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UPDATE: Stimulus –
Help for the Terminated But More Work for Employers
Please note that we are updating and republishing this article in light of further guidance issued by the IRS February 26, 2009. Please disregard the Dunn Carney eNews from Feb. 20, 2009.
The American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill” or “ARRA”) signed by the President February 17, 2009, provides relief to qualified beneficiaries of certain involuntarily terminated employees who terminate between September 1, 2008 and December 31, 2009, (“eligible qualified beneficiaries”). These provisions were designed to make continuation of health care more affordable to those adversely impacted by the current economic downturn.
Most of the new provisions are mandatory for employers, especially if an eligible qualified beneficiary elects to take advantage of the benefits offered. Action on the part of employers that sponsor health care plans is required.
The federal tax and benefit laws have long required certain group health plans to offer the opportunity to continue, for a period of time, participation in group health plans (i.e. continuation or COBRA coverage) after termination of employment. The law imposes an excise tax generally on the employer for failure to comply with these rules and the employer may face claims from affected qualified beneficiaries for damages including attorneys’ fees. While small group health plans (covering fewer than 20 employees) are not covered by COBRA, states, such as Oregon, have similar laws applicable to these smaller plans.
ARRA provides a partial subsidy for up to nine months to the “eligible qualified beneficiaries” who elect COBRA coverage. The subsidy is equal to up to 65% of the cost of the continuation coverage that is elected and would otherwise to be paid by the eligible qualified beneficiary. The subsidy not only applies to plans subject to COBRA but it also applies to comparable state-COBRA plans, e.g., small plans. However, it does not apply to coverage under flexible spending accounts (FSAs).
New Elections Available & New Notice Required – Find the Terminees.
The subsidy applies to those eligible qualified beneficiaries who elected COBRA coverage or its state equivalent and are still so covered on February 17, 2009. In addition, an “eligible qualified beneficiary” who either initially declined COBRA before February 17, 2009, or elected COBRA coverage before such date but is not enrolled on such date, is entitled to a new election, i.e., a right to elect coverage. This right may be exercised during a new election period that begins on the later of the date of termination or February 17, 2009 and ends 60 days after receipt of a notice of this special election right. The new election right and subsidy do not apply or provide coverage prior to February 17, 2009 and do not extend the period of continuation coverage as provided in COBRA. The subsidy ceases at the earliest of (1) the end of the nine month period, (2) the end of the COBRA coverage period, or (3) the date the eligible qualified beneficiary becomes eligible for any new employer-sponsored coverage other than merely dental, vision, etc. coverage.
Example: Employee Ron is involuntarily terminated October 10, 2008 and does not elect COBRA. Ron is given the new election notice March 1, 2009 and elects to take COBRA coverage on April 15, 2009. The subsidy period will run from March 1, 2009 through November 2009 with Ron paying only 35% of the COBRA cost. COBRA will continue until March 10, 2010. From December 2009 to March 10, 2010, Ron would have to pay 100% of the COBRA cost.
If the employer permits, an eligible qualified beneficiary may also be given an opportunity to elect coverage different than that which was in place prior to termination of employment provided (1) the premium for the coverage is not greater than the premium for the prior coverage, (2) the coverage is available to active employees, and (3) it is not a dental, vision etc only coverage or an FSA. In short, you can’t use the subsidy and election right to pay for an increase in your coverage. This election is available, if at all, for 90 days after a notice of this right is provided. Once a change is elected, the new coverage becomes the COBRA coverage to be maintained for the remainder of the COBRA coverage period even though the subsidy only lasts for up to nine months.
Contrary to several early explanations of these provisions, the notice of these new election rights that are available to an eligible qualified beneficiary must be given to all qualified beneficiaries of those who have terminated or will terminate employment between the above dates, not just to the qualified beneficiaries of those the employer deems to have been involuntarily terminated.
Notice Content.
The new notice that must be given must contain a description of one’s right to the premium reduction or subsidy and any conditions that must be met, provide the forms to make the election of such coverage or any permitted modified coverage and describe the obligation of the beneficiary to notify the plan of any eligibility for employer sponsored health care and the penalty for failure to do so. The new law specifies that the Department of Labor shall publish a model notice that complies with the content requirements within 30 days of the enactment of this legislation.
Mechanics of the Subsidy and Recapture of Benefits.
Unless the income limitations mentioned above apply, the subsidy does not directly involve the qualified beneficiary except that it results in the COBRA costs owing by such beneficiary during the nine month period being 35% of what it would otherwise be. The premiums due and payable to the insurer remain the same with the employer picking up the balance. In most insured plans not covered by COBRA, e.g. a small plan covered by a state equivalent of COBRA, the subsidy and the reduced premium goes to the insurer. The employer or insurer recoups this 65% through the payroll tax system. It is deemed to have paid the amount of the subsidy in payroll taxes, i.e., it is given an offset for the amount of the subsidy against these taxes that would otherwise be due. “Payroll taxes” include the income tax withholding and both the employer’s and employee’s portion of FICA and Medicare taxes. Special rules apply to those with self employment income, e.g., partners or LLC members. The IRS posted a list of questions and answers regarding these changes and a revised payroll reporting Form 941 here.
Reports will need to be filed to track on the amounts paid and offsets claimed. Such reports will require insurers and/or employers to certify information such as the involuntary termination nature of the covered employees, the amount of the payroll tax offsets claimed and COBRA costs paid.
Part and parcel of the subsidy is a recapture method that effectively may preclude higher income eligible qualified beneficiaries from retaining the economic benefits of the subsidy. The recapture method will require the eligible qualified beneficiary, at the end of the year, to recapture as income any subsidy to which he/she was not entitled.
In order to avoid recapture the subsidy as income, the eligible qualified beneficiary must have modified adjusted gross income of less than $125,000 or $250,000 (single or joint returns respectively) for the period in question. The recapture is phased-in for incomes above those amounts; being completely recaptured at modified adjusted gross incomes of $145,000 and $290,000 respectively. Thus, if the eligible qualified beneficiary received a subsidy but had income for the tax year over the maximum amounts described above, he/she would have to recapture the entire amount of the subsidy. However, in the next year, assuming the nine months of subsidy spans two tax years, recapture may not be required if the income limits are not met that year, e.g. the person is not yet employed.
An otherwise eligible qualified beneficiary who expects to be subject to recapture perhaps due to (1) income already received during the year that subsidies would otherwise be paid, (2) projected income from other sources or (3) spousal income, may permanently waive the subsidy and avoid any recapture under rules yet to be announced.
Questions.
While the ink is still drying on ARRA, there are a number of unanswered questions relating to this subsidy. One that has already come up involves the impact of this legislation on existing agreements with employees who were laid off since August 2008 that obligate the employer to pay for the COBRA coverage. Since the employee is not incurring any cost of the continuation coverage, our current consensus is that no subsidy would be available to the ex-employee or the employer. In that case, the employer would be required to continue to pick up 100% of the cost of such ex-employee’s coverage for the duration of the contractual period without any governmental assistance. We will be looking for further guidance from the government on this and other issues.
Action Needed by Employers.
Because these new ARRA provisions are effective immediately, quick action by employers, large and small, is required to insure the required notices are provided to terminated employees covered by these rules and the qualified beneficiaries. In addition the employers have the option of whether an election of alternative coverage is going to be made available.
If you have any questions or would like our assistance in complying with this new law, please contact Bob Winger head of our Tax/Employee Benefits Team and author of this Article.
The foregoing is intended as general information, not an opinion or legal advice and does not create an attorney client relationship between the firm and any reader.
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In addition IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.
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