Employee Benefits Legal Blog : Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

The COBRA subsidy portion of the American Recovery and Reinvestment Act includes a provision applying the 65% subsidy to state continuation programs, frequently referred to as "mini-COBRA."  These state provisions apply to groups with fewer than 20 employees that are not regulated by federal COBRA.  New Jersey has state continuation coverage for groups with fewer than 20 and the state Department of Banking & Insurance has issued its own guidelines on its continuation program and the subsidy.  There are two links, one for the State 2009 Recovery and Reinvestment Plan, and one from the Department of Banking & Insurance dealing directly with the subsidy.

Some key things that I picked out in these notices clarify how New Jersey mini-COBRA will be subsidized.  First, it is pretty clear that the state anticipates that the subsidy for these smaller plans will be handled directly through their insurance carriers.  Second, it will definitely not apply to the those dependents who are eligible for continuation as a result of the Age-30 extension.  New Jersey also clarifies that the subsidy will not apply to those who lost coverage as a result of reduction of hours. 

There were also two additional comments that jumped out at me.  New Jersey continuation is generally not available to those who were terminated "for cause."  Arguably, that means that those who were terminated for cause would not be eligible for the subsidy because they would not be eligible for the continuation coverage under state law.  This does not mean they could not apply for the subsidy, but it does appear that they would not receive it.  I expect multiple appeals on this issue.  Second, civil union participants are likely not eligible for the subsidy because, while recognized as participants in New Jersey, they are not recognized by federal law and would not be subsidy eligible individuals.  But the department has cautioned they are awaiting more guidance on this issue.

If you are subject to New Jersey mini-COBRA, I highly recommend you talk to your insurance provider to make sure they have all of the information they need from you to administer the subsidy program.

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I recently received a question about the obligations of a plan administrator to provide specific notices to plan participants and whether model notices existed for each required participant distribution.  Unfortunately the short answer to that question is "no" there are not that many model notices available.  While the new model COBRA notices are available for plan administrators and employers to modify and distribute, most disclosures are simply left open to interpretation.

The Department of Labor has issued a Reporting and Disclosure Guide for Employee Benefit Plans that sets out what notices, disclosures and reports are required of plan administrators for various plans.  They are broken down primarily between required documentation for all plans, welfare plans and retirement plans.  Obviously plan documents and summary plan descriptions are required and there are multiple requirements for contents to those documents.  But on top of these, there are multiple required notices and disclosures that plan administrators have to provide.  Sometimes these are on an annual basis, or they can be "as needed."  Either way, it is incumbent upon the plan administrator to know what it is they have to distribute and when.

Rather than simply repeat everything in the DOL guide, I recommend that plan administrators and sponsors read through this guide to make themselves aware of all the required documentation.  If you are missing a particular notice or document, or are unfamiliar with what is required, please contact your legal counsel or plan service provider to obtain an explanation of what is required and get them to assist in the preparation of required notices.  I firmly believe that this new COBRA notice and reporting will cause more plan audits because there will be more participant complaints.  So use this new flurry of activity to bring your plans completely into compliance.

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The United States Department of Labor has issued four model notices for employers and plan sponsors to use in conjunction with administering this new subsidy. The model notices are available at the DOL website at http://www.dol.gov/ebsa/COBRAmodelnotice.html. Each notice must be specifically tailored and customized to provide accurate information for the employer or plan issuing the notice.

General Notice (full version)

This notice must be sent to all employees and qualified beneficiaries who experienced a qualifying event on or after September 1, 2008, through December 31, 2008, regardless of the basis for the event. This is essentially the “new” general COBRA notice to be distributed to plan participants at the time of a qualifying event. It is captioned as being for individuals who have not yet received an election notice. However, the instructions from the DOL appear to make it clear that this notice should be distributed to everyone even if they have already received a notice.

It includes a COBRA election form for the participant to complete, as well as an optional form for switching COBRA benefit options if the plan permits assistance eligible individuals to elect to enroll in different coverage. The participant must also complete and submit a “Request for Treatment as an Assistance Eligible Individual” to be used by the employer to determine if the participant will receive the subsidy. The employer will then be required to notify the individual of their eligibility for the subsidy. Finally, it includes a model form for participants to notify employers or plan administrators that they are eligible for other coverage to lose the subsidy.

