Employee Benefits Alert
Yesterday the Treasury Department released Notice 2009-27, which includes 58 new questions and answers interpreting the COBRA subsidy provisions that were included in the American Recovery and Reinvestment Act of 2009 (“ARRA”). The Notice provides welcome guidance with many helpful examples on issues such as the events that qualify as involuntary terminations of employment, when retiree health coverage will qualify for the subsidy, how to treat individuals who are not qualified beneficiaries under COBRA for purposes of the subsidy, and when eligibility in another health plan will end eligibility for the subsidy.
Much of the guidance in the Notice is consistent with the comments agency personnel have been providing via public speeches and other informal communications. However, there were four provisions we found to be somewhat surprising. First, an individual may become eligible for the subsidy more than once and may receive up to nine months of subsidy each time. Second, with regard to certain non-qualified beneficiaries, many had speculated that if a state continuation law required coverage of an individual who was not a qualified beneficiary under COBRA, such as a domestic partner, the person would nonetheless be eligible for the subsidy because the state continuation coverage was required for that person. However, the Notice provides that the non-qualified beneficiary (i.e., the domestic partner in that example) is not eligible for the subsidy -- only individuals who are qualified beneficiaries under the federal COBRA standards are eligible for the subsidy, even if they are “qualified beneficiaries” under the state law.
Third, the Notice confirms that the subsidy may be available with respect to COBRA coverage provided under a health reimbursement arrangement (“HRA”), despite the fact that the HRA may qualify as a Code Section 106(c) flexible spending arrangement (“FSA”), which is generally ineligible for the premium assistance. The guidance clarifies that the relevant exclusion from the subsidy under ARRA only applies to FSAs that are provided through a Code Section 125 cafeteria plan, which would not include an HRA.
Finally, insurers will likely be surprised by the guidance regarding employer payments of insurance premiums under federal COBRA. The Notice provides that in the case of an insured plan that is subject to COBRA, if the insurer and employer have agreed that the insurer will collect the premiums directly from qualified beneficiaries, the insurer must treat the 35 percent payment by an assistance eligible individual as payment of the full premiums, even before the employer pays the insurer the remaining 65 percent. Most insurance contracts provide that the full premiums must be timely paid (including any amounts normally paid by the employer) or the coverage will be cancelled. The Notice is silent on the issue of whether the insurer may cancel coverage if eligible individuals would normally pay their premiums to the employer and the employer would forward both the individual and employer premiums to the insurer.
Insurance companies in particular had also hoped the guidance would address two other issues. First, the guidance does not discuss what constitutes an acceptable attestation of involuntary termination. Many insurers that are responsible for the subsidy under state continuation laws are questioning whether they can rely on an attestation from the individual or whether the insurer must also confirm with the employer that the termination was involuntary. In addition, the guidance does not provide much information on what factors will cause a state law to be “comparable” to federal COBRA, and therefore eligible for the subsidy, although it does list some common distinctions that generally will not alone cause a state continuation program to fail to be comparable to federal COBRA. The Centers for Medicare and Medicaid Services (“CMS”) has posted some information about state mini-COBRA laws; many expected that the Treasury guidance would have conformed to the information published by CMS, but it generally does not.
The Notice acknowledges that there are many open issues that still need to be addressed. Among others, employers and insurers are hoping IRS will publish guidance stating that, if upon audit, the IRS asserts an interpretation different from that adopted by the employer or insurer, the employer or insurer will be held harmless as long as they acted in good faith. We will continue to provide updates as new information becomes available.
For more information, please contact any of the following lawyers:
Michael Lloyd, firstname.lastname@example.org, 202-626-1589
Garrett Fenton, email@example.com, 202-626-5562