What’s Going On In Washington? –Welfare Plan Developments & Future Possible

Developments

Peter J. Marathas, Jr.Compliance Director, BAN

Partner, Proskauer Rose LLP617-526-9704

pmarathas@proskauer.com

Benefit Advisors NetworkApril 15, 2009

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Today’s Agenda

Latest Developments: COBRA Provisions of the American Recovery and Reinvestment Act of 2009 (“ARRA”)

CHIP Notice and Plan Document Requirements

Other Developments—What’s On the Horizon?

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Latest Developments—COBRA Provisions of the ARRA

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The COBRA Subsidy

Summary:

— Government-provided subsidy of 65% of the COBRA premium

— Applies for a maximum nine-month period

— Reimbursement is through a payroll tax credit

— COBRA eligibility must be the result of an employee having been involuntarily terminated between September 1, 2008 and December 31, 2009

— Subsidy begins March 1, 2009

— Applies to group health, stand alone dental, vision, HRAs, EAPs but not Medical Reimbursement under Flex

— Applies to federal and state mini-COBRA

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Who is eligible for the subsidy?

— Employee must be involuntarily terminated from employment

Termination is between September 1, 2008 and December 31, 2009

Employee is/was eligible to elect COBRA between September 1, 2008 and December 31, 2009

Spouse and dependent children are also eligible

— Other qualifying events are not eligible for subsidy

Eligibility

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What is involuntarily terminated from employment?

— Notice 2009-27—IRS appears to be using a “behest test”

Is the employee’s termination at the behest of the employer?

— Termination with or without cause—clearly involuntary

— RIF or Other Lay-off—clearly involuntary

Eligibility

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What is voluntarily terminated from employment?

— V-RIF

— Employee terminates voluntarily after being informed of reduction of hours

Note: Contrast this with just a “reduction in hours” of service qualifying event

— Employment terminates at the end of “temporary period”

Employment terminates at end of employment agreement as a result of non-renewal by employer or employee

Eligibility

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— Employment terminates while employee out on long-term disability

Employee terminates while employee out on long-term disability

— Employee dies

— Employee retires

— Employee offered work at alternative location quits

— Same-sex spouse, domestic partner, civil union partner, age-extended dependent

Eligibility

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Adjusted Gross Income (“AGI”) Limitations on Eligibility—What You Need to Know (And Don’t Need to Know)

— Subsidy is phased out for individuals with AGI of between $125,000 and $145,000 (for single filers), and $250,000 to $290,000 (for joint filers)

Assume $10,000 subsidy and $270,000 AGI—joint filer

Phase out at 50% mark, so only 50% of subsidy available

— Completely phased out for individual filers with AGI of, or over, $145,000 or joint filers of, or over, $290,000

Eligibility

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— Is employer responsible

No—just responsible for Notice and to provide one-time waiver

High-income employees can make a one-time election to waive the subsidy

— Onus is on individual:

Ineligible individual who receives subsidy must repay through payment to IRS

This is a $ for $ repayment—not imputed income

Eligibility

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Scenarios

— Employee involuntarily terminated November 1, 2008, family coverage in place, former employee dies December 1, 2008

Are spouse and children entitled to subsidy?

— Employee involuntarily terminated August 1, 2008, employer maintains “active” coverage through October 1, 2008 & employee claims actual termination is October 31, 2008, so subsidy applies

Does it?

Eligibility

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— Employee informed August 1, 2008 that termination will occur at end of 6 week “garden leave” period on September 15, 2008

Does subsidy apply?

— Employee covers domestic partner & employee is involuntarily terminated October 1, 2008—is domestic partner eligible for subsidy?

— Employee participates in HRA—does subsidy apply?

Eligibility

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Church Plans and others who voluntarily offer COBRA—are not required to offer the subsidy

Former employees (spouses, dependents) who are denied subsidy by employer may appeal to DOL

— DOL will release Model Form to use

— Under the Act, DOL is required to respond to each request within 15 business days of submission

Eligibility

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Who is Eligible for Special Enrollment opportunity?

— Individuals who were eligible to elect federal COBRA between September 1, 2008 and February 16, 2009 due to an involuntary termination and

Did not elect COBRA or

Elected and is no longer enrolled on February 17, 2009 (for reasons other than other group health coverage)

— Does not apply to state mini-COBRA unless state orders it

Special Enrollment

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When Does the Subsidy End

Eligibility for the subsidy ends at the beginning of the month on or after the earlier of:

— Eligibility for another group health plan (other than health FSA, dental or vision only, employer on-site medical facility) or Medicare

— Nine months after the subsidy became available to the individual

— COBRA coverage no longer required

E.g., non-payment of premium

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When Does the Subsidy End

Employee must notify the plan in writing if eligible for other coverage

— Penalty: 110% of subsidy

Note Eligibility for other group health plan:

— Employee is terminated involuntarily. His wife is employed by another employer that offers family coverage under its group health plan?

Eligible for subsidy?

— 65 Year Old is terminated involuntarily.

Eligible for subsidy?

