COBRA Subsidy Guidance from the IRS
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), a part of which provides a COBRA subsidy to assistance-eligible individuals (also see COBRA Subsidy - Information Support, from the Benefit Beat, March 2009). Assistance-eligible individuals are individuals who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009, and whose group health plan coverage is lost during that period.
The IRS has just issued guidance (Notice 2009-27) addressing issues relating to the COBRA subsidy. This guidance is very important reading for anyone responsible for administering the COBRA subsidy. Following are some hi-lites of this guidance:
Of particular note, the Notice includes nine questions and answers (Q&A-1 through Q&A-9) relating to the definition of involuntary termination. Involuntary termination means, “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.”
Examples of involuntary termination include, but are not limited to:
- A lay-off period with right of recall;
- When an employer takes action to end an individual’s employment while he/she is absent from work due to illness or disability;
- An employee’s resignation as a result of a change in geographic location of employment;
- Termination elected by an employee in return for a severance package (buy-out); and
- Retirement, if the individual would have been terminated but for the retirement.
Examples of qualifying events that would not be considered involuntary termination include:
- A reduction in hours, unless the reduction in hours causes the person to quit in order to get full time work; and
- Death, divorce, or loss of dependent status.
The notice clarifies that both the involuntary termination of employment and a loss of coverage must have occurred between September 1, 2008 and December 31, 2009.
Calculation of Premium Reduction
Q&A-20 through Q&A-26 of the Notice gives several examples of how to calculate the amount of the subsidy. The subsidy is only available on the portion of the COBRA premium that the qualified beneficiary is required to pay for him/herself, and spouses and children who are covered at the time of the qualified event. The subsidy is not available for individuals receiving COBRA-like benefits, such as non-family members, even if the COBRA-like benefit is mandated by State law.
Plans Subject to the COBRA Subsidy
Q&A-27 verifies that the subsidy is available for stand-alone dental and vision plans and “mini-med plans”, regardless of whether the employer pays a portion of the costs for active employees.
Q&A-30 verifies that the subsidy is available for health reimbursement arrangements (HRAs).
Premium Reductions for Highly-Compensated Individuals
For high income individuals, a permanent waiver can be satisfied by a document signed and dated, stating that the individual permanently waives the right to the subsidy. The individual then provides the waiver to the health plan. There is no requirement to file this document anywhere. What is important is that the individual waiving the right to the subsidy understands that the waiver is permanent, even if his/her income circumstances change. (Q&A-45 and 46)
State Continuation Coverage
The Notice addresses several issues relating to State continuation coverage, particularly in Q&A-56 through Q&A-58.
- This guidance clarifies that State continuation coverage does not have to have the same duration as federal COBRA to be subject to the subsidy.
- At this point, the insurer is the only entity eligible to claim the credit for the subsidy; and therefore, an employer subject State continuation coverage should work very closely with their insurer.
- An insurer would be subject to an excise tax if it does not accept 35% of the COBRA premium for the COBRA-subsidy eligible individual.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.