“Stimulus Package” Imposes Significant New Continuation Coverage Responsibilities on Employers – Effective Immediately
The American Recovery and Reinvestment Act of 2009 (the “Act”), signed into law on February 17, 2009, includes significant changes to the rights of certain individuals with respect to continuation coverage under most group health plans. These changes, in turn, impose significant additional responsibilities on employers.
Employers (and in some cases insurance carriers) need to take immediate action to (1) evaluate the extent to which the Act impacts employer sponsored benefit programs, and (2) determine how to comply.
OVERVIEW
The Act adds rights and imposes responsibilities in various ways including the following:
- The Act provides a temporary reduction of the amount certain qualified beneficiaries (called Assistance Eligible Individuals (“AEIs”)) must pay for continuation coverage by providing a “premium subsidy”.
- The Act allows certain persons who were qualified beneficiaries but not currently receiving continuation coverage a second opportunity to elect continuation coverage in order to access the premium subsidy.
- The Act not only expands COBRA but also extends the premium subsidy to federal and state laws similar to COBRA.
- The Act allows employers to offer AEIs a limited opportunity to switch coverage to a group health plan option other than the one in which they were enrolled at the time of the qualifying event.
The Act impacts:
- Virtually all employer-provided health benefits (with the exception of health flexible spending accounts (health FSAs) offered through a cafeteria plan).
- Persons who lose group health coverage due to an involuntary termination of employment.
- Some persons who have already lost continuation coverage due to an involuntary termination of employment.
- Many aspects of continuation coverage administration, including notifications, election forms, payment calculations, tracking for the subsidy period, and payroll tax administration.
SUBSTANCE
The requirements under the Act break down into two primary categories: (1) the Premium Subsidy, and (2) the Coverage Switch Opportunity. Because the categories are distinct from each other, each is described separately. In addition, comments and recommendations are made separately.
PREMIUM SUBSIDY
The premium subsidy is temporary. It applies only with respect to involuntary terminations resulting in the loss of group health plan coverage between September 1, 2008 and December 31, 2009. Losses of coverage for other reasons (e.g., divorce, ceasing to be an eligible dependent, etc.) are not eligible for the premium subsidy. And, losses occurring outside this time window are not eligible for the premium subsidy.
To What Benefit Programs Does the Subsidy Apply? With the exception of health flexible spending accounts (“health FSAs”) offered through a cafeteria plan, the premium subsidy requirements apply to all group health plans subject to COBRA (including ERISA-covered plans and governmental plans subject to the Public Health Services Act). Accordingly, it applies to coverage under not only major medical plans, but also for coverage under dental plans, vision plans, health reimbursement arrangements (“HRAs”), and employee assistance programs (“EAPs”) and wellness programs that constitute group health plans.
The premium subsidy is also available for coverage under group health plans not otherwise subject to COBRA, but which are subject to comparable federal and state continuation laws (e.g., plans covering federal employees, fully insured plans sponsored by small employers, fully insured plans sponsored by churches, etc.).
Note: The legislation specifically carves out coverage under health FSAs offered through a cafeteria plan. However, no special carve out exists for HRAs; HRAs are generally subject to the premium subsidy requirements. In addition, because they are not group health plans, health savings accounts (“HSAs”) are not subject to the premium subsidy requirements.
Note: In many cases, employees do not elect continuation coverage under HRAs because either (1) the cost exceeds the benefit, or (2) spend down access is provided in lieu of COBRA coverage. Because the premium subsidy may in effect allow employees to receive the full employer contribution to the HRA for thirty-five percent (35%) of the normal COBRA premium, many employees may now elect continuation coverage under HRAs (including through the special election period described below.
To Do Item:
Identify the group health plans to which the Premium Subsidy applies.
Who is Entitled to the Benefit of the Premium Subsidy?
