IRS Releases Notice (N-09-27) On ARRA COBRA

By Ric Joyner, CEBS, GBA, CFCI

eflex is providing some guidance and interpretation throughout this blog post. The purpose is to help employers and brokers gain insight and understanding into ARRA COBRA. We advise you to download the notice and read it thoroughly.  N-09-27

Definitions:

ARRA- American Recovery and Reinvestment Act

Federal COBRA- IRS COBRA Regulations, ERISA, Public Health Service Act

State Continuation- “Mini COBRA” or State Laws that modify or mirror Federal COBRA

COBRA Continuation coverage- is a formal terminology used by the IRS, DOL and Treasury to describe the regulations which constitute COBRA continuation under ARRA.

Involuntary Termination- An action taken by the employer which results in a termination, layoff, or furlough. Included are reduction of hours that causes an employee to quit.

AEI- Assistance Eligible Individual. A person and their family who qualifies for the 65% Employer subsidy in ARRA. “

Under the new provision, an assistance eligible individual is generally an
individual (1) who is a qualified beneficiary as the result of an involuntary termination during the period from September 1, 2008, through December 31, 2009, (2) who is eligible for COBRA continuation coverage at any time during that period, and (3) who elects the coverage. (N-09-27 paragraph 3)

QB- Qualified Beneficiary. An employee or family member that is subject to COBRA

QE-Qualifying Event- A circumstance that creates an event which leaves an employee or dependent without health insurance.

Extended Coverage- 9-01-08 to 12-31-08 Creates a second chance

Premium Reduction- The 65% the employers pays for COBRA on behalf of the employee

Subsidy- The 35% the employee pays, for their portion of the COBRA qualified health benefit  Once the employee elects COBRA and pay the 35% they are deemed to have satisfied COBRA.

Coverage Subject to ARRA- Health Insurance, Dental, Vision, EAPs (that qualify for COBRA) and HRAs. Flexible Spending Arrangements are NOT subject to ARRA COBRA.

Principles

The IRS recently said that to determine if someone is eligible for the subsidy use this logic.

Are they a qualified beneficiary? Were they involuntarily terminated during 9-01-08 through 12-31-09? Did they pay the 35% for their portion of the subsidy? If they meet these tests they are eligible for the subsidy.

INVOLUNTARY TERMINATION EXAMPLES

1. “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 was willing and able to continue performing services.” (N-09-27 QA 1)

eflex note: Examples are an employee is terminated for cause such as absenteeism, breach of handbook, layoffs, furloughs and reduction in hours that causes the employee to quit.

IRS clarification: “Involuntary termination is the involuntary termination of employment, not the involuntary termination of health coverage. Thus, qualifying events other than an involuntary termination, such as divorce or a dependent child ceasing to be a dependent child under the generally applicable requirements of the plan (such as loss of dependent status due to aging out of eligibility), are not involuntary terminations qualifying an individual for the premium reduction. In addition, involuntary termination does not include the death of an employee or absence from work due to illness or disability.”

eflex Note: If an employer “asks” an employee to resign and employee does so, this is considered an involuntary termination.

2. Does an involuntary termination include a lay-off period with a right of
recall or a temporary furlough period? (N-09-27 QA 2)

An involuntary reduction to zero hours, such as a lay-off, furlough, or
other suspension of employment, resulting in a loss of health coverage is an involuntary termination for purposes of the premium reduction.

3. Does an involuntary termination include a reduction in hours? (N-09-27 QA 3)

Generally no. If the reduction in hours is not a reduction to zero, the mere reduction in hours is not an involuntary termination. However, an employee’s voluntary termination in response to an employer-imposed reduction in hours may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.

4. Does involuntary termination include an employer’s action to end an
individual’s employment while the individual is absent from work due to illness or
disability? (N-09-27 QA 4)

Yes. Involuntary termination occurs when the employer takes action to
end the individual’s employment status (but mere absence from work due to illness or disability before the employer has taken action to end the individual’s employment status is not an involuntary termination).

5. Does an involuntary termination include retirement? (N-09-27 QA 5)

If the facts and circumstances indicate that, absent retirement, the
employer would have terminated the employee’s services, and the employee had knowledge that the employee would be terminated, the retirement is an involuntary termination.

eflex note: In other words, if the employee has planned the retirement, in this circumstance, it is not eligible for the subsidy.

6. Does involuntary termination include involuntary termination for cause? (N-09-27 QA 6)

Yes. However, for purposes of Federal COBRA, if the termination of
employment is due to gross misconduct of the employee, the termination is not a qualifying event and the employee and other family members losing health coverage by reason of the employee’s termination of  employment are not eligible for COBRA continuation coverage.

