On February 4, 2009, President Obama signed into law the Children’s Health Insurance Program Reauthorization Act of 2009 (the “CHIP Reauthorization Act”). On February 17, 2009, the President signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). These Acts include a number of significant provisions relating to employer-sponsored health plans, some of which require immediate or very quick action by employers or plan administrators, as well as an increase in the tax-free limit on transit benefits that employers may take advantage of if they wish to. They also include new restrictions on executive compensation for financial institutions receiving funds under the Emergency Economic Stabilization Act. Those restrictions are discussed in a separate client alert1.
CHIP Reauthorization Act
The State Children’s Health Insurance Program (“SCHIP”) provides funds to states to help provide health coverage to uninsured children who are not entitled to Medicaid. The Act makes it easier for states to provide SCHIP coverage by giving financial assistance to individuals to obtain coverage under employer-sponsored group health plans. It also allows states to provide similar financial assistance to individuals under age 19 who are entitled to Medicaid. The Act will require employer-sponsored group health plans to provide new special enrollment periods for eligible individuals and to make additional disclosures to participants and the states in which they operate. In particular:
- The Act requires group health plans to permit employees and their dependents who are eligible for coverage but not enrolled to enroll outside the usual enrollment period if they request coverage within 60 days after (1) becoming ineligible for coverage under a Medicaid or SCHIP plan or (2) being determined to be eligible for financial assistance under a Medicaid or SCHIP plan with respect to coverage under the plan. These special enrollment rights become effective April 1, 2009.
- The Act also requires an employer to provide annual notices to employees of any premium assistance that is available to them under a Medicaid or SCHIP plan with respect to coverage under the employer’s group health plan. It also requires plan administrators, upon state request, to disclose enough information to the state about benefits under the plan for the state to determine whether it would be cost effective to provide premium assistance with respect to coverage under the plan, and to enable the state to provide any required supplemental benefits. The government is required to issue model employee notices by February 4, 2010. Employers will have to provide the initial annual notices to their employees beginning with the first plan year after the model notices are issued.
American Recovery and Reinvestment Act
COBRA Premium Subsidy for Involuntarily Terminated Employees. COBRA requires an employersponsored group health plan to give employees and their families, who would otherwise lose coverage as a result of a termination of employment, divorce, and certain other events, a chance to continue to buy coverage for a limited period after that event. The maximum coverage period is generally 18 months, but can be longer depending on the reason for the loss of coverage, and can be extended if the individual becomes disabled. The plan may charge up to 102 percent of the cost of coverage for similarly situated active participants (the “COBRA premium”) or up to 150 percent if the maximum coverage period is extended because of disability. COBRA does not apply to group health plans sponsored by churches, governmental entities, or small employers (fewer than 20 employees), but the federal government and most states have similar laws that apply to these plans. ARRA treats these laws the same as COBRA for purposes of this provision, so we refer to them as COBRA in this discussion.
ARRA provides a premium subsidy for employees and their families to purchase COBRA coverage if the employees lost their jobs and health coverage between September 1, 2008, and December 31, 2009, as a result of involuntary termination. ARRA does not provide the subsidy directly to eligible individuals. Instead, if an individual is eligible, and pays 35 percent of the premiums charged for COBRA coverage under the plan (or some person other than the employer, such as a state government or charity, pays them on the individual’s behalf), the plan is not allowed to charge the individual the remaining 65 percent. Instead the employer (or the insurance company if the plan is fully insured, or the plan in the case of a multiemployer plan) is reimbursed via a credit against its payroll taxes equal to that remaining amount, or a direct payment to the extent the credit exceeds its payroll tax liabilities. The subsidy is not available for COBRA coverage that consists of contributions to a health flexible spending account.
