Number Two And Counting - Congress Extends And Expands The Cobra Subsidy Program

Article by Employee Benefits Group

Previously published in Kilpatrick Stockton LLP's Employee Benefits Legal News Alert, March 5, 2010.

At the beginning of this year, employers, insurers and COBRA administrators revised their procedures and notices to incorporate the extension of the COBRA subsidy added by the Department of Defense Appropriations Act, 2010. Once again, Congress has extended and expanded the COBRA subsidy program with the passage of the Temporary Extension Act of 2010 (the "Act"). The Act passed the House of Representatives on February 25, 2010, and the Senate on March 2, 2010. President Obama signed the Act hours later on the evening of March 2, 2010. Key highlights of the Act include the following.

• The Act extends the February 28, 2010, deadline for eligibility for the COBRA subsidy until March 31, 2010. (Additional legislation to extend this deadline even farther is pending.)
• The Act also extends the COBRA subsidy program to individuals who lost their health coverage as a result of a reduction of their hours of employment and who are later involuntarily terminated on or after March 2, 2010.
• A new second election right is provided under the Act to those individuals who did not elect COBRA coverage following a reduction of hours but who are now eligible for the COBRA subsidy.

Employers, insurers and COBRA administrators will need to update their COBRA subsidy notices and their COBRA administrative procedures to capture individuals now eligible for the subsidy and to reflect the new second election rights. Once again, due to the technical wording of the statute, the Act itself creates new open issues for employers and administrators. It will also likely frustrate and confuse employees who had a reduction of hours and then a termination of employment prior to March 2, 2010, because these employees fail to qualify for the subsidy due to the timing of their termination of employment.

One Month Extension of the COBRA Subsidy Eligibility Period

Under the Act, individuals who lose health plan coverage as a result of an involuntary termination of employment that occurs on or before March 31, 2010, may be eligible for the COBRA subsidy. Please refer to our February 24, 2009, Legal Alert (http://tinyurl.com/yky7obb)for details on the other requirements that continue to apply for an individual to be eligible for the subsidy, as well as our December 23, 2009, Legal Alert (http://tinyurl.com/yjgmgmb)regarding the first extension of the subsidy program. In addition, the Department of Labor has issued FAQs regarding the COBRA subsidy under ARRA, available at: http://www.dol.gov/ebsa/faqs/faq-cobra-premiumreductionEE.html.

Reduction of Hours of Employment Followed by an Involuntary Termination

New Category.
Under prior law, the COBRA subsidy was available only to individuals who lost health coverage as a result of an involuntary termination of employment. The Act now adds a new (but limited) category of assistance eligible individuals. Under this new category, an individual (and his or her covered family members) may be eligible for the subsidy if the individual.

• loses health coverage due to a reduction of hours of employment during the COBRA subsidy eligibility period (currently, September 1, 2008 to March 31, 2010); and
• after the reduction of hours, is involuntarily terminated from that employment on or after March 2, 2010, and on or before the last date of the COBRA subsidy eligibility period (currently, March 31, 2010).

For example, assume that a plan provides that only employees who work 30 hours per week are eligible for health coverage. If the employer reduces an employee's hours below 30 hours per week, then such individual would no longer be eligible for health coverage. However, because such individual has had a COBRA qualifying event, he/she would be eligible to elect continuation coverage under COBRA. Prior to the Act, that individual would not have been eligible for the COBRA subsidy, even if he/she had been involuntarily terminated at a later time. Now, under the Act, this individual would be eligible for the COBRA subsidy, assuming the reduction of hours and the involuntary termination of employment take place within the appropriate time periods. It is also worth noting that this provision is not likely to impact plans that have no hours requirement (e.g., if all employees are eligible for coverage regardless of the number of hours worked) because the reduction of hours of employment would not trigger a loss of coverage under the plan.

There is some ambiguity in the Act as to whether it is sufficient that the reduction of hours occur within the COBRA subsidy eligibility period, even if the involuntary termination occurs after the end of the COBRA subsidy eligibility period (i.e., after March 31, 2010). The language of the Act suggests this interpretation, but a preliminary description of the Act on the Department of Labor website requires that the involuntary termination must also occur within the subsidy eligibility period (i.e., currently by March 31, 2010).

Current COBRA Participants.

If an eligible individual experienced a qualifying event as a result of a reduction of hours of employment during the subsidy eligibility period, actually elected COBRA, and then, on or after March 2, 2010, is involuntarily terminated, then such individual is now eligible for the COBRA subsidy. This means that the individual's current COBRA premiums, beginning with the first period of coverage on or after the date of the involuntary termination, must be reduced to the 35 percent COBRA subsidy rate. Individuals will need to be notified of their new COBRA premium rates. Currently, it is unclear whether the 15-month COBRA subsidy period begins with the first period of coverage on or after the involuntary termination or if it is measured from the date that the COBRA continuation coverage period began (i.e., upon the reduction of hours). However, we understand the Department of Labor will clarify this aspect soon. Note, as well, that nothing extends the maximum period of COBRA coverage in this situation.

