On March 2, 2010, the Temporary Extension Act of 2010 (“Extension Act”) was signed into law extending and expanding (once again) the federal COBRA premium subsidy program. (The program was originally enacted on February 17, 2009, and has now been modified twice – on December 21, 2009 and again last week.) In general, the program subsidizes 65% of COBRA premiums for up to 15 months for individuals eligible for COBRA due to an involuntary termination of employment. The following is a summary of changes made by the Extension Act and recommended action.
1. Extension of Involuntary Termination Eligibility Period to March 31, 2010. To qualify for the subsidy, an individual’s involuntary termination of employment must occur during a specific period, which was set to expire on February 28, 2010. The Extension Act extends this date for an additional month – through March 31, 2010. Thus, individuals who become eligible for COBRA due to an involuntary termination of employment occurring during March 2010 will now qualify for the subsidy. (Note there is pending legislation in the Senate that would further extend the eligibility period through December 31, 2010.)
Recommended Action: Plans should update their current COBRA election notices and forms to reflect the 1-month extension in the COBRA subsidy eligibility period from February 28, 2010 to March 31, 2010, and should begin using the updated notices and forms right away. In particular, any individual who incurs a termination of employment qualifying event in March 2010 should receive the updated notices and forms, as this will eliminate the need to provide them a supplemental notice.
2. Special Rules for Reduction in Hours Followed by Involuntary Termination of Employment. The Extension Act also contains special rules for individuals who previously became eligible for COBRA due to a reduction in hours and who subsequently incur an involuntary termination of employment. Unfortunately, there are many grey areas in these provisions of the Extension Act, and interpretive guidance from the responsible agencies (the DOL and IRS) is necessary and will hopefully be issued very soon. The following is a summary:
A. Eligibility for the COBRA Premium Subsidy. To date, the COBRA premium subsidy has only been available where COBRA eligibility results from an involuntary termination of employment – not a reduction in hours. The Extension Act changes this on a limited basis. Specifically, it makes the COBRA premium subsidy available to individuals who meet the following requirements: (1) they became eligible for COBRA due to reduction in hours occurring during the period from September 1, 2008 through March 31, 2010, and (2) they subsequently incur an involuntary termination of employment during the period from March 2, 2010 through March 31, 20101 The maximum period of COBRA coverage (generally 18 months) will still run from the date coverage was initially lost due to the reduction in hours. For individuals meeting the above requirements, it appears the COBRA subsidy will be effective beginning with April 2010 coverage, but the Extension Act is not clear on this issue and guidance is needed. The subsidy can last for up to 15 months (the same as for other assistance eligible individuals). As noted below, this rule creates a new notice requirement, and eligible individuals will need to submit an application to receive the subsidy.
Example: Jim became eligible for COBRA on August 1, 2009 due to a reduction in hours. He did not qualify for the COBRA premium subsidy at that time because his qualifying event was not an involuntary termination of employment. Jim elected and remains on COBRA. On March 15, 2010, Jim is laid off. Jim will now be eligible for the COBRA premium subsidy (presumably beginning with April 2010 coverage) under the new rules. If Jim’s involuntary termination of employment had occurred on February 15, 2010, he would not be eligible for the subsidy.
B. New COBRA Election Period. For any individual meeting the requirements of 2.A., above, who isn’t on COBRA when the subsequent involuntary termination of employment occurs (either because COBRA wasn’t elected or because COBRA coverage lapsed due to non-payment), the Extension Act provides a new COBRA election opportunity.2 It appears that COBRA coverage, if elected, would start as of the involuntary termination date (not retroactively to the date coverage stopped). However, the Extension Act is not entirely clear on this point, and clarifying guidance is needed. If COBRA is elected, the maximum COBRA continuation period is measured from the initial loss of coverage date, not the subsequent involuntary termination of employment. Any gap in COBRA coverage must be disregarded in applying pre-existing condition exclusion rules.
C. New Notice Requirement. A new notice must be provided to any individuals who become eligible for the rights described in 2.A. and B., above. This notice must be provided within 60 days of the involuntary termination of employment, and individuals not on COBRA at the time will have a 60-day election period following the date of notice.
Recommended Action: Given the number of open issues related to the new rules applicable to a reduction in hours followed by an involuntary termination of employment, it is prudent to wait for interpretive guidance before drafting and providing notices. However, plans should begin compiling a list of employees who may qualify for these rights.
3. Good Faith Compliance Standard. Lastly, the Extension Act confirms prior IRS guidance establishing a good faith compliance standard. Under this standard, a plan’s determination that a particular individual qualifies for the subsidy will not be challenged by the IRS as long as the determination is based on a reasonable interpretation of the statute and administrative guidance thereunder, and supporting documentation is maintained.
Not Intended As Legal Advice.
- The requirement that the subsequent involuntary termination of employment occur during the period from March 2, 2010 through March 31, 2010 is based on preliminary guidance posted on the DOL’s website. The text of the Extension Act is not clear on this point, and can be read to include involuntary terminations occurring after March 31, 2010.
- Presumably, the rule applies separately to COBRA for medical and dental coverage where separate elections are offered.