The 35 percent and 65 percent amounts are based on the premiums that the plan would otherwise charge for COBRA coverage under the plan absent the new subsidy. Thus, for example, if the plan charges the full 102 percent of the COBRA premium, that it is allowed to charge in most cases, the individual must pay 35 percent of the 102 percent of premiums charged by the plan to qualify for the subsidy and the employer, insurance company, or multi-employer plan will be entitled to reimbursement for the remaining 65 percent of the 102 percent of premiums charged. On the other hand, if the plan charges only 50 percent of that cost, the individual will only be responsible to pay 35 percent of the 50 percent charged by the plan and the employer, insurance company, or multiemployer plan will only be entitled to reimbursement for 65 percent of the 50 percent charged. Similarly, if the plan charges nothing for COBRA coverage, then no subsidy or reimbursement is available. Employers should take this feature into account in designing termination programs, so as to maximize federal COBRA assistance. Employers that are already subsidizing COBRA coverage for terminated employees might wish to consider whether the arrangement can be modified for the same purpose.
Although “involuntary termination” is an essential requirement for the subsidy, the term is not defined. Conversations with congressional staff suggest that it was not necessarily intended to mean the same as it does under state unemployment insurance laws. However, it is unclear for now how it applies, for example, to employees who leave for good reason or who elect to leave under employer-initiated separation window programs in downsizing situations. Despite this uncertainty, the employer, insurance company, or multi-employer plan that is reimbursed for providing the subsidy must give the IRS an “attestation of involuntary termination of employment” for each employee for whom the reimbursement is claimed. Employers should take this limitation into account in designing termination programs, as a potential benefit if employees are deemed to be involuntarily terminated.
An eligible individual who became entitled to COBRA coverage on or after September 1, 2008, and before February 17, 2009, but did not elect COBRA coverage at that time must be given a second chance to elect COBRA coverage. The individual has 60 days after receiving a notice of this right (explained below) to make the election. If the individual elects COBRA coverage, the coverage is retroactive to the first period of coverage that begins after February 17, 2009. A “period of coverage” is the monthly or shorter period for which premiums are charged under the plan, so for most plans this means the coverage will be retroactive to March 1, 2009. In addition, the plan must disregard the period between the original loss of coverage and the date the COBRA coverage begins in determining whether the individual has a significant break in creditable health coverage for purposes of applying any pre-existing condition limitations. The employer may, but is not required to allow an eligible individual who has already elected COBRA coverage to change to a less expensive enrollment option under the plan. These changes will require group health plans to make temporary changes to their COBRA election procedures and, if they impose preexisting condition limitations, to their procedures for calculating creditable health coverage. It might also be advisable to discuss the changes with any insurer or stop loss carrier that might be affected.
The subsidy is available beginning with the first period of coverage under the plan that begins after February 17, 2009. It is available for up to nine months but ends if the individual becomes eligible for Medicare or another group health plan. (Eligibility is enough for this purpose; actual coverage is not required. The employee is required to notify the plan when this occurs.) The plan administrator may continue charging the eligible individual the full premium amount through the end of the second period of coverage beginning after February 17, 2009, but if it does so it must make arrangements to refund or credit the individual with the 65 percent he or she should not have been required to pay.
In a striking new government foray into plan administration, ARRA requires the Department of Labor (or the Department of Health and Human Services in the case of coverage provided under a state or federal law rather than COBRA itself) to review, de novo, a group health plan’s determination that an individual is not eligible for the subsidy, within 15 days after the individual requests the review.
The subsidy is not included in the individual’s income. In that respect it is similar to an employerprovided COBRA subsidy, which can often be provided on a pre-tax basis. However, unlike an employer-provided subsidy it is phased out via a special additional tax for individuals with modified AGI above $125,000 ($250,000 in the case of a joint return) in the year the subsidy is received. The plan administrator must amend its existing COBRA notices to include information about the new subsidy and election rights, or provide this information in a separate notice. In addition, the plan administrator must send this information – including information about the second chance to elect COBRA coverage for those who initially declined it – by April 18, 2009, to eligible individuals who became entitled to COBRA coverage before February 17, 2009. The Department of Labor is required to make a model notice available by March 19, 2009. The IRS is also directed to issue regulations requiring the employer, insurance company, or multi-employer plan that is reimbursed for providing the subsidy to tell each affected individual the amount of the subsidy that he or she received.
