COBRA Strikes Again: ARRA Issues At Open Enrollment and Year-End
By Andy R. Anderson, Morgan, Lewis & Bockius LLP, Chicago, IL
The COBRA ARRA provisions have created plenty of headaches this year for employers and COBRA administrators--but, just when the provisions began to achieve a degree of familiarity, a new set of issues looms that will refocus attention on the provisions. These issues are related to the operation of the COBRA ARRA provisions in the context of open enrollment elections for 2010 and also the currently scheduled December 31, 2009 sunset of the provisions.
The American Recovery and Reinvestment Act of 2009 (“ARRA”) contains a series of new provisions temporarily modifying the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) group healthcare plan continuation rules. These provisions represent the most wide-ranging changes to COBRA since its inception and have required significant administrative efforts for employers and COBRA administrators.
These efforts include:
- “Second chance” COBRA elections;
- New election options;
- Revised COBRA notices;
- Modified COBRA invoices;
- Interactions with payroll tax deposit mechanisms to fund the 65% assistance payment; and
- Adverse individual income tax consequences for assistance recipients who earn too much income in 2009 or 2010.
The objective of these provisions is to provide a government assistance payment for nine months to cover 65% of the cost of COBRA coverage for assistance-eligible individuals whose employment is involuntarily terminated on and after September 1, 2008 and before January 1, 2010. This subsidy is generally tax-free to the assistance-eligible individual. See Title III of ARRA.
The provisions are far more detailed than can be addressed here--and apply to more than merely group healthcare plans.
Open Enrollment Issues
Employers and COBRA administrators who are preparing for the 2010 open enrollment season have to make a number of decisions regarding the operation of the COBRA ARRA provisions for individuals who are on COBRA, receiving the ARRA 65% assistance payment, and will continue to receive the assistance payment into 2010. Some of these decisions may require further modifications to COBRA administrative systems.
These decisions center on whether the 65% assistance payment will be applicable to new benefits elected by assistance payment recipients or to new dependents added to the health benefits.
Individuals who are continuing health benefits under the terms of COBRA have the same open enrollment rights as are available to similarly situated active employees who have not experienced a COBRA qualifying event. These rights include moving from one plan option to another (such as switching from HMO to PPO coverage) or adding benefits they are not currently receiving under COBRA (such as starting dental or vision coverage). Employers and COBRA administrators already have well-developed plan administration rules regarding open enrollment rights for COBRA coverage and now must determine whether any replacement or expanded coverage is eligible for the 65% assistance payment.
Fortunately, the guidance received from the Internal Revenue Service (“IRS”) in Notice 2009-27 (available at http://www.irs.gov/irb/2009-16_irb/ar09.html), along with recent informal comments from Treasury representatives at the 2009 Joint Fall CLE Meeting of the Taxation section of the ABA, reach a fairly clear conclusion about the application of the 65% assistance payment to replacement or expanded coverage--namely, that such coverage is eligible for the 65% assistance payment. This is true even if the coverage is more expensive in 2010 than the coverage it replaced from 2009.
Specifically, Q&A 26 from Notice 2009-27 states that the 65% assistance payment applies to the increased premium if the plan allows the individual to change to a different benefit package with a higher applicable premium. According to informal Treasury comments made at the ABA Fall CLE Meeting, this includes not only changing from a HMO to a PPO at open enrollment but also adding dental or vision coverage during open enrollment to existing COBRA health plan coverage. So, in short, the COBRA 65% assistance payment will apply to COBRA coverage elected not just in 2009 but changes to that COBRA coverage elected during open enrollment for 2010.
In addition to questions regarding changes in coverage, employers and COBRA administrators also have to address the 65% assistance payment issues created by adding new dependents during open enrollment. Just like changing coverage at open enrollment, individuals who are continuing health benefits under the terms of COBRA have the same open enrollment rights to add new dependents as are available to similarly situated active employees who have not experienced a COBRA qualifying event.
As with the coverage change issue, Notice 2009-27 addresses the issue of individuals who are added to COBRA coverage at the time of open enrollment. According to Q&A 23 of Notice 2009-27, such individuals, who are usually not qualified beneficiaries for the purposes of COBRA, are not entitled to have their portion of the COBRA premium subsidized by the 65% assistance payment.
However, it is important to determine which portion of the COBRA premium is attributable to a newly-added individual. In this regard, Q&A 25 of Notice 2009-27 creates an incremental cost concept that also first allocates the cost of the COBRA coverage to individuals who are eligible for the 65% assistance payment. The end result of this approach is that if covering the non-assistance eligible individual does not add to the total COBRA price tag, then the full COBRA premium is eligible for the 65% assistance payment. Such an outcome often occurs when a family is already covered under COBRA, paying a family COBRA premium, and adds another family member (for no additional cost) at open enrollment.
The COBRA ARRA 65% assistance payment only applies to individuals who both experience an involuntary termination of employment and whose eligibility for COBRA occurs on or before December 31, 2009. This approach, which is outlined in Q&A 13 of Notice 2009-27, creates a significant year-end problem for many employers and COBRA administrators.
This problem is rooted in the common administrative practice of continuing active employee medical coverage through the end of the month in which a termination of employment occurs and starting COBRA coverage the first day of the subsequent month. This practice, which is rooted in administrative ease, uniform COBRA start dates, and premium payment practices for active employees will mean that any such employee who suffers an involuntary termination of employment in December of 2009 will not be entitled to the ARRA 65% assistance payment--because COBRA coverage will not start until January 1 of 2010.
While such an individual clearly suffers an involuntary termination of employment during 2009, COBRA coverage starts one day too late and, under the terms of ARRA, will result in not being eligible for the 65% assistance payment.
Absent additional guidance from the IRS (or an extension of the ARRA rules by Congress), employers should consider changing their plan rules, employee communication material, and administrative practices to start COBRA coverage on the last day of the month of an involuntary termination of employment instead of the first day of the following month.
Will ARRA Be Extended?
As of this writing Congress has not yet acted to extend the COBRA ARRA 65% assistance payment provisions--although rumblings about a possible extension have begun. However, even if the provisions are extended (and the December 2009 year-end issue is postponed), there will eventually come a day when the ARRA 65% assistance payment rules end. When that day comes--or if it comes at the end of 2009--employers will have to deal with the interaction between their typical COBRA start date administrative practices and the COBRA ARRA rules to be certain that their practices do not inadvertently exclude former employees from eligibility for the 65% assistance payment.
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