can the employee choose a medical plan now, if at termination they only had non-core coverage? A: No. The employee is entitled to the same coverage they had at the time of termination. Upon open enrollment, COBRA participants are entitled to change their plan. ALTERNATIVE COVERAGE OPTION Q: Can an employee choose different medical coverage under the special enrollment period if they failed to elect COBRA when they terminated employment? A: Yes. But only if the employer permits. The employer may permit the former employees to elect a lower cost medical plan but only if is also offered to active employees and is not non-core only coverage, or onsite facility coverage. LAPSE IN COVERAGE Q: If the employee was terminated in September 2008 but did not elect COBRA and chooses to elect COBRA under the special enrollment period effective March 1, 2009, is the employee responsible for the premiums due from the original termination date? A: No. The clock will run for the maximum COBRA period permitted (18 or 29 months) starting at the original termination date in September 2008, but there will be a gap in coverage. The premiums will not be required to be paid back to September 2008. Coverage will start March 1, 2009 but the COBRA maximum duration will reduced as a result of the time clock starting at the original term date. Q: Will there be a lapse in coverage? A: There will be a lapse in coverage, however, the 63-day break in creditable coverage and pre-existing condition rules of HIPAA do not apply. EMPLOYER COSTS & RECORDKEEPING OBLIGATIONS Q: What will the COBRA subsidy cost employers? A: The entire 65% subsidy that employers provide to eligible individuals will be reimbursed by the U.S. government. The employer will have minor administrative costs associated with mailing the notices and recordkeeping. Q: What are the recordkeeping requirements? A: Those employers claiming credit must maintain supporting documentation for the credit claimed. Such documentation includes, but is not limited to: Information on the receipt, including dates and amounts, of the AEI s 35% share of the premium. In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier. In the case of self-insured plans, proof of the premium amount and proof of the coverage provided to the AEIs. Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008 to December 31, 2009).
Proof of each AEIs eligibility for COBRA coverage and election. A record of the social security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals. Other documents necessary to verify the correct amount of reimbursement. PENALTY Q: What is the penalty for employers who fail to provide notice and/or offer the subsidy? A: A penalty of $100 per day can be assessed for failure to provide notice by April 18, 2009. ERISA provides additional civil penalties should a lawsuit occur as a result of the employer s failure to provide notice and/or offer the subsidy. ADDITIONAL GUIDANCE For additional guidance visit the DOL website at http://www.dol.gov/ebsa/cobra.html and the Internal Revenue Service (IRS) website at http://www.irs.gov/newsroom/article/0,,id=204335,00.html?portlet=6. Employers can click on the statement Subscribe to this page just under the heading on the DOL website at the above link to get email updates from the DOL, including an alert when the model notice is published. Barney & Barney/Saylor & Hill will also provide updates and further guidance as it becomes available. If you have any questions, contact your Barney & Barney/Saylor & Hill representative. Barney & Barney LLC is a California based privately held risk management and insurance brokerage firm providing solutions, services Barney and products & Barney in LLC commercial is a California property based and privately casualty held insurance, risk management employee benefits, and insurance workers brokerage compensation, firm providing executive solutions, personal services lines, and products surety in for commercial the past 100 property years. The and casualty firm also insurance, offers value employee added services benefits, in workers alternative compensation, risk financing, executive business personal continuity lines, and and loss surety control. for the past 100 years. The firm also offers value added services in alternative risk financing, business continuity and loss control.