COBRA Subsidy Extended; Further Extensions Likely

In the midst of the ongoing health care reform debate, Congress was able to unanimously agree on retroactively extending the Federal 65% COBRA health care premium subsidy for workers involuntarily separated. The original program provided only nine months of subsidy. Thus, for laid-off workers whose federal subsidies started March 1, 2009 (the earliest date possible), November was the last month they could receive the federal subsidy. The original program also did not cover workers who lost their health care after Dec. 31, 2009.

The expansion of the program to those involuntarily separated as late as Feb. 28, 2010, and for a total of 15 months of subsidy is good news for employees who have recently been laid off. Further, the House has passed an additional extension as part of a separate bill that the Senate is expected to take up before the Feb. 28 deadline. The President signed the legislation, which was an amendment to the Department of Defense Appropriations Act of 2010 (P.L. 111-118), on Dec. 19, 2009.

Background

COBRA allows workers who have lost their health care because of a “qualifying event” ' such as separation, reduction of hours, and death of the covered employee ' to purchase up to 18 months of coverage (36 months in certain cases) from the former employer. The employer may generally only charge 102% of the premium paid by active employees (150% for disabled employees). In the case of a self-insured employer, the employer's costs substitute for the premium.

The American Recovery and Reinvestment Act of 2009 (ARRA) established a special program under which the government would subsidize 65% of the COBRA premium for “assistance-eligible individuals” (AEIs). An individual is generally an AEI under ARRA if they were involuntarily separated between Sept. 1, 2008 and Dec. 31, 2009. Beginning with the first premium period after enactment (generally March 1, 2009, for those already involuntarily terminated), AEIs could receive the subsidy for up to nine months.

For AEIs that started receiving the subsidy March 1, 2009, the subsidy ended after the premium for the month of November 2009. Further, under the law, no new individuals could become an AEI (and eligible for the subsidy) after Dec. 31, 2009. The IRS and the Department of Labor issued considerable guidance on the ARRA subsidy program including numerous questions and answers and model notices, but also made it clear the IRS would not question an employer's liberal interpretation of “involuntary termination.”

AEIs received the subsidy by paying only 35% of the premium. Law firms received the federal subsidy for the other 65% by reducing the amount they contributed as employment taxes or by filing for a refund on their Form 941 or Form 941x. All reimbursements for 2009 had to be claimed on the 2009 forms.

Defense Appropriations Extension

The following includes an overview of extensions to the current COBRA allowances:

Length of the Subsidy. The provision extends the COBRA subsidy to 15 months from nine months. The provision is retroactive; it will apply starting in December for those who lost the subsidy after November.

Eligibility of the Subsidy. The provision extends the COBRA subsidy to individuals who were involuntarily terminated through Feb. 28, 2010. In a change from the prior law to avoid the situation where individuals who were terminated in December (but who did not lose coverage until January) were not AEI, the provision only looks at when the individual was involuntarily terminated, not when coverage was lost.

Transition. Because the provision is retroactive, it covers individuals whose subsidy ran out in November. Some of these individuals dropped COBRA coverage because of the increased cost; others paid 100% of the COBRA cost. Still others might have paid 35% in hopes that the employer would accept that or the law would be extended. Many of these individuals are still in their policies' “grace period” for making the December contribution and they can be reinstated if they so elect and make the necessary contribution. For those not in a grace period situation, the provision provides a grace period to change their election and make any contribution.

Notices. The provision requires notices to affected employees who were involuntarily terminated in November or December to receive notice of the extension even if they already received the basic notice of availability of the subsidy. In addition, plan administrators must give notice to AEIs whose coverage ran out in November and who did not keep COBRA coverage or who paid the full amount and are entitled to a refund or a credit. Plan administrators must provide the notices within 60 days of the start of the transition period and individuals must elect and pay any back payments 60 days after the enactment date of Dec. 19, 2009 (or, if later, 30 days after the notice). It is likely that Labor will issue a model notice as it did with respect to earlier notices ' but that is not yet clear.

Recovering Overpayments. In dividuals who paid 100% of the COBRA cost are entitled to a refund or a credit. Rules similar to the current rules apply. A credit may be applied toward future premiums if it is reasonable to believe the credit will be used up within 180 days. Otherwise the overpayment must be refunded.

What's Next

The House has passed a broader extension as Section 3302 of the “Jobs for Main Street Act, 2010″ (Jobs bill). The Senate is likely to take up the Jobs bill early in 2010 and further COBRA extension is likely. Additionally, the House health care bill included a long-term COBRA subsidy program (until the health exchanges go into effect in 2013). While the Senate health care bill does not include a similar provision, it is likely a COBRA subsidy will be discussed in the upcoming health care conference as well.