General Notice: (abbreviated version)

This notice is sent to those who had a qualifying event on or after September 1, 2008, but who have already elected COBRA coverage. If a person is already elected COBRA, they would get this notice instead of the full general notice. It is not limited to those who were involuntarily terminated. It does not include the election form (since an election has already been made) but does include the Request for Treatment as an Assistance Eligible Individual and the form to notify the employer of other coverage.

Alternative Notice

This form mirrors the full version of the General Notice, but applies to those individuals eligible for state continuation coverage (“mini-COBRA”) that generally applies to employers with fewer than 20 employees.

Notice in Connection with Extended Election Periods

As an alternative to the General Notice, if you have participants where the employers knows specifically that the qualifying event was an involuntary termination, those individuals are entitled to take advantage of the special extended election period. If they were COBRA eligible and did not elect (or did elect and subsequently terminated COBRA coverage before February 16, 2009), they are entitled to receive notice of the special election period. It contains the same form requirements as the full General Notice, but provide an explanation of the special enrollment extension.

Recommended Steps for Compliance

In preparing for the April 17, 2009, mailing deadline, we recommend employers take the following steps (including employers who are subject to state continuation obligations because they have fewer than 20 employees):

1. Identify, including names and addresses, all individuals who were COBRA eligible on or after September 1, 2008, regardless of the qualifying event, regardless of whether they elected coverage.

2. Separate from this list all participants who actually elected coverage.

3. Separate from the first list all participants whose qualifying event was an involuntary termination who did not elect COBRA coverage or who did elect and terminated that coverage before February 16, 2009.

4. Decide whether the plan will allow switching COBRA Coverage Benefit Options.

5. Determine how the employer will handle subsidy payments for the periods between February 17, 2009, and the first election period after April 17, 2009. The employer can reimburse participants for the 65% subsidy, or they can credit against future premium payments.

6. Customize each of the applicable notices for your plan and prepare for mailing to participants before April 17, 2009.

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Anyone who sponsors a defined benefit plan should be familiar with the minimum funding requirements of Section 302 of ERISA.  Basically, the minimum funding requirement sets forth the minimum annual contribution required to maintain the plan, and measures the funding standard account to determine if an accumulated funding deficiency has occurred.  It is in essence a snapshot of the general health of the plan as it relates to contribution is versus payments out. 

There is not necessarily a direct correlation between the required minimum funding and a general underfunding of the plan.  Plans can be underfunded (meaning without sufficient assets to pay all vested benefits) but still have a positive funding standard account balance.  The minimum funding requirement of Section 302 does not require the employer to eliminate all underfunding, only that they meet the required annual contribution.  This became very significant in the case of Cress v. Wilson (S.D. NY Dec. 2008).

In the Cress case, a class of Plaintiffs sued the trustees of a Northwest Airlines pension plan, claiming that by permitting the plan to become grossly underfunded, they breached their fiduciary duties.  The Court determined that in fact, the plan had met all of the funding requirements of Section 302 (meaning the minimum funding requirements were met) and that, since that was the required measure of funding in ERISA, no breach had occurred.

The Court did not suggest that the underfunding of the plan could not have occurred as a result of some other breach, but it does appear that, at least to this Court, meeting the annual funding obligation in a timely manner serves as some protection to plan sponsors if their plan is underfunded.  So make sure you make minimum funding obligations to the plan.

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The American Recovery and Reinvestment Act of 2009 provides for a temporary extension of employer-provided group health coverage (generally referred to as COBRA) that creates a premium reduction for certain individuals. It provides for an employer paid subsidy of 65% of the COBRA premium. We are waiting for a model notice from the Treasury Department that will have to be distributed to COBRA eligible individuals. In the mean time, some guidance has been issued by the IRS and Department of Labor that explains some of the aspects of this new law. What follows are answers to some questions posed by employers.

1.         Does the subsidy apply to everyone terminated after September 1, 2008?

The short answer is no. Everyone who had a COBRA qualifying event subsequent to September 1, 2008, is entitled to the new notice, regardless of the qualifying event. If the qualifying event was as a result of an involuntary termination, then the individual seeking continuation coverage would be eligible for the subsidy. There is a difference between who gets the notice and who gets the subsidy.