7. Does an involuntary termination include a resignation as the result of a
material change in the geographic location of employment for the employee? (N-09-27 QA 7)

Yes. For example if the employer says they are closing an office in NY and moving it to CA and the employer offers a job to everyone, but some employees won’t move, and thus lose their job, thi
s qualifies for the subsidy, even though they could still be employed if they moved with the company.

8. Does an involuntary termination include a work stoppage as the result of a
strike initiated by employees or their representatives? (N-09-27 QA 8)

No. However, a lockout initiated by the employer is an involuntary
termination.

9. Does an involuntary termination include a termination elected by the
employee in return for a severance package (a “buy-out”) where the employer indicates that after the offer period for the severance package, a certain number of remaining employees in the employee’s group will be terminated? (N-09-27 QA 9)

Yes.

ASSISTANCE ELIGIBLE INDIVIDUAL

10. Who qualifies as an assistance eligible individual?

An individual must be an assistance eligible individual to be eligible for the premium reduction. Under ARRA, an assistance eligible individual is a qualified beneficiary as the result of an involuntary termination that occurred during the period from September 1, 2008, through December 31, 2009, is eligible for COBRA continuation coverage at any time during that period, and elects the COBRA continuation coverage. In order to be a qualified beneficiary, the individual must be covered under the group health plan on the day before the involuntary termination (except in the case of a child born to or adopted by a covered employee during a period of COBRA continuation coverage or in certain circumstances where coverage was wrongfully denied the individual (see section 54.4980B-3, Q&A-1)). For purposes of Federal COBRA, an individual who loses group health coverage in connection with the termination of a covered employee’s employment by reason of the employee’s gross misconduct is not a qualified beneficiary and thus cannot be an assistance eligible individual.

11. If the involuntary termination and loss of coverage resulting in eligibility for
COBRA continuation coverage occur before September 1, 2008, can the individual
become an assistance eligible individual?

No. The involuntary termination resulting in COBRA continuation
coverage must occur during the period from September 1, 2008, through December 31, 2009, even if the individual is still on COBRA continuation coverage after February 17, 2009.

12. If the involuntary termination occurs before September 1, 2008, but the
loss of coverage resulting in eligibility for COBRA continuation coverage occurs after
September 1, 2008 (but no later than December 31, 2009), can the individual become
an assistance eligible individual?

No. The involuntary termination resulting in COBRA continuation
coverage must occur during the period from September 1, 2008, through December 31, 2009. Although section 4980B(f)(8) allows a plan to provide that the COBRA continuation coverage does not begin until the loss of coverage, that does not change the date of the involuntary termination.

13. If an individual’s involuntary termination occurs no later than December
31, 2009, but the loss of coverage resulting in eligibility for COBRA continuation
coverage occurs after December 31, 2009, is the individual an assistance eligible
individual?

No. Both the involuntary termination and eligibility for COBRA
continuation coverage must occur during the period from September 1, 2008, through December 31, 2009. If the loss of coverage is after December 31, 2009, the individual cannot become an assistance eligible individual.

14. For purposes of Federal COBRA, if an employer provides health coverage
for an involuntarily terminated employee after the involuntary termination on the same terms as for similarly situated active employees, when is a loss of coverage under the group health plan considered to occur (and, consequently, when does COBRA continuation coverage begin)?

For purposes of Federal COBRA, the effect on when a loss of coverage
under a group health plan is considered to occur if an employer provides health coverage for an involuntarily terminated employee after the involuntary termination on the same terms as for similarly situated active employees depends on how the employer treats the provision of health coverage for the involuntarily terminated employee. If the employer treats the provision of health coverage as deferring the loss of coverage, then for purposes of the ARRA premium reduction the loss of coverage (and eligibility for Federal COBRA) will be considered to occur when the employer’s provision of health coverage on the same terms as for similarly situated active employees ends. However, if the employer treats the provision of health coverage after the involuntary termination as part of its obligation to provide COBRA continuation coverage for the involuntarily terminated employee, then the loss of coverage will be considered to have occurred as of the date for which the employer begins making the provision of such COBRA continuation coverage.
Example. An individual is involuntarily terminated from employment on
November 15, 2009. Health coverage in connection with the November 15, 2009, termination of employment would normally end on November 30, 2009. However, the individual is provided with severance benefits that include six months of health coverage for which no premium is required, running from December 1, 2009, through May 31, 2010. The employer considers no loss of coverage to have occurred until the six
months of severance benefits have been exhausted. Under these facts, for purposes of Federal COBRA, the loss of coverage does not occur until May 31, 2010, which is after December 31, 2009. Although the  individual’s involuntary termination occurs during the required time period, the beginning of eligibility for COBRA continuation coverage does not. Consequently, the individual cannot become an assistance eligible individual. However, if the employer considered the payment of health coverage during the severance benefits period to be the provision of COBRA continuation coverage on behalf of the involuntarily terminated individual, for purposes of Federal COBRA the loss
of coverage would be considered to have occurred on November 30, 2009, and thus the individual could become an assistance eligible individual. For purposes of Federal COBRA, if the plan does not provide for the optional extension of required periods under section 4980B(f)(8) to apply, the end of the 18-month maximum required period of COBRA continuation coverage is measured from the date of the individual’s involuntary termination, November 15, 2009. If the plan does
provide for the optional extension of required periods under section 4980B(f)(8) to apply, the end of the 18-month maximum required period of COBRA continuation coverage is measured from the date of the loss of coverage, May 31, 2009.