In the Jobs bill, the eligibility period is extended to June 30, 2010, as opposed to the enacted Feb. 28, 2010. The Jobs bill also includes many of the provisions already enacted, such as the 15 months and notices to individuals. There is a somewhat unclear provision that provides benefits to individuals who lose coverage due to a reduction in hours and later are involuntarily terminated. Another provision would provide that retiree health coverage eligibility does not disqualify an individual for the subsidy (the current rules can be confusing, as they depend on whether the retiree benefits are part of the same plan or is a separate plan).

The Jobs bill would also “deem” a determination of involuntary termination as valid if the determination was reasonable and there was appropriate attestation. Although this is how IRS and Labor are currently interpreting the law, the provision would codify that interpretation. Under current law, individuals can appeal to Labor a finding that the termination was not involuntary. Labor then makes a ruling. There are penalties under the Code and Employee Retirement Income Security Act (ERISA) for a failure to follow Labor's ruling. The Jobs bill adds a right outside ERISA for the Secretary of Labor or an affected individual to enforce the subsidy determination or receive appropriate relief. Without ERISA's Section 502 limitations on enforcement actions, this provision may open employers to legal fees, damages and additional court proceedings.

Immediate Steps

Employers and plan administrators should act quickly to implement the new provisions and distribute the necessary notices. Many law firms or plans most likely have already mailed premium bills for January for the full amount and will need to determine how best to deal with issues that may arise. Employers will also need to determine whether they want to reimburse appropriate parties or credit the overpayments against future premiums.

Nothing in the bill changes the IRS's requirement that the subsidy recovery for 2009 be from 2009 employment taxes or on Form 941 or Form 941x for 2009. 2010 subsidies should be recovered from 2010 employment taxes or on Form 941x for 2010. IRS has not yet addressed how retroactive premium payments for 2009 made in 2010 should be treated. However it is critical that employers, law firms and appropriate third-party organizations take the necessary actions to make sure they have communications plans in place to address all possible changes that may come.

Stuart Sirkin is an Executive Director in Ernst & Young LLP's Compensation and Benefits practice. He joined the firm in 2007 after 31 years with the Department of Labor, the IRS, the PBGC, and the Senate Finance Committee. Mr. Sirkin, who is a Charter Member of the American College of Employee Benefits Counsel, is also a frequent speaker and writer on qualified pension plan and COBRA issues. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

In the midst of the ongoing health care reform debate, Congress was able to unanimously agree on retroactively extending the Federal 65% COBRA health care premium subsidy for workers involuntarily separated. The original program provided only nine months of subsidy. Thus, for laid-off workers whose federal subsidies started March 1, 2009 (the earliest date possible), November was the last month they could receive the federal subsidy. The original program also did not cover workers who lost their health care after Dec. 31, 2009.

The expansion of the program to those involuntarily separated as late as Feb. 28, 2010, and for a total of 15 months of subsidy is good news for employees who have recently been laid off. Further, the House has passed an additional extension as part of a separate bill that the Senate is expected to take up before the Feb. 28 deadline. The President signed the legislation, which was an amendment to the Department of Defense Appropriations Act of 2010 (P.L. 111-118), on Dec. 19, 2009.

Background

COBRA allows workers who have lost their health care because of a “qualifying event” ' such as separation, reduction of hours, and death of the covered employee ' to purchase up to 18 months of coverage (36 months in certain cases) from the former employer. The employer may generally only charge 102% of the premium paid by active employees (150% for disabled employees). In the case of a self-insured employer, the employer's costs substitute for the premium.

The American Recovery and Reinvestment Act of 2009 (ARRA) established a special program under which the government would subsidize 65% of the COBRA premium for “assistance-eligible individuals” (AEIs). An individual is generally an AEI under ARRA if they were involuntarily separated between Sept. 1, 2008 and Dec. 31, 2009. Beginning with the first premium period after enactment (generally March 1, 2009, for those already involuntarily terminated), AEIs could receive the subsidy for up to nine months.

For AEIs that started receiving the subsidy March 1, 2009, the subsidy ended after the premium for the month of November 2009. Further, under the law, no new individuals could become an AEI (and eligible for the subsidy) after Dec. 31, 2009. The IRS and the Department of Labor issued considerable guidance on the ARRA subsidy program including numerous questions and answers and model notices, but also made it clear the IRS would not question an employer's liberal interpretation of “involuntary termination.”

AEIs received the subsidy by paying only 35% of the premium. Law firms received the federal subsidy for the other 65% by reducing the amount they contributed as employment taxes or by filing for a refund on their Form 941 or Form 941x. All reimbursements for 2009 had to be claimed on the 2009 forms.

