In a previous communication, we provided you general information regarding the new COBRA elections and subsidies provided for in the American Recovery and Reinvestment Act of 2009 (ARRA). Less than two weeks ago, we provided you with additional information about the Department of Labor (DOL) model notices that are intended to guide employers in communicating the elections and subsidies to qualified individuals and their beneficiaries. Click here for a link to these previous communications.
Recently, the Internal Revenue Service (IRS) issued Notice 2009-27 to serve as additional guidance in the administration of COBRA benefits. PDF of IRS Notice 2009-27 (Full version). Presented in a “Question and Answer” format, Notice 2009-27 offers answers to employers’ most anticipated questions. The most noteworthy topics clarified include: involuntary termination, assistance eligible individuals, and the premium reduction calculations.
“Involuntary Termination” Defined Broadly
Perhaps the most anticipated topic covered by Notice 2009-27 is the determination of “involuntary termination.” Notice 2009-27 defines “involuntary termination” as “a severance from employment due to the independent exercise … 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.” For practical purposes, Notice 2009-27 clarifies that “involuntary termination” includes: employee-initiated termination for “good reason,” failure to renew an employment contract, termination for cause, and forced retirement.
Employee-initiated termination from employment for “good reason” attributable to the employer constitutes involuntary termination for purposes of premium reduction. Notice 2009-27 further states that failure to renew an employment contract at the time the contract expires also constitutes “involuntary termination” when the employee is willing and able to work. Termination for cause, moreover, constitutes involuntary termination so long as termination is not due to the “gross misconduct” of the employee. Retirement is considered “involuntary termination” if, absent retirement, the employer would have terminated the employee’s services and the employee had knowledge that the employee would be terminated.
Notice 2009-27 clarifies that a reduction in hours does not generally constitute an involuntary termination. An employee’s voluntary termination as a result of an employer-imposed reduction in hours, however, can constitute involuntary termination if the reduction in hours is a material negative change.
Assistance Eligible Individual and Premium Reduction Period
Notice 2009-27 clarifies that the premium reduction applies for assistance eligible individuals as of the first period of COBRA coverage beginning on or after March 17, 2009 (the date ARRA was enacted). However, under COBRA, a group health plan may provide that COBRA continuation coverage does not begin until the loss of coverage. So, for example, if the employer provides group health coverage to an individual who is otherwise an assistance eligible individual for six months after termination, the period during which the premium reduction applies depends on whether the plan treats this period as a loss of coverage. If so, the COBRA premium subsidy will apply immediately after termination, for up to nine months.
Notice 2009-27 also clarifies the premium reduction ceases if an individual becomes eligible for other group health coverage, regardless of whether the individual actually elects such coverage. However, the premium reduction will continue to apply during any waiting periods that apply under the other group health coverage.
Calculation of Premium Reduction
Notice 2009-27 clarifies how the premium reduction applies when the employer subsidies some or the entire COBRA premium. The premium used to determine the 35% share that must be paid by (or on behalf of) an assistance eligible individual is the amount that would otherwise be charged to the individual for COBRA continuation coverage. So, for example, if the cost of COBRA continuation coverage is $1,000 and the employer normally pays $500 of that amount, due to the ARRA premium reduction, the individual would only need to pay $175. The employer would be entitled to reimbursement of remaining the $325 that the individual would have paid absent ARRA.
Below are the additional topics covered by Notice 2009-27:
- Coverage Eligible for Premium Reduction. The premium reduction is available for COBRA continuation coverage under a vision-only or dental-only plan.
- Recapture of Premium Assistance. A plan can not refuse to provide the premium reduction to an individual because of the individual’s income.
- Extended Election Period. A plan can not require payment of the first premium earlier than 45 days after the date on which the COBRA election is made under the extended election period.
- Payments to Insurers Under Federal COBRA. If an employer and insurer agree that the insurer will collect the premiums directly from the qualified beneficiaries, the insurer may be liable if it fails to treat the 35% payment as a payment of the full premium.
- Comparable State Continuation Coverage. States coverage continuation programs with different periods of continuation coverage, different qualifying events, different qualified beneficiaries or different maximum premiums may nonetheless be “comparable” to Federal COBRA continuation coverage, to which the ARRA premium applies.