2.         What if they were terminated for performance related issues?

The Act makes no distinction regarding the basis for the involuntary termination. However, Department of Labor Guidance says that if the individual was terminated for gross misconduct so as to be ineligible for COBRA coverage, they would not qualify for the subsidy. But termination for gross misconduct under COBRA is very rare, so employers should assume any involuntary termination will qualify. Involuntary termination may include loss of coverage as a result of a reduction of hours but more guidance on this will have to be issued.

3.         What if someone quit their job on their own?

 Voluntary terminations would not be eligible for the subsidy. It is possible that someone who quit in anticipation of layoff could argue entitlement to the subsidy but right now, the guidance appears to confirm that a voluntary termination would not create eligibility for the subsidy.

4.         What if the employee did not originally elect COBRA?

 By April 18, 2009, all plans will be obligated to notify eligible individuals of a second election period which allows an additional 60 days to elect COBRA coverage. So this is a new COBRA election window that applies even if they did not originally elect. The individual will be without coverage for the period between his original qualifying event and the time when they actually elect under this new window. They will not be required to apply for coverage retroactively or pay those past premiums and, as of now, it looks as though they will also not have coverage for bills incurred during the period for which they did not have actual coverage. This could change as more guidance is issued.

5.         Are employees who elected COBRA after September 1, 2008, eligible for a refund?

 No. The premium reduction provision only applies to elections beginning on or after February 17, 2009, the effective date of the Act. So employees who paid 100% of the COBRA premium for periods beginning March 1, 2009, and after would be eligible for a 65% refund on those premiums. Employers must decide whether to issue a refund for the 65% of the premiums paid or whether to apply this “refund” as a credit against future payments.

6.         How long does the subsidy last?

 The subsidy lasts for a maximum of 9 months. It ends if (1) the individual becomes eligible for Medicare or another group health plan, or (2) the maximum COBRA period is exhausted. The subsidy obligation applies to elections made through December 31, 2009.

7.         Can employees switch to different coverage?

 Maybe. Group health plans are permitted, but not required, to allow COBRA qualified beneficiaries to use the special enrollment period to enroll in different coverage than they had at the time of the qualifying event provided that (1) the premium for the different coverage is the same or lower than the original coverage, (2) the different coverage is also offered to active employees, and (3) the different coverage is not limited to only dental or vision coverage, counseling coverage, on-site medical clinics or a flexible spending account.

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With the excitement over the new COBRA regulations, it is possible that some plan administrators might have missed the part of the American Recovery and Reinvestment Act that includes a new set of obligations under the Children's Health Insurance Program Re-authorization Act of 2009 (CHIPRA).  CHIPRA places certain notice and  reporting requirements on plans.  Specifically, it requires group health plans to allow individuals who were not covered by the plan to enroll when the become eligible for Medicaid/CHIP or when they become eligible for a premium subsidy from Medicaid/CHIP, regardless of whether such an event occurs during the plan's open enrollment period.

The law permits states to offer a premium subsidy for qualified employer-sponsored coverage to all employees or dependents who are Medicaid of CHIP eligible.  Plans in these stats must provide notice of the availability of federal assistance for coverage beginning the first plan year after February 4, 2010.  The plan will also, upon request, be required to disclose to the state information about the plan sufficient to determine whether providing a subsidy for coverage is more cost effective that providing Medicaid or CHIP coverage.

The premium assistance and special enrollment provisions are effective as of April 1, 2009, though notices are not yet required.  So as of April 1, 2009, employees and dependents who are eligible for coverage under the plan but not enrolled can enroll now if (1) their Medicaid of CHIP coverage is terminated as a result of loss of eligibility or (2) they become eligible for the premium assistance subsidy.  They must request enrollment within 60 days of either of these events.

Though no model notice has yet been issued, and the formal notice requirement has not kicked in, plans are required to inform participants about the availability this special enrollment provision.  Plan sponsors should notify participants about this special enrollment option now before the April 1, 2009 deadline.

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