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Collection of 35% of COBRA premiums

— Plan cannot charge more than 35% of the portion of the qualified beneficiary’s COBRA premium

2% “administrative charge” is included

— The qualified beneficiary’s portion of the premium can be paid by a third party, but not the entity claiming reimbursement for the subsidy

Mechanics of Reimbursement

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Collection of the remaining 65% (the subsidy)

— Amount of subsidy is 65% of charge to qualified beneficiary

Employer-subsidized amounts are not included in the government subsidy

How to treat greater employer subsidy

— The Issue: Employer provides some payment of COBRA Premium as part of severance package for involuntarily terminated employees

Mechanics of Reimbursement

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Scenario 1:

— COBRA monthly premium is $800

Employer pays 0

Employee pays $280 (35% x $800)

Subsidy is $520 (65% x $800)

Scenario 2:

— COBRA monthly premium is $800

Employer pays $640 (80% x $800)

Employee pays $ 56 (35% x ($800-$640))

Subsidy is $104 (65% x ($800-$640))

Mechanics of Reimbursement

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Scenario 3:

— Employer offers single and family coverage.  Family coverage is $1,000 per month.  Same-sex-spouse employee elects family coverage and covers himself and his same-sex-spouse and his (the employee's) 2 dependent children: 

Employee is entitled to the full subsidy for this premium cost (i.e., he pays $350 and the subsidy is $650)

Note: there is no additional cost to covering the same-sex-spouse (because the employee would have had family coverage anyway for his 2 kids).

Mechanics of Reimbursement

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Scenario 4:  

— Employer offers single, single +1, single plus "kids," and family.  Premium costs for each level are $500, $800, $1,000 and $1,200, respectively: 

Employee with no kids elects “single +1” for him and his domestic partner. 

Employee is involuntarily terminated and elects single+1 COBRA coverage. 

He is subsidized with respect to $500 of the cost of individual coverage (i.e., he pays $175 ($500 x 35%) and the subsidy is $325 ($500 x 65%);

The employee then pays an additional $300 for additional cost of the single +1 coverage to cover the domestic partner.

Employee’s total cost per month: $475

Mechanics of Reimbursement

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Scenario 5:

— Employer puts involuntarily terminated employee on COBRA on termination

— For six months, employee pays 100% of COBRA premium

— No reimbursement for subsidized portion for employer

Mechanics of Reimbursement

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Subsidy is received through a credit against payroll taxes

— Excess of subsidy over payroll tax liability treated as a payroll tax overpayment and refunded

Credit cannot be taken before 35% COBRA premium is received

Mechanics of Reimbursement

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Which entity claims the payroll tax credit?

— Single employer plans: the employer

— Plans subject to state mini-COBRA: insurer

— Multiemployer plans: the plan

Applies for payroll tax credit even if no employees

Mechanics of Reimbursement

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Alternative Coverage Option

Normal COBRA rule: qualified beneficiaries have the option to continue the level and type of coverage received as of the qualifying event

New provision: plan may permit assistance to eligible individuals to change coverage to a lower-cost (or same-cost) option

— Eligibility for election

Election must be made within 90 days of notice

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Premium must be less than or equal to premium for coverage in place at qualifying event

Alternative option must also be offered to actives

Alternative coverage cannot be dental, vision or EAP only, health FSA or employer on-site medical facility

— Availability of this option extends beyond subsidy period

Alternative Coverage Option

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Notice Requirements

General requirement:

— Notice of subsidy and enrollment right (if applicable) must be provided to individuals who become (or became) entitled to elect COBRA coverage between September 1, 2008 and December 31, 2009

Note: Notice must be provided to all qualified beneficiaries, regardless of qualifying event

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Timing of notices

— Individuals who became eligible for COBRA between September 1, 2008 and February 16, 2009

Must be provided with notice within 60 days of February 17, 2009 (i.e., by April 18, 2009)

— Individuals who became eligible for COBRA between February 17, 2009 and December 31, 2009

Must be notified of the subsidy in the normal course of COBRA notifications

May be included in the existing COBRA election forms or in a separate accompanying document

Notice Requirements

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DOL released 4 model COBRA notices and FAQs www.dol.gov/ebsa/cobra.html:

— General Notice (Full Version):

Sent to Qualified beneficiaries (not just covered employees);

Who experienced a qualifying event at any time from September 1, 2008 through December 31, 2009 (regardless of the type of qualifying event); and

Who either:

— Have not yet been provided an election notice; or

— Who were provided an election notice on or after February 17, 2009 that did not include the additional information required by ARRA.

