The Internal Revenue Service (IRS) has issued additional frequently asked questions (FAQs) relating to the COBRA subsidy, addressing some of the concerns raised by employers and group health plans. In addition, the Department of Labor (DOL) hosted a webcast on March 24, 2009, with representatives from the IRS joining, to address additional concerns related to the implementation of the subsidy. This is one of several alerts we have issued addressing the new COBRA subsidy under the American Recovery and Reinvestment Act of 2009 (ARRA). Please note that although we are relaying some of the informal remarks made by the DOL and IRS, the information provided during the webcast does not constitute the formal position of the government and will remain non-binding until the information is formally issued by the government.
Although it is difficult for employers and group health plans to keep track of and comply with the government’s pronouncements, especially since the government is not following its usual methods of issuing guidance (e.g. providing substantial amounts of information via informal webcasts, teleconferences, and FAQs), we understand that some of this informal guidance is helpful and will continue to monitor the government’s position on the COBRA subsidy rules. More written guidance is expected to be issued as early as next week.
Applicability of the Subsidy Rules
During the webcast, the government stated that both the termination of employment and the loss of coverage must have occurred between September 1, 2008 and December 31, 2009 in order for the COBRA subsidy to be available. For example, if an employee is involuntarily terminated on December 1, 2009, but does not lose coverage until January 1, 2010, the individual will not be eligible for the COBRA subsidy.
Furthermore, according to the webcast, if a former employee on COBRA continuation coverage adds a new spouse under the special enrollments rules, the new spouse would not be entitled to subsidized COBRA, but can be covered under subsidized family coverage if the premium amount does not increase. If the premium amount does increase, the incremental cost increase is ineligible for the COBRA subsidy. Similar rules would apply to other covered individuals who are not assistance eligible individuals, such as domestic partners.
Definition of Involuntary Termination
To date, neither the DOL nor the IRS has provided significant guidance defining what constitutes an involuntary termination for COBRA subsidy purposes. The new guidance briefly touches on what will constitute involuntary termination, simply confirming that an employer-initiated layoff is generally an involuntary termination for purposes of the COBRA subsidy.
During the webcast, the IRS indicated that they are expecting to issue additional guidance next week. In the meantime, informal remarks made during the webcast shed some light on what might constitute involuntary termination. It was stated that “constructive terminations,” including voluntary terminations in response to a material negative change in employment circumstances, would be considered involuntary terminations. For example, assume an employee was initially working 40 hours per week but the employer reduces the employee’s work schedule to 25 hours per week. The reduction, in and of itself, will not constitute an involuntary termination (even if the reduction constitutes a qualifying event for COBRA purposes). However, if the employee resigns because of the reduction in hours, this may be considered an involuntary termination since it is in response to a material negative change in employment conditions.
It was also informally stated that an election to retire or resign prior to being laid off (i.e. if an employer solicits individuals to resign prior to a layoff) may also constitute an involuntary termination.
The government also noted on the webcast that involuntary termination can occur if someone is fired for cause since an employer is taking action to end employment. However, if a termination is for “gross misconduct,” COBRA would not apply and the employee would not be entitled to the subsidy. According to the speaker from the DOL, if it is unclear to an employer whether an employee’s conduct amounted to gross misconduct and the employer does not want to expend the resources necessary to research a “gray area” of the law, it is unlikely that the government would second guess the employer’s decision to offer COBRA. It is not clear if this reasoning will be applicable to other determinations made by the employer, such as determinations of what is involuntary termination.
The governmental speakers also stated that involuntary termination does not include situations where an employee leaves his or her job after being called back to the military, because the termination is not initiated by the employer.
More on the Notice Requirements
The FAQs state that a group health plan is required to notify any individual with a qualifying event occurring during the period from September 1, 2008 through December 31, 2009 of the availability of the subsidy. This is consistent with the wording of ARRA, but during the webcast, the DOL representative indicated that the full general notice only needs to be given to those individuals who have not yet been provided an election notice or who were provided an election notice after February 16, 2009 that did not describe the subsidy. Employers may want to provide all individuals who experienced a qualifying event between September 1, 2008 and December 31, 2009 with information about the subsidy so that, for example, an employee who presumably voluntarily terminated has a chance to dispute that categorization. If an assistance eligible individual already had COBRA coverage in effect on February 17, 2009, then the individual should receive a special notice of the availability of the subsidy.