Not all people on continuation coverage are eligible for the premium subsidy. The premium subsidy benefits a limited class of persons called “assistance eligible individuals” (“AEIs”). AEIs include persons covered under a group health plan who satisfy all of the following elements:
(1) Became or becomes eligible for continuation coverage under COBRA (or a comparable federal or state law) at any time on or after September 1, 2008 and on or before December 31, 2009;
(2) The entitlement to such continuation coverage was or is due to the involuntary termination of a covered employee’s employment (other than for gross misconduct); and
(3) The continuation coverage election occurs either (a) during the original continuation coverage election period, or (b) during the special election period provided by the Act.
Note: Because the Act is a federal law that amends COBRA and relies upon the Internal Revenue Code of 1986, an AEI includes the opposite sex spouse and dependent children of the employee who was involuntarily terminated. However, persons covered under the group health plan through the employee but who are not the employee’s opposite sex spouse or tax dependents for purposes of health coverage are not AEIs. [This mirrors the rule regarding qualified beneficiaries for general COBRA purposes.]
To be an AEI, the individual must receive continuation coverage due to an involuntary termination of employment (i.e., not voluntary termination). Unfortunately, the Act does not define or provide details regarding what constitutes an “involuntary” termination of employment. However, employers (and insurance carriers in some cases) will be required to attest to the IRS that each individual receiving the premium subsidy is entitled to continuation coverage because of an involuntary termination of employment.
To Do Items:
Determine a working definition of “involuntary termination” for purposes of being an AEI. Apply the three step definition described above to identify AEIs. Identify those who receive coverage through the employee but cannot be AEIs. Identify those persons who would be AEIs but for the fact they are not actually covered under continuation coverage on February 17, 2009.
What is the Special Election Period? The special election period is a one-time election period available to address individuals who would be AEIs but for not having continuation coverage in effect on February 17, 2009. This includes qualified beneficiaries who did not elect continuation coverage and those who elected continuation coverage but then lost continuation coverage prior to February 17, 2009.
Note: The Act describes the plans subject to the special election provision differently than it does the plans subject to the premium subsidy in general. The special election provision does not apply to plans subject only to state continuation coverage laws and not subject to COBRA.
To Do Items:
Identify group health plans to which the special election period applies.
Identify individuals entitled to the special election.
What are the Mechanics of the Special Election Period? On or before April 18, 2009, notice must be provided to any individual entitled to the special election period describing the special election period and the availability of the premium subsidy. This means that some individuals who have previously (1) waived COBRA continuation coverage, or (2) had COBRA continuation coverage lapse, must be given an opportunity to re-elect the coverage and receive the premium subsidy. The individual has sixty (60) days following the provision of this notice to elect COBRA continuation coverage.
In general, the COBRA continuation coverage is not retroactive to the date of the individual lost coverage. COBRA continuation coverage elected during the special election period begins with the first COBRA coverage period beginning after enactment of the Act. For most plans that use the calendar month as their COBRA coverage period, coverage will begin on March 1, 2009.
The special election period does not extend the overall length of COBRA coverage to which qualified beneficiaries are entitled. COBRA continuation coverage elected during the special election period ends on the date the coverage would have ended if COBRA had been initially elected at the time of the qualifying event.
To Do Items:
Prepare a special election notice and election form to be used with respect to this special election. Inform individuals of their right to elect COBRA continuation coverage during the special election period on or before April 18, 2009. Adjust the tracking of the duration of COBRA continuation coverage.
How Does the Special Election Period Impact Preexisting Condition Limitations?
General Rule. Under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), group health plans that contain preexisting condition limitations may generally impose those limitations only after giving credit for prior creditable coverage. Prior coverage of an individual is not creditable coverage if the coverage was received before a sixty-three (63) day break in coverage. Because the effective date of the COBRA continuation coverage may result in a gap in coverage, those taking advantage of the special election period could, under the normal HIPAA rules, be subject to preexisting condition limitations.
Special-Rule – AEIs. The Act modifies the normal HIPAA rules. The period beginning on the original qualifying event date and ending on the effective date of the COBRA coverage elected during the special election period is disregarded. Therefore, any portion of that time period during which an AEI did not have creditable coverage is disregarded for purposes of determining whether there was a sixty-three (63) day break in coverage.