Defense Appropriations Extension

The following includes an overview of extensions to the current COBRA allowances:

Length of the Subsidy. The provision extends the COBRA subsidy to 15 months from nine months. The provision is retroactive; it will apply starting in December for those who lost the subsidy after November.

Eligibility of the Subsidy. The provision extends the COBRA subsidy to individuals who were involuntarily terminated through Feb. 28, 2010. In a change from the prior law to avoid the situation where individuals who were terminated in December (but who did not lose coverage until January) were not AEI, the provision only looks at when the individual was involuntarily terminated, not when coverage was lost.

Transition. Because the provision is retroactive, it covers individuals whose subsidy ran out in November. Some of these individuals dropped COBRA coverage because of the increased cost; others paid 100% of the COBRA cost. Still others might have paid 35% in hopes that the employer would accept that or the law would be extended. Many of these individuals are still in their policies' “grace period” for making the December contribution and they can be reinstated if they so elect and make the necessary contribution. For those not in a grace period situation, the provision provides a grace period to change their election and make any contribution.

Notices. The provision requires notices to affected employees who were involuntarily terminated in November or December to receive notice of the extension even if they already received the basic notice of availability of the subsidy. In addition, plan administrators must give notice to AEIs whose coverage ran out in November and who did not keep COBRA coverage or who paid the full amount and are entitled to a refund or a credit. Plan administrators must provide the notices within 60 days of the start of the transition period and individuals must elect and pay any back payments 60 days after the enactment date of Dec. 19, 2009 (or, if later, 30 days after the notice). It is likely that Labor will issue a model notice as it did with respect to earlier notices ' but that is not yet clear.

Recovering Overpayments. In dividuals who paid 100% of the COBRA cost are entitled to a refund or a credit. Rules similar to the current rules apply. A credit may be applied toward future premiums if it is reasonable to believe the credit will be used up within 180 days. Otherwise the overpayment must be refunded.

What's Next

The House has passed a broader extension as Section 3302 of the “Jobs for Main Street Act, 2010″ (Jobs bill). The Senate is likely to take up the Jobs bill early in 2010 and further COBRA extension is likely. Additionally, the House health care bill included a long-term COBRA subsidy program (until the health exchanges go into effect in 2013). While the Senate health care bill does not include a similar provision, it is likely a COBRA subsidy will be discussed in the upcoming health care conference as well.

In the Jobs bill, the eligibility period is extended to June 30, 2010, as opposed to the enacted Feb. 28, 2010. The Jobs bill also includes many of the provisions already enacted, such as the 15 months and notices to individuals. There is a somewhat unclear provision that provides benefits to individuals who lose coverage due to a reduction in hours and later are involuntarily terminated. Another provision would provide that retiree health coverage eligibility does not disqualify an individual for the subsidy (the current rules can be confusing, as they depend on whether the retiree benefits are part of the same plan or is a separate plan).

The Jobs bill would also “deem” a determination of involuntary termination as valid if the determination was reasonable and there was appropriate attestation. Although this is how IRS and Labor are currently interpreting the law, the provision would codify that interpretation. Under current law, individuals can appeal to Labor a finding that the termination was not involuntary. Labor then makes a ruling. There are penalties under the Code and Employee Retirement Income Security Act (ERISA) for a failure to follow Labor's ruling. The Jobs bill adds a right outside ERISA for the Secretary of Labor or an affected individual to enforce the subsidy determination or receive appropriate relief. Without ERISA's Section 502 limitations on enforcement actions, this provision may open employers to legal fees, damages and additional court proceedings.

Immediate Steps

Employers and plan administrators should act quickly to implement the new provisions and distribute the necessary notices. Many law firms or plans most likely have already mailed premium bills for January for the full amount and will need to determine how best to deal with issues that may arise. Employers will also need to determine whether they want to reimburse appropriate parties or credit the overpayments against future premiums.

Nothing in the bill changes the IRS's requirement that the subsidy recovery for 2009 be from 2009 employment taxes or on Form 941 or Form 941x for 2009. 2010 subsidies should be recovered from 2010 employment taxes or on Form 941x for 2010. IRS has not yet addressed how retroactive premium payments for 2009 made in 2010 should be treated. However it is critical that employers, law firms and appropriate third-party organizations take the necessary actions to make sure they have communications plans in place to address all possible changes that may come.

Stuart Sirkin is an Executive Director in Ernst & Young LLP's Compensation and Benefits practice. He joined the firm in 2007 after 31 years with the Department of Labor, the IRS, the PBGC, and the Senate Finance Committee. Mr. Sirkin, who is a Charter Member of the American College of Employee Benefits Counsel, is also a frequent speaker and writer on qualified pension plan and COBRA issues. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.