Friday, April 24, 2009
EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATIONS NEWSLETTER
DEPARTMENT OF LABOR MODEL NOTICES AND INTERNAL REVENUE SERVICE ADDITIONAL GUIDANCE ON THE COBRA PREMIUM SUBSIDY
The American Recovery and Reinvestment Act of 2009 (the “Act”) contains important changes to continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 and other similar continuation coverage laws (collectively, “COBRA”). The Act generally provides a federal government subsidy of COBRA premiums for nine months for qualified beneficiaries whose qualifying event is attributable to a covered employee’s involuntary termination of employment between September 1, 2008, and December 31, 2009.
As called for under the Act, both the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) have issued guidance to aid employers in their administration of the COBRA premium subsidy. On March 19, 2009, the DOL issued model notices that may be used when notifying individuals of the premium subsidy, and further, on March 31, 2009, the IRS released Notice 2009-27, which contains helpful guidance on certain unresolved issues, including what qualifies as an “involuntary termination” of employment for purposes of the premium subsidy and how the amount of the premium subsidy is calculated (the “Notice”). This newsletter describes the model notices issued by the DOL and provides a general summary of the Notice’s guidance regarding what constitutes an “involuntary termination” and how to calculate the premium subsidy amount.
DOL MODEL NOTICES
The Act requires employers to provide notices to certain individuals informing them of the new COBRA premium subsidy.
General Election Notice (full version). This full version of the general election notice should be provided to all qualified beneficiaries (not only covered employees) who experience a qualifying event between September 1, 2008 and December 31, 2009, and who previously did not receive a COBRA election notice or were provided an election notice on or after February 17, 2009, that did not include a discussion of the premium subsidy. This general election notice should be used from now until December 31, 2009, in place of the COBRA election notice normally used. After December 31, 2009, this general election notice will no longer be needed given that the premium subsidy is available only to qualified beneficiaries whose qualifying event relates to an involuntary termination on or prior to December 31, 2009. This notice should be furnished to qualified beneficiaries within the same time period the standard COBRA election notice is provided (i.e., generally within 44 days of a qualifying event).
General Election Notice (abbreviated version). This abbreviated version of the general election notice generally includes the same information as the full version discussed above with the exception of the election form. This general election notice should be provided to qualified beneficiaries (not only covered employees) who experienced a qualifying event on or after September 1, 2008, who have elected COBRA coverage, and who currently have COBRA coverage. This abbreviated version should be sent in lieu of the full version of the general election notice and should be furnished to qualified beneficiaries preferably no later than April 18, 2009.
Notice of Extended Election Period. This extended election period notice provides certain individuals with another opportunity to elect COBRA coverage. This notice should be provided to “assistance eligible individuals” (or individuals who would be “assistance eligible individuals” if a COBRA election was in place) who experienced a qualifying event between September 1, 2008 and February 16, 2009, and who either did not elect COBRA coverage when it was available initially or elected COBRA coverage but are no longer receiving such coverage. “Assistance eligible individuals” for purposes of this extended election period notice include those qualified beneficiaries whose qualifying events are due to the involuntary termination of a covered employee’s employment. The opportunity to elect COBRA coverage during the extended election period ends 60 days after a qualified beneficiary receives the extended election period notice. Note that the availability of the extended election period does not extend the period during which COBRA coverage is available. This extended election period notice must be furnished to qualified beneficiaries no later than April 18, 2009.
Alternative Notice. This alternative notice should be provided to individuals who are eligible for continuation coverage under state law (including mini-COBRA laws) during the period between September 1, 2008, and December 31, 2009.
Another Possible Notice: If notices are provided only to the qualified beneficiaries who are described in the DOL descriptions of the notices, qualified beneficiaries who become entitled to COBRA coverage as a result of a termination of employment that the employer deems “voluntary” and who previously have received an election notice that does not include a description of the premium subsidy will not receive any notice of the premium subsidy. However, the Act requires that all qualified beneficiaries receive some notice of the subsidy, regardless of whether their qualifying event is attributable to a covered employee’s involuntary termination of employment. Therefore, notice of the premium subsidy may need to be provided to these qualified beneficiaries to allow them the opportunity to challenge an employer’s determination that they are not entitled to the premium subsidy by appealing the decision in accordance with the DOL’s expedited appeal procedure.
The Notice further clarifies what constitutes an “involuntary termination” for purposes of the premium subsidy and how the premium amount is calculated when an employer subsidizes some of the cost of COBRA coverage for a qualified beneficiary.
Involuntary Termination. The Notice provides employers with specific guidance regarding situations that will and will not qualify as an involuntary termination for purposes of determining whether an individual is entitled to the premium subsidy. The IRS generally defines an involuntary termination as the unilateral authority of the employer to terminate employment where the employee is willing and able to continue performing services. The Notice also makes clear that there must be an involuntary termination of employment, not simply an involuntary termination of health coverage. Thus, qualifying events other than an involuntary termination of employment, such as a divorce or a dependent child ceasing to qualify as a dependent, are not involuntary terminations that will qualify an individual for the premium subsidy. The Notice cautions that a determination of whether an employee has been involuntarily terminated is based on all of the facts and circumstances, but fortunately provides the following examples of terminations that qualify as “involuntary” for purposes of the premium subsidy:
- An involuntary termination for cause, unless the termination is for gross misconduct and the termination accordingly is not a qualifying event under COBRA;
- An employer’s termination of an employee while the employee is absent from work due to illness or disability;
- The failure to renew an employment contract at the time the contract expires, assuming the employee is willing and able to execute a new contract with similar terms and conditions;
- An employer-initiated lockout;
- An employer-initiated reduction of an employee’s hours to zero (e.g., a lay-off with a right of recall or a temporary furlough period);
- A termination elected by an 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;
- An employee-initiated good reason termination due to an employer action that causes a material negative change in the employment relationship (e.g., an employee’s termination in response to an employer-imposed reduction in hours or change in geographic location if such reduction in hours or change in location is material);
- A termination designated as voluntary or as a resignation, but the facts and circumstances indicate that the employer would have terminated the employee’s services and that the employee was aware that he would be terminated otherwise; or
- An employee’s retirement if the facts and circumstances indicate that the employer would have terminated the employee’s services, and the employee was aware that he would be terminated otherwise.
The Notice further provides that the following will not be considered involuntary terminations for purposes of determining whether a qualified beneficiary is entitled to the premium subsidy:
- The employee’s death or absence from work due to illness or disability;
- An employer-initiated reduction of an employee’s hours but not to zero and not enough to effect a negative material change or good reason termination; or
- A work stoppage as the result of a strike initiated by employees or their representatives.
Calculation of the Premium Subsidy. The Notice clarifies that the amount of the premium subsidy is based on the amount that a qualified beneficiary otherwise would be required to pay for COBRA coverage. Therefore, if a qualified beneficiary must pay the maximum applicable premium in order to have COBRA coverage, then the qualified beneficiary only has to pay 35% of the maximum applicable premium. However, if the employer subsidizes a portion of the COBRA premium so that the amount that is charged to the qualified beneficiary is less than the maximum applicable premium, the qualified beneficiary must pay only 35% of the COBRA premium charged. For example, if the maximum applicable premium for COBRA coverage is $1,000, but the employer subsidizes the premium by contributing $400 towards the cost of the coverage, then the subsidy is based on the $600 the qualified beneficiary must pay in order to receive coverage. In this scenario, the qualified beneficiary would be required to pay only $210 (35% of $600) to be entitled to COBRA coverage, and the employer would pay $390 (and be later reimbursed by the federal government in the form of a payroll tax credit for this same amount).
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