To Do Items:
Adjust creditable coverage notices.
Adjust calculation of creditable coverage.
How Much of the Premium is Subsidized? For purposes of this Act, “subsidy” is determined with respect to the portion of the continuation coverage premium the AEI would otherwise have to pay. The amount the AEI would otherwise have to pay is not necessarily the applicable premium for the continuation coverage (i.e., the entire cost to the plan to provide the coverage). Sometimes, the employer pays a portion of the continuation coverage cost. The premium subsidy does not apply to that payment.
Note: If the employer has agreed, through a severance agreement, collective bargaining agreement, or otherwise, to pay the entire continuation coverage premium, no premium subsidy is available. If the employer pays a portion of the continuation coverage premium, the amount of subsidy that would otherwise be available will be reduced. For example, assume the full continuation coverage premium is $600, but the employer only charges the continuation participant $400. The premium subsidy available to be paid by the federal government is sixty-five percent (65%) of the $400 continuation coverage premium provided the AEI pays the thirty-five percent (35%) of the $400 continuation coverage premium.
With respect to the amount the AEI would otherwise have to pay, the federal government pays sixty-five percent (65%) provided the remaining thirty-five percent (35%) is paid by the AEI, or a third party other than the employer (e.g., a relative, a provider, the State, etc.) on behalf of the AEI. Provided the AEI’s thirty-five percent (35%) is paid, the AEI is treated as having paid the entire required amount for continuation coverage.
Suggestion: Keep the way in which the calculation is conducted in mind for future situations involving severance, reductions in force, etc. For example, an employer may not want to pay a portion of the cost of continuation coverage as part of the benefit package if the subsidy could cover it. Those employer dollars may be better used elsewhere.
To Do Items:
Identify the amount the AEI would otherwise have to pay for continuation coverage. Apply the premium subsidy calculation. Establish a tracking mechanism to identify at what point the AEI pays his or her thirty-five percent (35%) of the continuation coverage premium.
How Does the Federal Government “Pay” the Premium Subsidy?
In most cases, the federal government “pays” the premium subsidy to the employer in the form of a credit against the employer’s payroll tax liability (FICA and federal income tax withholding). In essence, this means the employer bears the financial responsibility for the sixty-five percent (65%) subsidy in order to keep the continuation coverage in place and is then made whole by the federal government through the payroll tax credit.
If the group health plan is (1) a fully insured plan, and (2) not otherwise subject to federal COBRA, the payroll tax credit belongs to the insurance carrier. In this situation, the insurance carrier bears the financial responsibility for the government’s sixty-five percent (65%) of the cost for which the AEI would otherwise have had to pay in order to keep the continuation coverage in place.
If the group health plan is a self-insured multiemployer plan, the payroll tax credit belongs to the multiemployer plan, not the employers participating in the plan. In this situation, the plan itself bears the financial responsibility for the government’s sixty-five percent (65%) of the cost for which the AEI would otherwise have had to pay in order to keep the continuation coverage in place.
Special rules apply with respect to applying the credit, what to do if the credit exceeds the payroll tax otherwise due, etc.
To Do Items:
Identify which entity (employer, insurance carrier, or multiemployer plan) receives the payroll tax credit. If it is the insurance carrier, confirm this with the insurance carrier. If it is the employer, address how the employer bears the financial responsibility pending the ability to take the payroll tax credit. Make arrangements to begin taking the payroll tax credit.
What are the Tax Consequences of the Premium Subsidy to the AEI?
General Rule. Normally, something of value is taxable income to the recipient. However, subject to certain limitations, the value of the premium subsidy is not taxable income to the AEI.
Note: The Act specifically provides the value of the premium subsidy is not to be counted as income, resources, wages, etc. for purposes of determining an individual’s eligibility for public assistance.
Special Rule – High-Income Individuals. AEIs that are “high-income individuals” do not receive the full benefit of the premium subsidy on a tax free basis.
