IRS issues additional information on COBRA subsidy under ARRA
April, 2009
This eAlert supplements our previous eAlerts available here and here regarding the COBRA subsidy enacted as part of the American Recovery and Reinvestment Tax Act of 2009 (the "ARRA"). On March 31, 2009 the Internal Revenue Service issued Notice 2009-27 ("Notice") which contains additional information in a question and answer format pertaining to the following issues:
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The definition of involuntary termination;
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Who is an "Assistance Eligible Individual";
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Calculating the premium reduction;
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Coverage eligible for premium reduction;
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Beginning of the premium reduction period;
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Recapture of premium subsidies;
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The extended election period;
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Payments to insurers under federal COBRA;
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How to determine when state continuation coverage is comparable
Involuntary Termination
Involuntary termination is a requirement to qualify for the COBRA subsidy. The Notice elaborates upon what constitutes an involuntary termination. The general rule as set forth in the Notice states that an involuntary termination is "a 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."
Additionally the notice elaborates on a few areas that were previously uncertain.
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Reduction in hours – Generally voluntary. However, if the reduction in hours is to zero (a layoff, furlough or other suspension of employment resulting in a loss of health coverage) or amounts to a material negative change in the employment relationship and the employee voluntarily terminates for this reason, it could be deemed to be involuntary;
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Termination by the employer due to absence from work or disability – Involuntary, when the employer acts to end the employment relationship (although a mere absence from work due to illness or disability before the employer has taken action is not involuntary termination);
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Retirement – Involuntary where based on facts and circumstances, absent the retirement, the employer would have terminated the employee and the employee has knowledge that he or she would be otherwise terminated;
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Termination for cause – Involuntary unless the termination is due to "gross misconduct" in which case the termination is not a COBRA qualifying event (and the terminated employee is not eligible for continuation coverage);
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Termination in return for a severance package – Involuntary where the employer indicates there will be a specified workforce reduction following the severance package offering; and
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Death – Voluntary
Who is an "Assistance Eligible Individual?" (AEI)
The Notice affirms that an individual will not be an AEI if the involuntary termination occurs prior to September 1, 2008 or after December 31, 2009. Additionally, the Notice clarifies that an individual can become an AEI more than once. More specifically, an individual who becomes a qualified beneficiary as the result of an involuntary termination and who otherwise meets the requirements to be an AEI is treated as an AEI even if previously treated as an AEI.
Calculating the premium reduction
The premium amount used to determine an AEI's 35% share is the cost of the amount actually charged to the AEI. If the premium that would be charged to the AEI is less than the maximum COBRA premium,(e.g. the employer chooses to subsidize the coverage by paying part of the cost), the amount actually charged to the AEI is used to determine the AEI's 35% premium payment.
Additionally, the Notice makes clear that the premium reduction does not apply to portions of the premium attributable to individuals who are not qualified beneficiaries. A qualified beneficiary generally includes the spouse of the employee or a dependent child unless the spouse or dependent child is not covered under the plan at the time of the qualifying event (i.e. added to coverage during a later enrollment period).
Recapture of Premium Assistance
A plan cannot refuse to provide the premium reduction to an individual because of the individual's income (e.g. they exceed the $145,000 income threshold or $290,000 for joint filers). COBRA continuation coverage must be provided when the 35% premium is paid by the AEI.
An AEI who wants to waive the right to the premium reduction must make a permanent election by providing a signed (and dated notification) to the person who is "reimbursed" for paying the premium subsidy. This waiver must include a reference to "permanent waiver."
When is State Continuation Coverage "Comparable"?
As noted in our prior eAlert, the COBRA subsidy applies to employers with less than 20 employees where a "comparable" state continuation law is applicable ("mini-COBRA" law). The Notice provides that a state continuation law will be "comparable" even if the state law contains differences in the duration of continuation coverage, different qualifying events, different qualified beneficiaries or differences in premium amount.
If you are interested in learning about the provisions in the American Recovery and Reinvestment Tax Act of 2009 or would like assistance in implementing any aspect of the COBRA subsidy program please contact the Employment or Tax Group at Bullivant Houser Bailey PC at 1.800.654.8972.
Circular 230 Compliance: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.