1. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 COBRA Subsidy Extended! How to Stay Compliant in 2010 Mary E. Powell and Tiffany N. Santos January 12, 2010

2. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 2 Overview of COBRA Subsidy  Premium assistance for COBRA coverage made available under the American Recovery and Reinvestment Act of 2009 (“ARRA”) to qualified beneficiaries who became eligible for COBRA because of an involuntary termination that occurred between September 1, 2008 and December 31, 2009  Premium assistance available for COBRA periods of coverage that commence on or after ARRA’s date of enactment (February 17, 2009) > i.e., March 1, 2009 for plans that administer COBRA periods that commence as of the first day of each month > Note: Under ARRA, the involuntary termination and the loss of coverage had to occur by December 31, 2009

3. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 3 Overview of COBRA Subsidy  The federal subsidy is available for COBRA continuation coverage under  > Federal COBRA laws: ERISA and the Internal Revenue Code This includes medical-only, dental-only, vision-only, EAP, or any combination thereof Exclusion for COBRA coverage under a Health FSA > Public Health Services Act (applies to certain State government plans) > Federal Employees Health Benefits Program > Comparable State Law For example, in California Cal-COBRA applies to insurers that provide coverage on behalf of small employers

4. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 4 Overview of COBRA Subsidy  Involuntary Termination—There are still a lot of “tricks” or issues to consider > If the qualified beneficiary loses group health coverage due to a qualifying event that is not involuntary termination, then the qualified beneficiary is not an AEI For example, if the loss of coverage is due to a reduction in hours or divorce, the individual is a “qualified beneficiary” but is not an AEI

5. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 5 Overview of COBRA Subsidy  Involuntary Termination—Additional Examples and Issues > The rules define involuntary termination to mean, “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to employee’s implicit or explicit request, where the employee was willing and able to continue to perform services.” May include the following: The non-renewal of a contract Retirement, where the facts and circumstances indicate that, absent the retirement, the employer would have terminated the employee’s services, and the employee had knowledge that the employee would be terminated

6. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 6 Overview of COBRA Subsidy  Involuntary Termination (cont’d) Termination elected by the employee in return for a severance package where the employer indicates that after the offer period for the severance package, a certain number of remaining employees in the employee’s group will be terminated Resignation as a result of a material change in the geographic location of employment for the employee

7. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 7 Overview of COBRA Subsidy  Allows “Assistance Eligible Individuals” (“AEIs”) to pay just 35% of the COBRA premium payable for up to 9 months > Federal government pays the remaining 65% via a payroll tax credit for employers To obtain the tax credit and/or reimbursement, employers, insurers and multiemployer plans must file the Form 941 Note: If an employer, insurer or multiemployer plan has no payroll tax liability or if the credit exceeds payroll tax liability, a reimbursement is available

8. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 8 IRS Audits of Form 941  A plan sponsor that claims that payroll tax credit must maintain supporting documentation for the credit claimed. This includes: > Information on the receipt, including dates and amounts, of the AEIs’ payment of the 35% > For an insured plan, a copy of the invoice or other supporting documentation from the insurance carrier and proof of timely payment of the premium to the insurance carrier > In the case of a self-funded plan, proof of the premium amount and proof of coverage provided to the AEIs

9. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 9 IRS Audits of Form 941 > Attestation of the involuntary termination, including the date of the involuntary termination > Proof of each AEI’s eligibility for COBRA coverage and an election of COBRA coverage > A record of SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one individual or two or more individuals > Other documentation necessary to verify the correct amount of the reimbursement

10. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 10 Overview of COBRA Subsidy  The subsidy is subject to full recapture by the IRS with respect to AEIs who have “high incomes” ($145,000 for single filers and $290,000 married joint filers) > Partial recapture is available for taxpayers whose adjusted gross income is between $125K and $145K ($250K and $290K for joint filers)  A high-income individual is not treated as an AEI and avoids the premium recapture if he elects to permanently waive COBRA premium assistance > If the AEI makes the permanent election to waive the right to the premium subsidy, the AEI may not later reverse that election—regardless of income in later years

11. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 11 Overview of COBRA Subsidy  An AEI ceases to be eligible for the premium reduction if the individual becomes eligible for coverage under any other group health plan or Medicare or fails to timely pay for COBRA > Note: Eligibility for the subsidy will not terminate if the other coverage provides only dental, vision, or counseling, or referral services (or a combination of these), or is a health FSA or health reimbursement arrangement, or onsite medical facility provided by an employer that consists primarily of first-aid services, prevention and wellness care, or similar care (or combination of such care) Only eligibility for the group health plan or Medicare is required and not actual enrollment

12. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 12 Overview of COBRA Subsidy  ARRA required plans to issue “enhanced” COBRA notices to all individuals who became eligible to elect COBRA between September 1, 2008 and December 31, 2009 > DOL issued model notices  Plans required to administer a second COBRA election period for AEIs whose involuntary termination occurred on or after September 1, 2008 and who did not elect COBRA or who allowed COBRA to terminate before February 17, 2009

13. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 13 Overview of COBRA Subsidy  Plans required to credit or reimburse AEIs who paid the full COBRA premium due while plans implemented scheme to administer subsidy > The employer was required to refund within 60 days of receiving the payment from the individual, unless it was reasonable to believe that the credit will be used within 180 days of the date the employer received the individual’s overpayment

14. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 14 COBRA Subsidy Extension  On December 19, 2009, President Obama signed the Department of Defense Appropriations Act, 2010 (“DOD Act”) > The DOD Act includes extensions of the premium assistance available under ARRA  COBRA subsidy extensions are effective as of the date of ARRA’s enactment, i.e., February 17, 2009

15. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 15 Brief Overview of DOD Act’s COBRA Provisions  Extends the eligibility period from December 31, 2009 to February 28, 2010 > Changes the definition of an “Assistance Eligible Individual” (“AEI”)  Extends the subsidy duration period from 9 months to 15 months  Provides for a “transition period” to AEIs who dropped COBRA or who paid the un-subsidized cost of COBRA prior to December 19, 2009  Requires plans to issue notices regarding DOD Act changes  No other changes to the subsidy or its administration

16. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 16 Extension of Eligibility Period  As amended by the DOD Act, an AEI is an individual who > Is a qualified beneficiary as the result of an involuntary termination that occurred any time during the period between September 1, 2008 and February 28, 2010; and > Timely elects COBRA  The DOD Act eliminated the requirement that an AEI be eligible for COBRA at any time during the period from September 1, 2008 through Dec. 31, 2009 > This means that an individual can qualify for premium assistance even if he or she becomes eligible for COBRA after February 28, 2010

17. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 17 Extension of Eligibility Period  Example – If an employee is involuntarily terminated on February 15, 2010 and is eligible for continued coverage under the employer’s plan through June 30, 2010 as part of the employer’s severance package (coverage is not COBRA coverage), the employee is eligible for premium assistance as of the first day of his/her COBRA coverage period (July 1, 2010), provided he/she timely elects COBRA coverage > Note: Watch out for Internal Revenue Code Section 105(h) discrimination issues for self-funded plans. This also can cause Internal Revenue Code Section 409A issues.

18. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 18 Duration Extended by an Additional 6 Months  DOD Act extends the maximum duration of the subsidy from 9 months to 15 months > Because the DOD Act extensions are effective as of the date of ARRA’s enactment, AEIs who have already used up their 9-month entitlement are eligible for an additional 6 months Example: If an AEI used up his/her 9-month subsidy as of November 30, 2009, the AEI is eligible to pay COBRA at the subsidized rate for the period from December 1, 2009 through May 31, 2010 (more on this later)

19. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 19 Required Notices  Current COBRA notices for qualifying events that occur on or after December 19, 2009 must be revised to incorporate the DOD Act extensions > Notices must be sent within COBRA’s normal deadlines for providing election notices  Plans must provide notices regarding DOD Act changes to individuals who were AEIs on or after October 31, 2009 and to individuals who were terminated (voluntarily or involuntarily) on or after October 31, 2009 and lost health coverage

20. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 20 Transition Period  A payment “Transition Period” is available to those AEIs who dropped COBRA coverage after his/her 9-month subsidy period ended prior to 12/19/09 > Plans must permit such AEIs to pay the subsidized COBRA rate for all months that follow the end of the AEI’s 9-month period by February 17, 2010 or, if later, 30 days after receiving a notice describing the DOD Act changes Example: An AEI whose 9-month subsidy period ended as of November 30, 2009 would be eligible to pay the subsidized premium for December 2009 coverage by February 17, 2010

21. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 21 Transition Period  The DOL FAQs explain the “transition period” as follows: The new provisions require that notice of changes made to the premium reduction program be provided within 60 days of the first day of your “transition period.” The “transition period” begins with the first day of the first period of coverage that would be eligible for the premium reduction because of the 2010 DOD Act extension… If you have not made the December payment, to continue your coverage you need only pay 35% of the full premium by the later of February 17, 2010 or 30 days after notice of the extension is provided by your plan administrator.

22. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 22 Transition Period  The DOL FAQs include the following example http://www.dol.gov/ebsa/faqs/faq-cobra-premiumreductionEE.html  QUESTION: If my eligibility for the premium reduction under ARRA expired (after receiving it for nine months) in November and I did not pay the December premium, will I be able to re-enter the program and get the additional six months of subsidy?  ANSWER: Yes, as long as you otherwise remain eligible for the premium reduction program. The law has a retroactivity provision, but 35% of the premium must still be paid for each month for coverage to remain in effect. Individuals who now have additional months of reduced premiums available (because the 2010 DOD Act extended ARRA’s maximum period from 9 to 15 months and they otherwise remain eligible for the premium reduction) are in a “transition period” and will have additional time to pay certain unpaid reduced premiums related to the extension. Accordingly, to continue their coverage, individuals described above must pay 35% of the full premium for the December and January periods of coverage by the later of February 17, 2010 or 30 days after notice of the extension is provided by their plan administrator.

23. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 23 Transition Period  If an AEI used the full 9-month subsidy period and continued COBRA by paying the full premium after that period ended, the AEI is entitled to receive either a credit for future months of COBRA or a reimbursement of the overpayment > Plans must identify all AEIs who paid the full COBRA premium and notify the AEI of the credit or reimbursement as applicable > Remember that the employer is required to refund within 60 days of receiving the payment, unless it is reasonable to believe that the credit will be used within 180 days of the date the employer received the individual’s overpayment

24. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 24 Transition Period – Notice  Plans must issue a notice to AEIs who are eligible for the transition period within the first 60 days of their respective transition period > Example: If the transition period began on December 1, 2009, the notice deadline is January 29, 2010

25. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 25 Administration – Notices  Plans must identify > All individuals who were AEIs on or after October 31, 2009 and those who were terminated (voluntarily or involuntarily) on or after October 31, 2009 and lost health coverage Notice of DOD Act changes must be provided no later than February 17, 2010 > All AEIs who are eligible for the transition period Notice of DOD Act changes must be provided within 60 days of the AEI’s transition period (as early as January 29, 2010 if the AEI first took the subsidy as of March 1, 2009)  DOL has stated that a combined notice may be sent to these groups of individuals (see Q&A 13 of DOL FAQs) > We understand that the DOL will be issuing model notices soon  For qualifying events that occur now, current COBRA notices must be revised to incorporate DOD Act changes

26. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 26 Administration  Plans must decide whether to credit or reimburse those AEIs who are eligible for the transition period and who paid the full COBRA premium due  Because the definition of “AEI” has been changed to eliminate the requirement that an AEI become eligible for COBRA between September 1, 2008 and December 31, 2009, plans may be required to administer the subsidy through 2011 and thereafter > Particularly, if the employer provides generous severance benefits and employees continue coverage for a period of time after their involuntary termination

27. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 27 Administration  DOD Act extensions should be communicated among all affected departments (HR, Benefits, Payroll, Legal, etc.) and service providers so that appropriate notices can be sent and payroll tax credits can be claimed > Multiemployer plans should also communicate changes with employers to help ensure continued cooperation

28. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 28 The Future  Premium assistance may be further extended – Jobs for Main Street Act (H.R. 2847) > Extends eligibility period to June 30, 2010 > Expands the definition of AEI to include qualified beneficiaries who become eligible for COBRA because of a reduction in hours of employment > Penalizes plans for failing to provide the subsidy ($110/day penalty) > Plans may rely on employee attestations regarding the “involuntary” status of an employee’s termination  Passed by House on December 16, 2009 and awaiting Senate consideration and approval

29. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 29 Contact  Mary E. Powell, Esq. Tiffany N. Santos, Esq. Trucker  Huss, APC 100 Montgomery Street, 23 rd Floor San Francisco, CA 94104 (415) 788-3111 mpowell@truckerhuss.com tsantos@truckerhuss.com www.truckerhuss.com

30. © Copyright Trucker Huss, APC | 100 Montgomery Street, 23rd Floor, San Francisco, California 94104 Telephone: 415-788-3111 | Facsimile: 415-421-2017 30 Disclaimer  These materials have been prepared by Trucker  Huss, APC for informational purposes only and constitute neither legal nor tax advice  Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship  Anyone viewing this presentation should not act upon this information without seeking professional counsel  In response to new IRS rules of practice, we hereby inform you that any federal tax advice contained in this writing, unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties or (2) promoting, marketing or recommending to another party any tax-related transaction(s) or matter(s) addressed herein