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| Posted on: Tuesday, March 3, 2009 |
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There has been a flurry of Q&A’s, webinars and fact sheets issued since the passage of the American Recovery and Reinvestment Act of 2009 (ARRA) signed into law just two weeks ago, including the Denman briefing you should have received (copy attached for reference). The following update is intended to assist you in preparing to comply with the ARRA COBRA subsidy law. It is not an all-inclusive overview as additional guidance and clarifications are yet to be issued.
The Basics
The ARRA provides for premium reductions and an additional COBRA election opportunity for medical plan benefits (the regulations are currently unclear as to whether it applies to dental and vision) under COBRA, PHSA (for public employers) and small employers (<20 employees) under state Continuation of Coverage laws. Assistance Eligible Individuals (AEI’s) as they’re referred to in the Act, pay only 35 percent of the total COBRA premium rate (102%), with the remaining 65 percent paid back to employers through a payroll tax credit. The premium reduction or subsidy applies to periods of health coverage beginning on or after February 17, 2009 and lasts for up to nine months.
Definitions
Assistance Eligible Individuals (AEI’s): Individuals who were participating in an employer sponsored group health plan and who have been or will be involuntarily terminated between September 1, 2008 to December 31, 2009 and elect COBRA are eligible for a federal subsidy (also includes those who were involuntarily terminated during the prescribed timeframe and are currently enrolled in COBRA).
Individuals who are NOT AEI’s:
1. An employee who was terminated prior to September 1, 2008
2. An employee who was terminated for the following COBRA qualifying
events: reduction in hours or voluntary termination of employment
(including mutually agreed upon termination.• Dependents who lost
health plan eligibility due to reaching the limiting age, divorce from an
enrolled employee or due to an enrolled employee’s death.
3. Those who are eligible for other group health coverage (such as a
spouse’s plan) or Medicare are not eligible for the premium reduction.
4. An employee who was terminated for gross misconduct which is
generally defined as a) willful or wanton disregard of the employer’s
interest, b) deliberate violations or disregard of standards of behavior
that the employer has the right to expect of an employee and/or c)
carelessness or negligence of such degree or recurrence as to indicate
evil design or wrongful intent on the part of the employee. Employees
who were fired for reasons other than gross misconduct are subsidy
eligible.
5. Individuals who exceed the income limit (adjusted gross income
exceeds $125,000 single (or $250,000 in the case of a joint return) for
2009 or, if applicable, 2010 AND who notify the Plan Sponsor they
are “opting out” of the subsidy. NOTE: Individuals who exceed the
income limit may accept the subsidy, however they will be required to
repay the subsidy via their federal income tax filing, plus a 10% fine.
Employers are not required to track income limits of the COBRA
beneficiary.
6. Domestic partners, civil union partners, or same-sex spouses unless
they are a tax dependent of the employee as defined by the IRS Code
section 152.
Involuntary Termination: Any employment termination where the employer is the party who took the action of terminating the employee. This would include lay offs, terminations due to poor performance, etc. This does not include terminations due to resignation, gross misconduct, employee death, or reduction in hours.
Types of Benefit Plan Coverage Subject to ARRA: Group medical plans that are subject to these requirements include medical and Health Reimbursement Accounts (HRA)(including both insured and self-funded plans), but does not include Healthcare FSA’s. As it relates to dental and vision plans, we’d recommend clients await further guidance.
High Income Individuals: Those individuals with modified adjusted gross income (AGI) that exceed $125,000 single filer ($250,000 in the case of joint return filers) for the tax year in which they receive the subsidy.
Subsidy Commencement Date: The date the subsidy is applied to an individual’s COBRA premium
1. February 17, 2009 – for plans that bill for and provide COBRA on a mid-
month or prorated basis
2. March 1, 2009 – for plans that charge for and provide COBRA in whole
calendar month intervals
Subsidy Duration: the period of time for which an individual may receive the subsidy. Measured from the Subsidy Commencement Date, the subsidy shall end on the earlier of the following:
1. nine months after the subsidy period begins to apply to that individual, or
2. the end of the original maximum period of COBRA if the person either
currently has COBRA or had the person elected COBRA. The regular
COBRA coverage period commences from the date coverage was lost
due to the qualifying event of involuntary termination, not as of the
subsidy effective date.
3. the date the individual becomes eligible for other coverage under
another group health plan or Medicare. Individuals must report their
eligibility for other coverage to plan sponsors;. If they fail to do so, the
individual is subject to a repayment penalty equal to 110 percent of the
subsidy amount which will be assessed when they file their personal
income taxes.
4. the date the AEI fails to pay their required premium by the premium due
date.
Special COBRA Election Period: The election period for AEI’s who aren’t currently enrolled in COBRA. It begins 2/17/09 and ends 60 days after the plan provides the required notice. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee’s involuntary termination).
