February 2009

Corporate Benefits Personnel Need To Learn New Acronyms

ARRA and CHIPRA

As part of the initial wave of reform and economic recovery legislation expected from the Obama Administration, the President has executed two pieces of legislation affecting the administration of employer healthcare plans. The changes outlined below have a significant impact on the COBRA benefits available to terminated employees and new notice obligations for employers. It is highly recommended that careful attention be given to these changes to COBRA benefits as they apply retroactively to terminations since September 1, 2008.

AMERICAN RECOVERY and REINVESTMENT ACT (ARRA).

Signed by the President on February 17, 2009, “ARRA” is the Administration’s much anticipated economic stimulus bill. Among sweeping changes in the tax code, “safety net” expansions and spending initiatives, the bill also contains major temporary changes to how virtually all employers must administer COBRA. Employers, especially those dealing with reductions in force, MUST pay special attention to these new rules.

The Subsidy. The centerpiece of ARRA’s changes to COBRA is that employees who are involuntarily terminated will not be required to pay the full COBRA premium. “Assistance Eligible Individuals” may receive full COBRA coverage under their health plan by paying only 35% of the COBRA premium after the date of enactment. The employer pays the remaining 65%. Fortunately, this employer “subsidy” is reimbursed through a payroll tax credit.

• An “Assistance Eligible Individual” is (i) any qualified beneficiary under your health plan (ii) who lost coverage because of an involuntary termination of employment (iii) during the period September 1, 2008 through December 31, 2009 and (iv) elects COBRA coverage.

• The “Assistance Eligible Individual” must actually pay the 35% to get reimbursement under ARRA.

• For “Assistance Eligible Individuals” with COBRA elections already in place, they need only pay 35% of the required premium. If they have paid the full premium after February 17, 2009, they receive a refund or credit toward future premiums for the excess paid over the 35% rate.

Before deciding to “subsidize” COBRA coverage for your employees on layoff, be aware that by subsidizing coverage, you may reduce available tax credits to your organization.

Electing a Cheaper Plan. Normally, COBRA coverage is the same coverage a qualified beneficiary had when they lost coverage. But, as an accommodation to facilitate employees’ retaining coverage after they lose their jobs, employers (i) may allow (but are not required to allow), (ii) “Assistance Eligible Individuals” to elect a different coverage, (iii) available to active employees, (iv) having an equal or lesser premium.

Period of the Subsidy. The “subsidy” is temporary. It is limited to the earlier/shorter of: (i) 9 months, (ii) the first date the “Assistance Eligible Individual” is eligible for coverage under another group health plan, or (iii) normal expiration of COBRA.

Special Election Rights. Individuals terminated prior to February 17, 2009 (and on or after September 1, 2008), who could have received the subsidy, but who do not have a COBRA election in effect on February 17, 2009, must be given another chance to elect COBRA. Employers must notify them and offer another 60 day election period.

• This special election does not extend the maximum COBRA continuation period;

• COBRA coverage should not be retroactive to pre-election periods;

• If an individual makes the special election, any period of lapse prior to the start of the Special Election Period will not count toward the 63 day break in coverage period for preexisting conditions under HIPAA.

Special COBRA Notices. Several COBRA notice issues are implicated.

• All notices issued through December 31, 2009 (including the “reload” notices described above) must include: (i) forms necessary to establish eligibility for the subsidy, (ii) contact information for questions, (iii) description of any extended election period, (iv) the duty of an Assistance Eligible Individual to advise if other group coverage is obtained, (v) rights, if any, to “downselect” to a lesser plan and premium.

• Persons involuntarily terminated on or after September 1, 2008 and prior to February 17, 2009 and who do not have a COBRA election in effect must be given the new, revised “reload” notice.

• Model notices are to be issued by Department of Labor by March 17, 2009.

Tax and Credit Issues. The credit that employers receive is treated as payroll taxes paid, but no credit arises until the COBRA recipient pays his or her 35% of the premium. A special report is required of employers claiming the credit to include attestations as to accuracy and identification of COBRA recipients with respect to whom the credit is claimed.