Although they are AEIs, and therefore eligible to receive the premium subsidy, the government begins to “recapture” it. The tax-free benefit of the premium subsidy begins to phase out for single taxpayers with modified adjusted gross income in excess of $125,000 and for joint taxpayers with modified adjusted gross income in excess of $250,000. Single taxpayers with modified adjusted gross income in excess of $145,000 and joint taxpayers with modified adjusted gross income in excess of $290,000 must repay the entire premium subsidy by including that amount as taxable income.
This high-income individuals rule introduces interesting tax consequences. For example, consider an employee and family who lose coverage due to an involuntary termination. Each of the family members losing coverage is considered an AEI. The spouse and two children actually elect COBRA coverage. They are AEIs and are required to pay only thirty-five percent (35%). If the employee is a high income individual, he or she will have to deal with the tax consequences of the premium subsidy received by the spouse and two dependent children that elected COBRA.
To avoid having to address these tax issues, high-income individuals may waive the premium subsidy. The waiver is a one-time, irrevocable waiver.
To Do Items:
Notify AEIs of the premium subsidy tax consequences.
Provide high-income individuals the ability to waive the subsidy.
When Is the Premium Subsidy First Available? The premium subsidy is first available for the period of continuation coverage beginning on or after February 17, 2009. Because most continuation coverage periods are monthly, the premium subsidy for most group health plans applies beginning March 1, 2009.
This is true with respect to both (1) AEIs actually receiving continuation coverage on February 17, 2009, and (2) persons who become AEIs by enrolling in continuation coverage through the special election period.
For AEIs experiencing a qualifying event after March 1, 2009, the premium subsidy is available coincident with the start of the continuation coverage.
Because of the short implementation time frame, the Act provides some transitional relief. If an AEI entitled to the premium subsidy actually pays the full continuation premium in March or April, the employer must either (1) credit the subsidized portion of the premium against that AEI’s future continuation premiums (provided the credit will be exhausted within one hundred eighty (180) days), or (2) refund it to the AEI within sixty (60) days.
To Do Item:
Determine whether overpayments in March and April will be credited or refunded to the AEI.
For How Long is the Premium Subsidy Available? The premium subsidy generally is available for up to nine (9) months. However, the premium subsidy ends prior to that time on:
(1) The date on which the AEI becomes eligible for certain other employer-sponsored group health coverage or Medicare; or
(2) The expiration or cancellation of the continuation coverage.
Note: The Act excludes many types of other employer-sponsored coverage when applying this rule. For example, eligibility for the following types of plans will not cause the premium subsidy to end: coverage consisting of only dental, vision, or counseling or referral services (i.e., an EAP), coverage for treatment provided at most on-site medical facilities, coverage under a health FSA, and coverage under most HRAs. As a result, in most cases only eligibility for major medical coverage will result in an end to the premium subsidy, even if the premium subsidy is being received under other types of group health plans.
An individual is considered to be eligible for other coverage on the date on which such other coverage would begin. AEIs are required to notify the plan in writing if they become eligible for other coverage. An individual failing to do so is subject to a penalty of one hundred ten percent (110%) of the premium subsidy provided after the date the subsidy should have ceased.
Observation: The premium subsidy ends upon mere eligibility for other coverage even if that other coverage is not taken. This is a different standard than used for the COBRA continuation coverage itself. In other words, it is possible to have the premium subsidy end but still have continuation coverage available.
To Do Items:
Establish administration mechanisms to track the duration of the premium subsidy. Establish administration mechanisms to verify eligibility for other coverage. Provide appropriate notice of the change in the cost of continuation coverage upon the subsidy ending where continuation coverage remains available.
What if the Premium Subsidy Is Denied? The plan makes the initial determination regarding AEI status. If an individual believes he or she is an AEI entitled to the premium subsidy and the plan refuses to provide the premium subsidy, the individual has the right to have the plan’s decision reviewed by the government. The review will be conducted by either (1) the Department of Labor for plans subject to ERISA, or (2) the Department of Health and Human Services for all other plans. The form and manner of the appeal to these agencies has not yet been determined.
To Do Items:
Establish a process by which to determine and document AEI decisions. Include the right to have the decision reviewed in communication materials and other plan documentation.