Notice Requirements

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• Provides information about subsidy (who is eligible, how it works, etc.) and election information

Includes:

— (i) a “Summary of the COBRA Premium Reduction Provisions under ARRA,”

— (ii) a “Request for Treatment as an Assistance Eligible Individual,” form

— (iii) a “Participant Notification” of eligibility for other group health coverage or Medicare (and, thus, ineligibility for the subsidy); and

— (iv) a “Form for Switching COBRA Continuation Coverage Benefit Options,” as permitted by the Act (if applicable)

Notice Requirements

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— Abbreviated Version of General Notice: Send to all qualified beneficiaries who experienced a qualifying event (i) on or after 9/1/2008 and (ii) who are currently on COBRA

Simply provides information about subsidy (not election information)

Notice Requirements

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— Extended Election Period Form: Send to all assistance eligible individuals (or individuals who would qualify as assistance eligible individuals if a COBRA election was in effect) who:

experienced an involuntary termination of employment on or after September 1, 2008 and on or before February 16, 2009 (i.e., prior to the Act’s enactment), and

were previously offered COBRA coverage but either did not elect such coverage or elected it and then subsequently discontinued it

This notice must be provided no later than April 18, 2009, and the second election period must last for a period of 60 days from the date the notice is provided

Notice Requirements

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— Alternative Notice:

For use by insurance companies to notify persons eligible for state law continuation health coverage about the subsidy

Notice Requirements

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Transition Rule

Full COBRA premium may be charged for up to two billing periods to which the subsidy applies

— Plans that take advantage of this rule must provide reimbursement of the overcharge or a credit for subsequent billing periods

— Credit cannot be used unless reasonable to believe that it will be used within 180 days from the date the full premium was received

— Where credit not permitted, refund must be within 60 days of the full payment

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Action Steps

Review and modify payroll and benefits administration systems (and communicate with third party vendors)

— Capture information necessary to identify eligible employees

Systems may need to generate codes to record types of termination

Particular challenge for multiemployer plans to identify involuntary terminations

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— Calculate and recover subsidy

Identify an aggregate amount of subsidies provided and capture timing of each individual’s premium payment

Systems must track 9-month period for each eligible individual

Credit claimed on Form 941

— Report to employees and the government

Your and vendors’ systems must be able to capture required government reporting information—have vendors confirm

Action Steps

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Send Appropriate Notice

Determine whether to credit/refund for March and April for those already on COBRA

Decide whether to permit qualified beneficiaries to elect an alternative same/lower-cost option

Where vendors perform various functions, confirm with them what they will do and whether extra fees with be charged

Action Steps

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Action Steps

Consider eliminating/adjusting employer subsidies for COBRA for involuntarily terminated employees to take advantage of full government subsidy

— Former employees can be made whole through a taxable severance payment

Another option is to continue terminated employees as active for the employer subsidy period

— Complications include discrimination testing, insurer approval, ensuring that full COBRA period follows and that COBRA begins before December 31, 2009

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CHIP Notice and Plan Document Requirements

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Background

— Previously S-CHIP, now renewed as CHIP

— Provides health and dental coverage to those ineligible for Medicaid because of income but unable to afford private coverage

— New rules impose plan design change and notice requirements

CHIP

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Design Change

— Employer plans must be amended, effective April 1, 2009, to permit special enrollment if an eligible employee or dependent loses eligibility under Medicaid or CHIP

Special enrollment not required if coverage is lost due to nonpayment of premium

— Must also permit special enrollment for those who become eligible for government assistance under CHIP or Medicaid

CHIP

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Design Change

— Possible amendments:

Welfare Plan might need to be amended

SPD might need to be amended

Cafeteria Plan might need to be amended

— In each case, whether amendment is necessary depends on whether the special enrollment rules spell out events and 30 day period or simply cross reference federal law

CHIP

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Notice Requirement

— Each employer that maintains a group health plan in a state that provides Medicaid or CHIP assistance must provide each employee written notice about premium assistance programs

— HHS/DOL to issue Model Notices by 2/4/2010—notice by employer is then due at beginning of first plan year following (i.e., for calendar year plans, January 1, 2011)

— We assume that the notice can be provided with the health plan SPD or with other enrollment information

— Note: if SPD is amended, ERISA requires that an SMM be delivered within 210 days after the close of the year in which it was adopted

CHIP

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Other Developments

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Possible New Developments Senator Kennedy: Chairman Health, Education, Labor

and Pension Committee— “Health Care Can’t Wait” – Priority #1 – Universal Coverage

Massachusetts Model/ Stakeholder discussions ongoing Target: Early Summer mark-up

Senator Baucus: Chairman Finance Committee — “Call to Action: Health Reform 2009”

Universal Coverage through a “Health Insurance Exchange” Employer “Play or Pay” & Small Employer and Individual Tax Credits Controlling costs (Cap exclusion on employee income and payroll) SCHIP/HIS/Medicare Buy-In Efficiencies to Improve Quality & Value/ Prevention & Wellness Individual Responsibility – Individual Mandate Target: Public Hearings April/May; Out of Committee June 26

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Possible New Developments

Senator Wyden and Senator Bennett

— The Healthy Americans Act (HAA)

Private health care coverage—employers out of equation and offers portability;

Insurance provides benefits similar those offered to Congress;

Includes incentives for individuals and insurers to focus on prevention, wellness and disease management

Purportedly paid for by spending the $2.2 trillion currently spent on health care in America

Peter J. Marathas, Jr.Partner, Proskauer Rose LLP

617-526-9704pmarathas@proskauer.com