On April 7, 2009, the Internal Revenue Service (“IRS”) issued Notice 2009-27, which contains new guidance relating to the COBRA subsidy made available under the American Recovery and Reinvestment Act of 2009 (“ARRA”).
ARRA provides for a COBRA premium subsidy for up to nine months for assistance eligible individuals who lose health plan coverage as a result of an employee’s involuntarily termination between September 1, 2008 and the end of 2009 and who satisfy the income requirements for the subsidy. ARRA generally requires the employer maintaining the health plan to provide the subsidy. ARRA permits the employer to seek credit for the subsidy against its payroll taxes.
Under ARRA a majority of eligible employees, and other qualified beneficiaries such as spouses and dependent children, who were/are involuntarily terminated between September 1, 2008 and December 31, 2009, are eligible for a 65 percent subsidy for the cost of health care continuation coverage under COBRA for the nine months. For example, if the required COBRA premium for continuation of benefits is $1,000 per month, an eligible individual would only need to pay $350 per month to receive COBRA coverage. Hawaii-covered employers are required to comply with ARRA’s COBRA provisions.
The Notice issued by IRS is available at the Department of Labor (“DOL”) website. This reviews some of the significant provisions affected by the guidance. The most significant guidance provided by the Notice addressed the issue of what constitutes “involuntary termination.”
The Notice defines “involuntary termination” as “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.”
The determination of whether a termination is “involuntary” is based on all of the facts and circumstances. If a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee’s services, and that the employee had knowledge that the employee would be terminated, the termination is involuntary.
The Notice made clear that an “involuntary termination” can include retirement, 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 Notice confirmed that performance-related terminations constitute an “involuntary termination” for purposes of premium reduction to the extent the conduct does not rise to “gross misconduct.”
Both the failure to renew an employment contract on expiration of the contract where the employee is willing and able to work, and an employer’s action to end an individual’s employment while the individual is absent from work due to illness or disability, constitute “involuntary termination.”
The Notice states that a reduction in hours does not generally constitute an involuntary termination. However, an employee’s voluntary termination as a result of an employer-imposed reduction in hours or for other changes that are “materially negative” can constitute involuntary termination. The Notice provides no further guidance on “material negative” change in the employment relationship.
The Notice states an “involuntary termination” does not result from a work stoppage as the result of a strike initiated by employees or their representatives. However, a lockout initiated by the employer would constitute an “involuntary termination.”
The Notice clarifies that typical qualifying events such as a divorce or a dependent child ceasing to be a dependent child under the generally applicable requirements of the plan do not constitute an “involuntary termination.”
Other issues addressed by the Notice included:
Covered Plans. The Notice confirms that premium assistance is available for dental-only, vision-only, and “mini med” plans, as well as health reimbursement accounts.
Timing and Duration of Premium Assistance. The Notice provides that both involuntary termination AND loss of coverage must occur during the period from September 1, 2008 through December 31, 2009 in order for a terminated employee to be eligible for premium assistance. An employee terminated in December 2009 that does not lose coverage before the end of the year 2009 is not eligible for the premium.
Premium Assistance and Income Limits. A plan may not refuse to provide the premium reduction to an individual because of the individual’s income. If the individual’s income is too high to qualify for the premium reduction, COBRA coverage must be provided so long as the assistance eligible individual pays the required 35%.
The Notice provides that an eligible individual may permanently waive the premium reduction by providing a signed and dated notification that includes a reference to “permanent waiver” to the entity eligible to be reimbursed for the premium reduction.
Retiree Coverage. The Notice provides that premium reduction is available where eligible individuals are offered retiree health coverage identical to the health coverage offered to similarly situated active employees.
If the retiree coverage is offered at the same time as COBRA, but under a “different group health plan,” then the availability of the premium reduction depends on when the individual was terminated and if he or she is still eligible to enroll in the retiree health plan. Specifically, individuals involuntarily terminated and entitled to COBRA on or after February 17, 2009 are not entitled to a premium reduction.
Individuals terminated and entitled to COBRA on or after September 1, 2008 but before February 17, 2009, are not entitled to a premium reduction if the entitlement to enroll in the retiree plan continued until February 17. If as of February 17 the individual was no longer entitled to elect retiree coverage, an ARRA premium reduction is available.
In determining whether retiree health coverage is offered under the “same plan” as COBRA, COBRA regulations provide that all health care benefits provided by an entity are deemed to be offered under the same plan, unless it is clear from the plan documents that benefits are being offered under separate plans.
Refund of Excess Premium Subsidies. An employer has no obligation to refund to the IRS any excess payroll tax credit received merely because the assistance eligible individual failed to report eligibility for other coverage, unless the employer had actual knowledge of the eligibility.