Health Coverage Tax Credit. Section 35 of the Code provides a refundable health coverage tax credit (“HTHC”) to certain individuals to help them purchase health insurance for themselves and their families. Eligible individuals include (1) certain individuals who qualify for different forms of trade adjustment assistance (“TAA”) because they lost their jobs due to the effects of international trade, and (2) individuals receiving retirement benefits from the Pension Benefit Guaranty Corporation (“PBGC”) who are at least 55 years old. An individual is not eligible for the HTHC if he or she has certain other health coverage, generally including coverage under Medicare or another group health plan (if an employer pays 50 percent or more of the premiums). The credit is equal to 65 percent of the premiums the individual is otherwise required to pay. Health insurance to which the subsidy can be applied includes COBRA coverage as well as coverage under a group health plan available through a spouse’s employment. An individual can sign up to have the HTHC sent directly to the group health plan from which he or she receives coverage.
Group health plans subject to COBRA must give individuals who lose their jobs and health coverage in TAA-related events a second chance to elect COBRA coverage after they become eligible for TAA. In addition, they must disregard the period between the TAA-related loss of coverage and the first day of the special election period in determining whether the individual has a significant break in creditable health coverage for purposes of applying any preexisting condition limitations. There are no specific disclosure requirements in COBRA regarding these provisions. However, the Department of Labor has included an optional paragraph on them in its model election notice, and advises employers to include information on the provisions in the COBRA section of the plan’s summary plan description.
ARRA expands the TAA program in several respects, and thus makes more employees eligible for the HTHC. It also increases the HTHC from 65 percent to 80 percent from May 1, 2009, through December 31, 2010, and makes individuals more likely to claim the credit. It also makes several changes related to the HTHC that directly affect employers and administrators of group health plans. In particular:
- It requires a group health plan to disregard the period between when a TAA-eligible individual has a TAA-related loss of health coverage and seven days after he or she is certified by the IRS as eligible to have the HTHC sent directly to his or her group health plan in determining whether the individual has a significant break in creditable health coverage for purposes of applying any preexisting condition limitations. This change is effective for plan years beginning after February 17, 2009, and will require group health plans that impose pre-existing condition limitations to modify their procedures for calculating creditable health coverage by that time.
- For an individual who loses health coverage under a group health plan because of a termination of employment or reduction in hours, and was entitled to receive retirement benefits from the PBGC at that time, it extends the period during which the plan must provide COBRA coverage to the date the individual dies (or 24 months later in the case of his or her family). For an individual who loses health coverage in the same situation and was TAA-eligible at that time, it extends the period for as long as the individual remains TAA-eligible (or 24 months later in the case of his or her family). Both changes apply regardless of whether the individual is actually entitled to or receiving the HTHC. Both changes are effective for periods of COBRA coverage which would otherwise end on or after February 17, 2009, although they do not require any period of COBRA coverage to extend beyond December 31, 2010. These changes will require immediate changes to group health plans’ procedures for determining when COBRA coverage will end.
- It expands the definition of qualified health insurance which can be paid for with the HTHC to include health coverage provided by a voluntary employees’ beneficiary association (“VEBA”) established in a bankruptcy context. This change is effective from March 1, 2009, through December 31, 2010.
Public Transit Benefits. Section 132(f) of the Code allows an employee to receive van pool, transit pass, and parking benefits from his or her employer on a tax-free basis as long as the amount of the benefits does not exceed certain statutory limits. The current limits are $120 per month for aggregate van pool and transit pass benefits and $230 per month for parking benefits. ARRA amends section 132(f) to increase the monthly limit for van pool and transit pass benefits to the same level that applies to parking benefits. The change is effective from March 1, 2009, through December 31, 2010. The change is not mandatory and will only affect employers that wish to take advantage of the new higher limits.