15. Does an involuntary termination of an employee following another
qualifying event, such as a divorce, satisfy the requirements for the qualified beneficiary from the first qualifying event to be an assistance eligible individual?

No. Generally, if COBRA continuation coverage is based on a qualifying
event before the involuntary termination, the later involuntary termination does not cause the qualified beneficiary to become an assistance eligible individual. However, if, in anticipation of an involuntary termination that would otherwise qualify an individual as
an assistance e
ligible individual, the employer takes action other than the involuntary termination of the individual that results in a loss of coverage for the individual (for example, a reduction in hours for the employee in anticipation of involuntarily terminating the employee), the action causing the loss of coverage prior to the involuntary termination is disregarded in determining whether involuntary termination is the qualifying event that results in the COBRA continuation coverage for the individual.
Example 1. An employee is divorced after September 1, 2008, and before December 31, 2009. The divorce results in a loss of health coverage for the spouse of the employee. The spouse is eligible for and timely elects COBRA continuation coverage. After the divorce, and before December 31, 2009, the employee is involuntarily terminated and loses health coverage. The employee elects COBRA continuation coverage that begins before December 31, 2009. The spouse is not an
assistance eligible individual because the qualifying event with respect to the spouse’s COBRA continuation coverage is not an involuntary termination. The employee is an assistance eligible individual.
Example 2. An employee experiences a reduction in hours in March 2009 that does not constitute (and is not in anticipation of) an involuntary termination. The reduction in hours results in a loss of coverage for the employee. The employee is eligible for and timely elects COBRA continuation coverage that begins as of April 1, 2009. In November 2009, the employee is involuntarily terminated from employment. The employee cannot become an assistance eligible individual in connection with the November 2009 involuntary termination because the qualifying event with respect to the COBRA continuation coverage is not involuntary termination.

16. If, as the result of an involuntary termination that occurred during the
period from September 1, 2008, through December 31, 2009, an individual loses
coverage under a health plan that is not subject to the COBRA continuation coverage
requirements (as defined under ARRA) and the individual is offered and elects
continuation coverage provided voluntarily by an employer, is the premium reduction
applicable and the related payroll tax credit for the employer (or other entity) available with respect to the continuation health coverage?

No. In order for the COBRA continuation coverage premium reduction
and the related payroll tax credit to apply, the plan must be subject to the COBRA continuation coverage requirements as defined in ARRA.
Example. A group health plan maintained by an employer that is not subject to COBRA continuation coverage requirements under Federal COBRA, under the FEHBP, or under State law nevertheless provides continuation health coverage to involuntarily terminated employees. Because the terminated employees are not eligible for COBRA
continuation coverage (as defined under ARRA), they are not assistance eligible individuals and the premium reduction does not apply.

17. Can an individual become an assistance eligible individual more than
once?

Yes. An individual who becomes a qualified beneficiary as the result of an involuntary termination and who otherwise meets the requirements to be an assistance eligible individual is treated as an assistance eligible individual even if previously treated as an assistance eligible individual. See Q&A-43 regarding the period of premium reduction in such situations.

18. If an individual has a loss of coverage and becomes a qualified beneficiary
eligible for COBRA continuation coverage as the result of an involuntary termination no later than December 31, 2009, and timely elects COBRA continuation coverage after December 31, 2009 (with the COBRA continuation coverage beginning retroactively back to the loss of coverage), is the individual an assistance eligible individual eligible for the premium reduction?

Yes. The election of COBRA continuation coverage is not required to
occur during the period from September 1, 2008, through December 31, 2009, as long as the resulting COBRA continuation coverage begins during that period.

19. Is the death of an employee an involuntary termination of employment that
would make qualified beneficiaries such as the spouse and dependent children of the
employee assistance eligible individuals?

No. The death of an employee is not an involuntary termination of
employment.

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