What Notice Requirements Apply? Plans are required to notify AEIs of their entitlement to the premium subsidy. For those individuals currently receiving continuation coverage or entitled to the special election period, such a notice must be provided by April 18, 2009 (i.e., sixty (60) days following enactment of the Act). For those who become eligible for continuation coverage after enactment of the Act, the notice must be provided along with the standard election notice.
Note: Within the next thirty (30) days, the Department of Labor is expected to provide model notices for plans to use to satisfy the Act’s notice requirements.
To Do Items:
Prepare special notices or wait for release of the model notices. Distribute notices to AEIs on or before April 18, 2009. Adjust existing election notices to include subsidy information for AEIs who have not yet received election notices because their qualifying events have not yet occurred or occurred very recently.
What Reporting Requirements Apply? Employers (or insurance carriers) will be required to report certain information to the federal government regarding the premium subsidy including attesting the premium subsidy was provided only with respect to AEIs. Reporting will also be required regarding the amount of the payroll tax credit taken and the employees benefitting from the premium subsidy.
Note: Specific requirements regarding the reporting will be determined by the IRS.
To Do Items:
Establish mechanisms to track credits taken and information regarding employees receiving the subsidy. Monitor updates from the IRS regarding the procedure for reporting this information.
COVERAGE SWITCH OPPORTUNITY
Special Note: This provision of the Act is permissive. An employer may choose to make this opportunity available but is not required to make this available.
To What Benefit Programs Does the Coverage Switch Opportunity Apply? As with the Premium Subsidy described above, the Coverage Switch Opportunity is available with respect to all group health plans (except for health FSAs offered through cafeteria plans) subject to COBRA or another comparable federal or state law.
Accordingly, the Coverage Switch Opportunity is available with respect to not only major medical plans, but also for coverage under dental plans, vision plans, HRAs, and EAPs and wellness programs that constitute group health plans.
Special Note: Because of the limitations described below, as a practical matter, the Coverage Switch Opportunity primarily impacts major medical plans.
What Does the Coverage Switch Opportunity Involve? Generally, continuation coverage is initially provided under the coverage option under which the qualified beneficiary was covered at the time of the qualifying event. The Act specifically authorizes employers to allow AEIs to enroll in certain other coverage options. The employer may only make this opportunity available to AEIs. The Act does not authorize the employer to provide this opportunity in other COBRA situations.
What is “Other Coverage” for this Purpose? To be “other coverage,” the coverage must satisfy all of the following requirements:
(1) The continuation premium for the other coverage option may not exceed the premium for the coverage in which the AEI was enrolled on the date of the qualifying event;
(2) The other coverage option must be an option otherwise available to active employees; and
(3) The other coverage option cannot provide only dental, vision, or EAP/wellness coverage and cannot be a health FSA, health reimbursement arrangement, or on-site facility.
Otherwise Available to Active Employees. The coverage must be coverage otherwise available to active employees. For example, an employer offers two major medical coverage options to its employees (e.g., a $500 deductible and a $2,000 deductible). An AEI covered under the $500 deductible can be allowed to take continuation coverage under the $2,000 deductible coverage option. An employer may not offer a coverage option just to AEIs and have it be “other coverage.”
What Notice Must the Employer Provide? If the employer allows AEIs to enroll in another coverage option, it must provide notice of the right and allow the AEI at least ninety (90) days to elect the other coverage option. It is unclear whether this period is intended to extend the sixty (60) day election period normally available under COBRA or replace it for AEIs who experience a qualifying event after February 17, 2009.
To Do Items:
Identify the group health plans to which the Coverage Switch Opportunity can apply. Determine whether “other coverage” exists. Decide whether to allow the opportunity to switch. Determine how to apply the ninety (90) day election period. Prepare a notification form and election form. Review and revise plan descriptions of COBRA continuation coverage.
The scope and timing of the stimulus package requirements promise to pose implementation issues. Please let us know if you have any questions regarding the new continuation coverage requirements or need our assistance with any of the action items.
__________________________________________________________________
The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.