Notice: The COBRA Election notice Plan Sponsors are required to issue describing the premium reduction available to AEI’s. This notice must be mailed by no later than April 18th to all COBRA eligible individuals who had a qualifying event from September 1, 2008 through December 31, 2009 (whether or not they are eligible for the subsidy). This includes AEI’s currently enrolled in COBRA but who may have chosen less coverage than entitled when first offered.
Switching Benefit Options: Employers with multiple coverage options may (but are not required to) allow AEI’s to elect different coverage options than what they were previously enrolled in when they became eligible for COBRA. To retain eligibility for the ARRA premium reduction, the coverage that the AEI elects must have the same or lower premiums as the individual’s original coverage. The different coverage can not be coverage that provides only dental, vision, a health flexible spending account, or coverage for treatment that is furnished in an on-site facility maintained by the employer.
Payroll Tax Credit: The 65 percent of the COBRA premium that shall be reimbursed to employers through the federal quarterly payroll tax reporting system. The Act requires employers to pay for the 65% premium subsidies and then be reimbursed through reduced federal payroll tax payments. Payroll taxes include amounts to be withheld for federal income tax and the employer and employee portions of FICA, Social Security, and Medicare taxes. For entities that offer COBRA coverage but do not collect payroll taxes, these entities will receive a credit or refund check directly from the Secretary of Treasury in an amount equal to the 65% subsidy. Important notes follow:
1. The payroll tax credit is earned on the date the individual’s 35 percent
payment is received, not the date of the employer’s 65 percent
payment.
2. Employers claiming the credit must maintain supporting documentation,
such as an attestation of involuntary termination. For more information,
visit the IRS FAQs.
3. The AEI must pay the 35% of the required premium. If the employer is
subsidizing the AEI’s entire premium, the individual is not eligible for the
subsidy. In addition, if the employer is subsidizing a portion of the
premium, the subsidy credit an employer can claim is determined based
upon the amount of the premium the AEI is responsible for paying. For
example, if the employer already put in place a severance agreement
with the employer paying 75% of the employee’s total COBRA premium,
the employer could only claim a payroll tax credit of the 25% of the
premium for which the former employee was responsible.
Employer-Plan Sponsor Action Steps
The Model Election notice will be issued on or before March 19, 2009. Employers are well advised to wait until the model notice is issued to send out to individuals who experienced a COBRA qualifying event since 9/1/08. In the meantime, Plan Sponsors will want to prepare by taking the following actions:
1. Review the Department of Labor (DOL) Fact Sheet and the
Premium Subsidy Guidance FAQs.
2. If COBRA administration is performed by an outside third party, review
their Briefing material likely sent directly to Plan Sponsors within the last
week for additional guidance.
3. Prepare a mailing list of all individuals who experienced a COBRA
qualifying event since 9/1/08 and identify which are considered AEI’s.
Once the Model Notice is available, notices will need to be sent to these
individuals as soon as possible, but in no event later than April 18th. The
list may include individuals who are not eligible for the subsidy, however
under the terms of the regulations, it appears the Notice must be sent to
all individuals, but only eligible AEI’s may elect COBRA during the special
election period. The Notices should be mailed to the last known
address.
4. AEI’s may be contacting you requesting more information.
• For those currently enrolled in COBRA, calculate the revised COBRA
premiums and notify them of their new COBRA premium (35% of the
full COBRA premium rate, which includes the 2% admin fee). Due to
the timing of the enactment of the Act, if AEI’s pay the full COBRA
premium for March and April of 2009, the plan administrator must
either credit the subsidized portion of the premium against future
premiums (if the administrator reasonably expects the overpayment to
be fully applied to future COBRA premiums within 180 days) or refund
the subsidized portion within 60 days.
• For those AEI’s who are eligible but didn’t previously elect COBRA and
contact you for more information prior to the Notices being sent out,
you could direct them to the Department of Labor’s FAQs about
COBRA For Workers And Their Families.
5. If multiple plan coverage options exist, determine whether you, as the
employer, want to allow employees to switch to a different plan option
(lower cost option). This decision will need to be communicated within
the Notice.
6. Prepare/amend COBRA communication documents as required by the
Act.
• COBRA Notice (model notice should be issued by March 19, 2009)
and supporting documents as may be applicable, including your
organization’s internal COBRA procedure manual. Denman will mail
this out as soon as it becomes available.
• Plan Document/SPD/Certificate of Coverage. Amendment shall also
include waiving Pre-Existing Condition exclusions for AEI’s as the time
period between an AEI’s COBRA qualifying event and COBRA
coverage effective date will not count towards the 63-day period
applicable to the Health Insurance Portability and Accountability Act
(HIPAA) creditable coverage and preexisting condition restrictions.
7. Coordinate with your payroll department on the following:
• Process for paying the 65% share of the premium
• Procedure for obtaining reimbursement of the amounts from the
federal government. NOTE: the IRS has posted a set of 20 Q&As which will
assist employers in claiming the credit on Form 941.
Should you have any additional employee benefit questions or would like to discuss this material in detail, please don’t hesitate to call the Denman Team. |
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