In addition, the FAQs provide that an employer cannot avoid sending a notice to an assistance eligible individual who has COBRA in effect by just reducing the individual’s premiums to 35%, because an individual may not be eligible for the subsidy (e.g., due to eligibility under another group health plan). It was noted on the webcast that there is no statutory deadline to provide the abbreviated general (or “subsidy only”) notice to qualified beneficiaries currently enrolled in COBRA coverage. The DOL presumes that April 18, 2009 is a reasonable deadline for providing these notices since the second chance election notices must also be provided by this date.
Second Chance Election Notice
As previously reported, if an individual’s involuntary termination took place on or after September 1, 2008 and before February 17, 2009 and the individual was eligible for COBRA during that period, the individual can elect COBRA and get the subsidy regardless of whether the individual failed to elect COBRA coverage initially, or elected COBRA coverage and later discontinued it. During the webcast, one of the speakers indicated that it was irrelevant whether the discontinuance resulted from non-payment of premiums. Also during the webcast, the DOL provided an example to demonstrate that the extended election period (or “second chance”) notice need not be given to a divorced spouse (or “aged-out” dependent) who was divorced and received a COBRA election notice between September 1, 2008 and February 17, 2009. This is because the spouse (or aged-out dependent) could not possibly qualify as an assistance eligible individual.
The DOL acknowledged that it may be unclear whether certain terminations were involuntary, and suggested that employers may want to wait for further guidance. Alternatively, employers can send the second chance notice to everyone who terminated between September 1, 2008 and February 16, 2009 and then determine whether the subsidy applies when requests for treatment as an assistance eligible individual are received.
Second Chance Under One Plan Only
It was also noted on the webcast that an employee who has two separate involuntary terminations between September 1, 2008 and February 17, 2009 will not be provided an extended election right under two plans. For example, assume an employee who is involuntarily terminated on September 1, 2008 elects COBRA coverage, secures another job in October and enrolls in that employer’s health plan, and is then involuntarily terminated again on December 1, 2008. In this instance, the first employer will not be required to send the second chance election notice (presuming the employer knows of the other coverage), but the second employer will be required to do so.
Payment of the Premium
The FAQs explain that an assistance eligible individual may reduce his or her COBRA premium to 35% immediately (rather than waiting for the notice from the health plan), but suggest that an individual planning to reduce his or her premium should contact the group health plan or employer before sending in a reduced premium to avoid any inadvertent interruption of coverage.
The FAQs also caution that an employer may not pay the individual’s 35% share of the premium, rather than collecting it, while the government subsidizes the remaining 65%.
The IRS noted on the webcast that an individual who elects COBRA during an extended election period may have up to 165 days to pay the COBRA premiums. Because the employer has 60 days to issue the second chance notice, the individual then has 60 days to elect COBRA and, under COBRA, an individual who elects COBRA has 45 days to pay the initial premium. Thus, for example, an individual may be paying premiums for March through July as late as August 1.
State Tax Treatment of the Subsidy
Although the subsidy will not be included in income for federal tax purposes, its treatment for state income tax purposes will be determined under state law and will depend on the tax laws of each particular state. Thus, it appears that the subsidy amounts may need to be included as income for state tax purposes, if applicable state law so provides.
Claiming a Credit
According to the new guidance, if an employer with unpaid employment or income taxes claims a COBRA premium credit on Form 941, and the amount of the credit exceeds the amount of payroll tax liabilities reported on the form, then the IRS will offset the other unpaid taxes against the balance due before refunding any balance, and will notify the employer of the offset.
The guidance also addresses how the COBRA credit will apply in instances where a business acquisition results in a successor employer by providing that there is no “one size fits all” answer. According to the guidance, the result will depend on different facts and circumstances, including whether the entity that provided the subsidy continues in existence. Simply because an employer is a successor employer for purposes of applying the social security wage base will not mean that it can claim the subsidy credit provided by the previous employer.