HORAN Compliance Update

 

 

COBRA Premium Subsidy- Seminar Questions & Answers and New Guidance from the IRS

On April 3, HORAN sponsored an education session on the new COBRA Premium Subsidy.  Time constraints prevented us from answering all questions the session participants asked regarding the Premium Subsidy, therefore we asked them to submit the questions in writing before leaving the session.

 

I have researched the written questions from both education sessions [the questions are italicized below] and have analyzed the new IRS Notice.  The seminar questions and central issues from the Notice are addressed in this informational memo.  It is not intended nor should anyone rely on it as legal advice but only as an indication of what a search of various databases and sources revealed.  

 

Clarification of the Term: "Involuntary Termination"

The trigger for the Subsidy qualification is "Involuntary Termination."  As we discussed during the education sessions and in the HORAN Compliance Alert on the Subsidy, the original legislation did not define or provide information about a term central to the entire program.

 

For the purposes of the Premium Subsidy only, Federal regulators now describe this term as follows:

"...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...

 

"In addition, an employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee."

 

In other words, "involuntary termination" occurs when the following conditions are met:

• At its sole discretion, an employer acts to end the employment of an individual.
• The employee did not in any way request the end of employment.
• The employee was able and willing to continue employment.
• The employer's actions cause a substantive and negative change in the conditions of employment even if the end of employment is requested by the employee.

Thus, certain events, although they may qualify an individual for COBRA, do not qualify the individual for the Premium Subsidy.  For example, divorce and loss of dependent status are caused by the employer's actions and never qualify for classification as an Assistance Eligible Individual [AEI].

 

Example Situations:  The regulators also provided examples of both involuntary terminations that qualify for the Subsidy and end of coverage situations that, while they may qualify for COBRA, do not qualify an individual for the Subsidy.

 

The following table summarizes the examples covered by the IRS regulators.

 

Involuntary - Action by Employer-	Not Subsidy Qualifying - No Act by Employer to End Employment -
Failure to Renew [ Employment] Contract	Loss of Dependent Status
Reduction in Hours that Resulted in Employee's Resignation	A Reduction in Hours with Lost Health Coverage When Employee Continues Working
Layoff with Right of Recall or Temporary Furlough or Lockout	Work Stoppage/Strike
	Divorce
	Death of Employee
Employer Ends a Person's Employment Due to Absence Because of Illness or Disability	Absence, " From Work Due to Disability or Illness Without Formal Termination of Employment
Retirement in Lieu of Termination	Voluntary Retirement
Termination For Cause [Not The Same As Gross Misconduct]	Gross Misconduct
Resignation Due To Requirement To Relocate [Material Change In Geographic Location]
Buy-Out or Severance Arrangement in Lieu of Termination

 

 

Reduction in Hours

Depending on the impact, reduction in hours may or may not qualify an individual for the Premium Subsidy.  Generally, a reduction in hours does not qualify as an involuntary termination because the individual continues working.  However, if the employee views the reduced hours as a material negative change in employment conditions and resigns [employment ends]; the reduction causes actual job loss and qualifies the individual for the Subsidy.

 

Which Benefits Qualify For COBRA And For The Subsidy?

Q:  [There were a number of questions before, during and after the HORAN education session on this issue.]

The criterion that determines eligibility of a benefit for continuation coverage is classification as an ERISA group health plan.  Benefits are eligible for both COBRA and Premium Subsidy when they provide "medical care" and when they are sponsored by an employer, that is, they are group health benefits under ERISA.   Those group plans that clearly fall into this category are: health, dental, vision and an Employee Assistance Program [EAP].  This includes mini-med, vision-only and dental-only plans sponsored by the employer whether or not the employer pays a portion of the costs.

 

Normally, when an Assistance Eligible Individual becomes eligible for another group health plan, the person loses eligibility for the Subsidy.  However, if the group plan provides only dental, vision, counseling or referral services then Subsidy eligibility is not lost.

 

The following benefits present special issues that require additional explanation or careful consideration before classification as COBRA eligible:

• Cafeteria Plan [Section 125]
• HSAs
• FSAs
• HRAs
• Voluntary Coverage

In general, if they are employer sponsored group plans providing health benefits to employees, then they qualify for COBRA continuation.  If not, then certain factors disqualify them as ERISA group health plans.  Even if or when they are not ERISA group health plans, they can be tied to an ERISA benefit, thus complicating the issue.