Insured Coverage. Employers who have fully insured coverage have more administrative issues to address because it would appear (subject to apparent confusion between the statute and interpretive Committee reports) that the insurer is entitled to the tax credit. Yet:

• The employer sponsoring the plan is required to provide the special notices, election rights, etc. demanded by the Act;

• For insurers to properly claim credits, they must provide affirmations to the government regarding the right to the refund, which they really cannot directly provide;

• If “Assistance Eligible” former employees have paid more than 35% of the premium, they must receive a refund; however, this seemingly must come from the insurer. Since they likely have never interfaced with the insurer on COBRA premiums, however, one can see problems there as well.

Also, insured employers, whose “Assistance Eligible” former employees elect COBRA, must be careful not to overpay invoices to insurers for COBRA coverage, e.g. not pay more than 35% of the premium, otherwise, they must negotiate with the insurer to recover the overpayment.

Penalties. Beware of two possible penalties:

• COBRA beneficiaries who do not tell their employers they are eligible for other group health insurance coverage are liable for a penalty equal to 110% of the subsidy.

• Failure to provide a compliant COBRA notice or follow the extensive new “reload” and other notice rules will expose ERISA governed employers to a $110 per day penalty.

Expedited Review of Subsidy Denials. If a person claims to be an Assistance Eligible Individual and is denied that status by the plan sponsor, the person can appeal to the Secretary of the Labor/Treasury/HHS (as they parse this action) for a review which must be rendered within 15 days.

Phase Out of the Subsidy. Ordinarily, the subsidy will not be taxable to employees. The subsidy, however, phases out for employees with adjusted gross income of $125,000 ($250,000 for joint return). As income exceeds those levels and attains $145,000 ($290,000 for joint filers), the subsidy will be added back to the individual’s tax.

Who Is Covered. All plans subject to COBRA, all federal governmental plans and all governmental employers subject to the Public Health Services Act (which is nearly all governmental employers). Flexible spending accounts offered through a cafeteria plan, for instance, are exempt. Also, it would appear that small employers (under 20 persons) who are not subject to COBRA and plans maintained by religious organizations are not covered.

CHILDREN’S HEALTH INSURANCE
PROGRAM REAUTHORIZATION ACT of 2009 (CHIPRA)

The Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA), among other items, amends the Employee Retirement Income Security Act of 1974 (ERISA) to provide for special enrollment rights, new notice and disclosure requirements, and penalties for non-compliance.

Subsidies. The amendment to ERISA comes about because the Act provides the ability for states to provide a premium assistance subsidy for qualified group health plan coverage where a child is eligible for assistance under the State Children’s Health Insurance Program (SCHIP).

If cost effective, states may subsidize the cost of covering the child under the plan. When the state program subsidizes coverage, the state may also have to provide supplemental coverage (on a secondary basis) up to a baseline level. The Act also allows employers to opt out of being paid the premium assistance directly. In such cases, the state would pay the subsidy directly to the employee.

Special Enrollment Rights. As of April 1, 2009, group health plans must permit employees and dependents who are “eligible but not enrolled for coverage” under an employer’s group health plan to enroll, if: 1) the employee’s or dependent’s Medicaid or SCHIP coverage is terminated as a result of loss of eligibility; and 2) the employee or dependent becomes eligible for a subsidy under Medicaid or SCHIP. The employee or dependent must request coverage within 60 days after the employee or dependent is terminated from, or determined to be eligible for, such assistance. Plan documents will need to be amended to reflect these changes.

Notice. Group health plans will be required to distribute notices when an employee becomes eligible for enrollment. Model notices are to be drafted by the Department of Labor (DOL) and the Department of Health and Human Services (HHS) by February 4, 2010. Plans will be required to distribute notices during the first plan year beginning after the date on which model notices are first issued (or January 1, 2011 for calendar year plans).

Disclosures to States. Upon request, Plan administrators will be required to disclose information about their plans to states to determine the cost-effectiveness of providing the subsidy. HHS and the DOL are also developing a model disclosure form. States cannot request plan information until the first plan year after the date on which the model form is published. The model disclosure form will request information such as eligibility information, contact information for the Plan Administrator, benefits offered under the group health plan, information regarding premiums and cost-sharing.

Penalties. Employers will face penalties of up to $100 a day for failure to comply with the notice and disclosure requirements of the Act. The $100 penalty applies for each violation per participant or beneficiary.

If you have any questions about any of the items listed above please do not hesitate to contact any of the lawyers at the Lowenbaum Partnership, L.L.C.

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