New Election Rights for Individuals Who Did Not Elect COBRA (or Who Dropped COBRA).
If an eligible individual did not elect COBRA coverage following a reduction of hours (or did elect COBRA coverage but later dropped that coverage), and if that individual is then involuntarily terminated from employment on or after March 2, 2010, the Act provides that the involuntary termination of employment is treated as a second qualifying event. The Act provides the following special rules with respect to this second qualifying event –

• The maximum COBRA coverage period is determined as though the qualifying event was the reduction of hours. This means that upon the later involuntary termination of employment, the individual can elect COBRA coverage only for the remainder of the original COBRA coverage period which began upon the reduction of hours of employment.
• If the individual elects COBRA coverage as a result of the second qualifying event, the individual is not required to pay for COBRA coverage for periods prior to the second qualifying event.
• If the individual elects COBRA coverage as a result of the second qualifying event, the period between the reduction of hours and the involuntary termination is not treated as a break in coverage under the HIPAA portability rules. These rules are similar to the rules applicable to the special election rights provided when the COBRA subsidy was first introduced in 2009.

The above provisions apply to the first period of coverage that begins on or after March 2, 2010. If these special election rules apply, the affected individuals will not have coverage on the date of the involuntary termination because coverage would have terminated when the reduction of hours occurred. As a result, the period of coverage would typically begin on the same date that the involuntary termination occurs (and not the first of the following month). This group of individuals presents unique challenges, as follows –

• Because these individuals are not normally eligible for COBRA continuation coverage, employers and administrators will need to develop procedures on how to identify these individuals. The procedures used when the COBRA subsidy was first introduced to determine individuals eligible for second election rights may be helpful in this regard.
• Because these individuals did not have health coverage immediately prior to the second qualifying event, a modified COBRA election notice will be needed and will need to reflect the remaining period of the COBRA continuation coverage for which the individual is eligible.
• When the COBRA subsidy was first enacted over a year ago, individuals who incurred an involuntary termination prior to the enactment date were given a second election opportunity to the extent that a COBRA election was not made previously. If someone did not make a "full election" (e.g., they elected medical, but not dental or vision), the second election opportunity applied to the dental and vision benefits. The same result appears to apply here to those participants who did not make a full COBRA election as a result of the reduction of hours.

Clarifications of December Amendment

The Act clarifies two issues raised by the extension amendment that was passed last December (i.e., the amendment that increased the subsidy period to 15 months and extended the period to February 28, 2010). First, under the December amendment, eligible individuals whose 9-month subsidy period expired in November 2009 and who failed to pay their COBRA premiums for the "transition period," were entitled to have their COBRA coverage reinstated retroactively if they paid the missed premiums by the later of 60 days after enactment, or 30 days after receiving the notice that was required to be provided to them. The Act clarifies that these premiums can also be paid by the date established by the plan for timely premium payments, if that date is later. Second, the Act clarifies that the transition period applies to periods of coverage that also occurred in November 2009, if the 9-month subsidy period expired in November. This is how most plans and administrators operated the transition period and thus these provisions are welcome clarifications. (Please see our December 23, 2009, Legal Alert (http://tinyurl.com/yjgmgmb) for more information on the December extension amendment.)

Other COBRA Subsidy Changes

The Act also makes other changes relating to the operation of the COBRA subsidy program as follows.

• The Act provides that the 15-month COBRA subsidy period ends 15 months after the "first day" from which the COBRA subsidy applied. Previously, the 15-month period ended 15 months after the "first day of the first month" from which the COBRA subsidy applied. This change should provide more clarity in those cases where the COBRA subsidy begins other than on the first day of a month.
• The Act increases enforcement of the COBRA subsidy program by allowing appeals determined by the Department of Labor to be enforced by bringing a civil action under ERISA. The Department of Labor is also empowered to assess a civil penalty of $110 per day for a failure to comply with an appeal determination.
• The Act provides that an employer's decision as to whether an individual was involuntarily terminated will be respected, if the determination is reasonable, is based on applicable law and administrative guidance, and is documented in writing, including an attestation by the employer. However, this change was added to Code Section 6432, which provides the rules on reimbursements to employers and insurers of the 65 percent Federal subsidy. Although this change should reduce the situations where the Internal Revenue Service could impose penalty taxes, it is not likely to affect appeal determinations submitted by individuals to the Department of Labor.

Required Notices

Employers and administrators will need to update their general COBRA subsidy notices to reflect the 30-day extension, plus the new rules that apply to those who lost coverage as the result of a reduction of hours prior to an involuntary termination of employment. The updated COBRA subsidy notice will need to be provided to individuals and their covered family members who experience a qualifying event (or second qualifying event) in March.

For those individuals who incur a second qualifying event on or after March 2, 2010, the Act provides that the COBRA subsidy notice must be sent within 60 days after the involuntary termination of employment. The Act does not directly answer the question of whether a COBRA election notice can also be provided during this 60-day period or whether the normal notice period applies (i.e., generally 44 days after the date of the qualifying event). However, concluding that the 60-day period applies to both notices is the better view and makes the most practical sense. Further Department of Labor guidance on this issue would be helpful.

The information contained in this article is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact the author(s) of this article or your existing firm contact. The invitation to contact the author is not to be construed as a solicitation for legal work in any jurisdiction in which the author is not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship must be confirmed in writing. You may also contact us through our Web site at www.kilpatrickstockton.com