 

CAFETERIA PLAN [SECTION 125]

 

Because a cafeteria plan does not provide benefits directly to an employee, it does not fit the typical ERISA model of an employee welfare arrangement. Employees use a cafeteria plan as a financing mechanism for benefits under other employer sponsored plans, thus, it is not technically an ERISA plan.   On the other hand, many of the benefits financed under a cafeteria plan are subject to ERISA [e.g., health FSAs, medical, dental, vision, and prescription drugs]. 

 

In general, cafeteria plan balances can be used to pay COBRA premiums.  Under the 2007 IRS proposed cafeteria plan regulations, an individual, under certain circumstances can use pre-tax severance or final compensation payments to pay COBRA premiums through a cafeteria plan.

 

Since the cafeteria plan is not an ERISA plan, and since an employee does not contribute funds directly to it but rather to the other plans that it funds, then it is not eligible for the Premium Subsidy.

 

HEALTH SPENDING ACCOUNT [HSA]

 

In general, HSAs are not considered employer sponsored group health plans and thus are not subject to COBRA.   Thus, they would also not qualify for the premium subsidy.

 

HEALTH FLEXIBLE SPENDING ACCOUNT [FSA]

 

By reimbursing participants for their out-of-pocket medical expenses, employer sponsored FSAs meet the definition of group health plans that qualify for COBRA continuation.   However, there are exceptions and limitations to the COBRA obligation.

 

Exceptions:  Small groups [those who do not meet the required number of employees], churches and the federal government are exempt from COBRA.  Thus, FSAs maintained by them are also exempt from COBRA requirements.

 

Limitations: Under IRS regulations,  FSAs can limit their COBRA obligations if they are:

• Not limited to HIPAA excepted benefits [limited scope dental and vision].
• If they do not exceed certain maximum limits
• If they meet certain premium amount conditions.

If they meet all three of these conditions then, the following limits apply:

• COBRA does not need to be offered to individuals who "overspent" their FSA accounts as of the qualifying event date [that is, no longer have a positive balance]; and
• COBRA may be cut off from those who have not spent all of their accounts by the end of the year in which the qualifying event occurred.

A note of caution:  under COBRA, each FSA participant has a separate right of continuation.  This means that what was a family FSA could become separate plans for husband, wife and each dependent.

 

FSAs, CAFETERIA PLANS & PREMIUM SUBSIDY

 

FSAs which are offered under cafeteria plans are specifically excluded from the Premium Subsidy.   Other FSAs can be COBRA eligible [see HRA below].

 

HEALTH REIMBURSEMENT ARRANGEMENT [HRA]

 

Although HRAs could be classified as an FSA, the HRA rarely ever qualifies for the special limitations available to FSAs.  Further, HRAs may not be paid through a cafeteria plan. Therefore, generally, HRAs qualify for COBRA continuation.

 

HRAs also qualify for the premium reduction under ARRA.

 

Voluntary Plans [Employee-Pay-All]

 

A voluntary insurance plan is one in which the employee pays the full premium and the employer has very little involvement.   They may or may not be COBRA qualified plans depending on several factors.  The Department of Labor [DOL] contains a "safe harbor" set of criteria  that makes them a non-ERISA plan and exempt from COBRA even if they pay medical benefits.

 

The safe harbor criteria are as follows.

• The plan is completely voluntary.
• The plan has no employer contributions.
• The employer strictly limits its involvement to:
  • Collecting premiums through payroll deduction.
  • Remitting the premium to the insurer.
  • Permitting the insurer to advertise or promote the plan directly to the employees.

Employers may include voluntary plans in COBRA coverage, but if they do not want that responsibility, they must meet and comply with the provisions of the safe harbor.  Any other employer involvement in the voluntary plan, such as endorsement or participation in any aspect of administration, can make the plan subject to COBRA continuation.  For example, if the employer enables payment of voluntary medical premiums from a cafeteria plan or takes credit for arranging the coverage, the voluntary plan becomes a group plan and therefore COBRA eligible.

 

Dual Key:  Involuntary Termination and Loss of Group Coverage

 

Q: If an employee leaves the company, voluntarily or involuntarily, do we need to send a COBRA [Subsidy] notice if they did not take the benefits, but were eligible?

