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Another Extension for the COBRA Subsidy

The COBRA subsidy, which was initially put into place by the American Recovery Act of 2009 (“ARRA”) and extended by the Department of Defense Appropriations Act of 2010, has again been extended by Congress with the passage of the Temporary Extension Act of 2010 (the “Act”). (See our prior articles on this topic, "COBRA Subsidy Extended," Communiqué, December 2009; "COBRA Coverage Modified by the American Recovery and Reinvestment Act of 2009 ("Stimulus Act")," Communiqué, February 2009.)

COBRA Subsidy Further Extended

The Act will extend eligibility for the 65% subsidy for COBRA premiums for qualifying events that constitute an involuntary termination through the end of March 31, 2010. Previously, the Department of Defense Appropriations Act of 2010 extended eligibility for the COBRA subsidy through February 28, 2010.

New Subsidy Eligible Qualifying Event – Reduction of Hours Followed by Termination

The Act also extends the COBRA subsidy to individuals who first experience a qualifying event due to a reduction in hours and are subsequently involuntarily terminated on or after the enactment of the Act. Prior to the Act, individuals who had an reduction in hours followed by an involuntary termination of employment did not qualify for the subsidy. The reduction in hours remained their sole qualifying event, which was not eligible for the subsidy. Now, an involuntary termination that follows a reduction in hours is considered a qualifying event for all purposes under COBRA, including the subsidy, (other than to extend the maximum COBRA period, as discussed below). Individuals who experience such an involuntary termination qualify for the subsidy regardless of whether they elected COBRA in connection with their reduction in hours, and whether or not they paid for COBRA after the reduction in hours.

No Extension of the Period of COBRA Coverage

The period of COBRA coverage for individuals subject to a subsequent termination of employment shall be determined from the initial reduction of hours. This means, for example, if an individual experiences a reduction of hours in August 2009 and is subsequently terminated in March 2010, the 18 month COBRA period would start in September 2009 (assuming coverage through August 2009) and would run through February 2011. The subsidy eligible period would begin in March 2010 based upon the subsequent termination of employment. Assuming the individual does not qualify for an extension of COBRA coverage due to, for example, disability, he or she will be eligible for the subsidy for 11 months beginning in March 2010 and ending in February, 2011, which is when the maximum 18-month COBRA period would expire.

Additional Notice

The addition of a new subsidy eligible qualifying event will now require notice to individuals who have experienced a reduction in hours followed by an involuntary termination on or after enactment of the Act. The notice should be substantially the same as the notice that is currently provided to individuals who are eligible for the COBRA subsidy. For example, the notice should include an explanation of the individual’s additional COBRA election period and entitlement to the subsidy. This notice must be furnished during the 60 day period following the termination of employment.

Employer Determinations of Involuntary Terminations

Under ARRA, employers generally determine whether an individual is involuntarily terminated and thus eligible for the subsidy. If the individual disagrees, he or she can ask the Department of Labor to review the subsidy denial. The Department of Labor has received over 6,000 requests to review subsidy denials, and has overturned an employer’s denial close to 80% of the time.

With the Act, it appears that Congress has expressed a clear desire that employers not unduly interfere with an employee’s right to receive the subsidy.

Employer Protection

Many employers have expressed concern over the potential audit risks with the subsidy and associated reimbursement from payroll taxes. The Act provides that so long as an employer’s determination is reasonable and documented, it will not be second-guessed on audit. To be protected under the Act, the Employer must retain copies of records associated with any determination of an individual’s eligibility for a subsidy, including an attestation of involuntary termination of employment with respect to the covered employee.

Additional Enforcement Added by the Act

To encourage the proper administration of the subsidy, Congress has added additional enforcement provisions. The Act provides that either the Department of Labor or the affected individual can sue an employer to enforce the Department of Labor’s decision to overturn a subsidy denial. In addition, the Secretary of Labor now has the authority to impose a penalty of up to $110 per day on the plan sponsor or health insurer for a failure to provide the subsidy within ten days after being notified by the Department of Labor that the denial has been overturned.

These new enforcement methods are in addition to any existing measures. For example, an employer may also be subjected to an excise tax for failure to comply with its COBRA reporting requirements. If you recall, effective January 1, 2010, the IRS implemented new reporting and excise tax requirements for failure to comply with COBRA and other health and welfare plan rules. (See "COBRA Extension Notices Due To Some Qualified Beneficiaries No Later Than January 30, 2010," Communiqué, January 2010.)

We await further guidance from the Department of Labor and the Internal Revenue Service on the Act. In addition, as with the prior extension, it is not clear if this is the last time Congress will extend or make other changes to the COBRA subsidy. Given the short period of the new subsidy qualifying event, it appears likely that Congress intends to extend the subsidy even further.

For more information, please contact:

Sarah Lockwood Church 412 394 7731 schurch@thorpreed.com

Kristen Belz Ornato 412 394 7749 kornato@thorpreed.com

Paul A. Kasicky 412 394 2441 pkasicky@thorpreed.com

Kevin A. Wiggins 412 394 2401 kwiggins@thorpreed.com

This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and should not be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise this Communiqué if there are subsequent changes in the law.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

#P0094558 March 2010