There are two ways to answer this depending on the meaning of the phrase "did not take the benefits."  It could mean either that the person did not take COBRA when offered or did not take group coverage when it was offered to the person as an employee.

 

Did Not Elect COBRA:  If the person had group coverage when the termination occurred, he or she would be eligible for COBRA.  If the termination occurred between September 1, 2008 and December 31, 2009, it appears from the wording in the notices that Federal regulators want employers to send a notice to all whose employment ended whether involuntarily or voluntarily.  At a minimum, this provides the information needed to get an expedited appeal of the "voluntary" termination classification if the person disagrees with it.

 

Did Not Select Employer Coverage When Offered:  The trigger for Subsidy eligibility are two conditions that must occur together: the loss of group health coverage and the involuntary end of employment.  The two are tied together, meaning that coverage must have been in place the day before the involuntary end of employment.

 

If an employee did not accept coverage when offered as part of a benefits package, then the coverage was not in place when employment ended.  Therefore, the person cannot qualify as an Assistance Eligible Individual and no notice needs to be sent.

 

Q: If an individual elected self-only COBRA, and COBRA eligible spouse and dependents did not elect it, do they get a second election chance?

Yes, federal regulators recently clarified this situation and eligible spouses and dependents do get a second election chance.

 

Q: If an employee was on FMLA, termed benefits, and then was involuntarily terminated, should they be given COBRA Subsidy notice since they termed coverage prior to termination?

For the purposes of group health coverage, under FMLA an individual must be treated the same as active employees, that is, the coverage continues during the leave.

 

When an individual voluntarily ends employer sponsored coverage while still considered an active employee for the purposes of the coverage, then the coverage ceases before the end of employment.  Thus, at the time of termination, no coverage exists to continue and there is no COBRA right and no eligibility for the Subsidy.

 

Who Is Eligibility for the Subsidy?

 

Q: If an eligible employee had been off work for a period of time and accrued a backlog of healthcare contributions, will that affect subsidy eligibility if he refuses to pay the accrual?

If "off work" means that the person was on leave but was still carried as an employee eligible for benefits, then the non-payment of "contributions" can end the employer sponsored coverage.  The end of coverage would then occur prior to termination of employment and the person would not be eligible for either COBRA or the Premium Subsidy.  In other words, the end of the coverage and the end of employment were not related.  [Please see the information under Dual Key above]

 

Q: Can an individual be eligible for the Subsidy more than one time?

Yes. This can happen when a person loses employment more than once between September 1, 2008 and December 31, 2009.  Each time, the person is eligible for a full 9 months of premium reduction.

 

Dependents Eligible for Subsidy

Q: Eligible dependents only mean those covered on the plan prior to involuntary termination, right?

In general, only those covered under the employer's plan on the day prior to termination are eligible for the premium reduction.

 

However, there are two exceptions: 

• If they would have been eligible for COBRA at the end of the employee's employment, and the termination occurred within the Subsidy timeframe, they have an extended election period during which they can elect COBRA and qualify for the Subsidy.
• A child born to or adopted by a covered employee during a period of COBRA is a special case and need not be covered by the employer plan on the day prior to termination.  Such a child would be eligible to be an Assistance Eligible Individual.

Q: If an employee is still covered under the health plan as an active employee and the dependents have a qualifying event [age/divorce], would the dependents be eligible for Subsidy?

The dependents would not fall under the dual conditions for Subsidy eligibility: loss of employment and loss of coverage.  In other words, the employee still continues working even though the dependents lost coverage.  The dependents would be eligible for COBRA but not the Subsidy.

 

ELIGIBILITY FOR OTHER COVERAGE

Q: If a terminated employee is eligible for coverage under a spouse's plan, does that preclude eligibility for the Subsidy?

In general, eligibility for other group coverage, either at the time of job termination or while receiving a Subsidy, makes a person ineligible for the Subsidy.  If a spouse has an employer sponsored group plan under which the terminated employee could be covered, then the terminated employee would be ineligible for the Premium Subsidy.  Eligibility is not the same as enrollment.  The person merely needs to meet the requirements of the plan but does not have to actually enroll in order to lose Subsidy eligibility.

 

If the spouse's plan only offers coverage for him or her, then the terminated employee would be eligible for the Premium Subsidy.

 

Q: If an employee is eligible for Medicare upon termination, does this automatically preclude eligibility for the Subsidy?

For the purposes of the Premium Subsidy Program, Medicare is considered a group health plan.  Eligibility for the subsidy ceases with eligibility for other group health coverage including Medicare.  The key word here is "eligibility."  An individual does not actually need to elect the other coverage but merely be eligible for it. 

 

Therefore, if the termination and Medicare eligibility are virtually simultaneous, then there would be no eligibility for the Subsidy.  In the event that they were not simultaneous, then the Premium Subsidy would be available only for a premium period [e.g., a month] in which the person was not yet eligible for Medicare.   For example, if the individual's employment ended on June 1 and they elected COBRA immediately,  then became eligible for Medicare on July 1, the Premium Subsidy could apply for one month.

 

NEGOTIATED SEVERANCE & THE SUBSIDY

Q: How is the government going to know if an employer is paying part of a former employee's COBRA premium?

The central issue relates to a negotiated severance in which an employer agrees to pay part or all of an employee's COBRA premium.  The part that the employer agrees to pay is not eligible for the Premium Subsidy.  This means that the employee pays 35 % of the net premium [the standard premium less what the employer agreed to pay] and the employer can only claim reimbursement for 65 % of the net premium.

 

The Premium Subsidy provisions of the ARRA require the employer to keep certain documentation.  That documentation does not need to be routinely submitted to the IRS.  However, it can be audited by federal regulators, either from the IRS or DOL.  When audited, it is highly likely that a 35 % payment that does not match a standard premium will send up a red flag.

 

If the employer filed for a 65 % reimbursement of an invalid amount, the IRS would take steps to reclaim that money.  If found to violate COBRA, an employer is liable to an IRS excise tax of $100 per day per employee affected by the violation.  The DOL can levy an ERISA violation penalty of $110 per day per affected employee.

 

Finally, if an employee continues to accept the premium reduction after losing eligibility, the employee will be responsible for paying 110 % of all premium reduction amounts.  The employer will not be asked to repay any amount that it was reimbursed because of the employee's failure to notify of ineligibility.  The IRS will reclaim the entire invalid amount on the employee's individual income tax filing. 

 

Q: If an employee signed a severance agreement in lieu of termination that included his voluntary resignation agreement, does that impact the Subsidy?

The key to this situation is the phrase "in lieu of termination."  According to federal regulators,  this type of termination is in fact "involuntary" because:

• The "employer would have terminated the employee's services"
• The "employee had knowledge that the employee would be terminated..."

"In lieu of termination" means that the employer would have acted anyway and also means that the employee was aware of this probability. Therefore, the individual would be eligible for the Subsidy.

 

WHO MUST SEND THE SUBSIDY NOTICE?

Q: What happens if you outsource the COBRA information, i.e., [we] use [a vendor] to do all the COBRA notices?  Do we have to do these forms [the notice packets]?

The answer is a qualified no.  You do not need to send the notices yourself as long as two conditions are met:

1. You have determined that the vendor will, in fact, send the required notices to terminated individuals.
2. The employer has the ultimate responsibility.  If something goes wrong, Federal courts will hold the employer responsible and not the vendor.  The employer has the obligation to provide notices and may delegate the process to a vendor but not the responsibility.

KENTUCKY CONTINUATION & DENTAL COVERAGE

Q: Does state continuation apply to dental in Kentucky?

Kentucky Revised Statue for mini-Cobra continuation coverage makes no specific mention of dental benefits.  However, it does provide that those benefits that will be covered under the COBRA like continuation are the same as those the person had before qualifying for state continuation coverage.

 

THE COBRA COUNT

Q: Can you explain how to calculate the size of a company for COBRA Compliance?

The two critical variables in the COBRA count are definition of "employee" and the method of making the count.

1. Who Must Be Counted As An "Employee?"  Three factors identify employees:
   ·         Full and part time individuals, although part time can be counted as a fraction of full time.
   ·         All persons employed even if they are not eligible for or do not participate in the health plan.
   ·         All owners, partners and officers.
2. How Must An Employer Count Employees? The government specifies that the employer must look back at the preceding calendar year and count the number of employees that it had on each "typical business day."  If the employer had 20 or more employees, on 50 percent of its typical business days, then COBRA applies.
   
   The count always looks back to the previous year.  The 20/50 designation obligates an employer for the entire current calendar year even if the count drops below 20 employees.

 

If you need additional clarification or have additional questions, please do not hesitate to contact your HORAN Account Manager.