1. The American Recovery and Reinvestment Act of 2009 COBRA Provisions Peter J. Marathas, Jr. Compliance Director, BAN Partner, Proskauer Rose LLP 617-526-9704 pmarathas@proskauer.com February 20, 2009

2. 1 Today’s Agenda  Brief Overview of COBRA  COBRA Provisions in the American Recovery and Reinvestment Act of 2009 —The COBRA Subsidy —Eligibility for Subsidy —Special Enrollment Right —When Subsidy Ends —Mechanics of Reimbursement —Alternative Coverage Option —Notice Requirements —Transition Rule —*Next Steps: Action Plan for Sponsors*

3. 2 Brief Overview of COBRA

4. 3 Overview of COBRA  Consolidated Omnibus Budget Reconciliation Act of 1985 —Where specific “qualifying events” (e.g., loss of job) result in the loss of group health coverage, “qualified beneficiaries” (e.g., employees and their dependents) are given the right to elect to continue that coverage on a self-pay basis for a limited period (generally 18 months in the case of termination of employment) —Generally applies to group health plans of employers with at least 20 employees, and state and local governments as well —Each qualified beneficiary has an independent election right

5. 4 COBRA Provisions in the American Recovery and Reinvestment Act of 2009

6. 5 The COBRA Subsidy  Under the Act: —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

7. 6 Effective Date  Periods of COBRA continuation coverage beginning on or after February 17, 2009  No subsidy applies for periods prior to the effective date

8. 7  Who is eligible for the subsidy? —Employee is involuntarily terminated from employment  Unclear what constitutes involuntary (e.g., good reason?) —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  Treatment of domestic partners/same sex spouses is unclear Eligibility

9. 8  Limitations on eligibility —Phased out for individuals with adjusted gross income of between $125,000 and $145,000 (for single filers), and $250,000 to $290,000 (for joint filers); —No subsidy for individuals making over $145,000 or joint filers making $290,000 —Ineligible individual who receives subsidy must repay through income tax payment —High-income employees can make a one-time election to waive the subsidy Eligibility (cont’d)

10. 9  Other eligibility rules —Each qualified beneficiary is independently eligible for the subsidy —Applies to all plans subject to continuation coverage other than Health FSAs  Continuation coverage can be federal COBRA or state mini- COBRA —Cannot receive both COBRA subsidy and health coverage tax credit under the Trade Act  Expedited appeal process for individuals treated by the plan as not assistance eligible —DOL must decide within 15 business days Eligibility (cont’d)

11. 10  Special enrollment opportunity for certain individuals —Individuals who were eligible to elect COBRA between September 1, 2008 and February 16, 2009 due to an involuntary termination —Did not elect COBRA or elected and is no longer enrolled on February 17, 2009 (for reasons other than other group health coverage)  Unclear treatment of individual who had other group health coverage but lost it prior to February 17, 2009 Special Enrollment

12. 11  Election of Special Enrollment —Individual must request coverage within 60 days from notice of special enrollment rights —Coverage is prospective from February 17, 2009 —Maximum coverage period still runs from qualifying event/loss of coverage —For those who elect special enrollment, period without coverage through February 17, 2009 does not count toward 63-day break in coverage for purposes of creditable coverage/preexisting condition rules under HIPAA Special Enrollment (cont’d)

13. 12 When Subsidy Ends  Eligibility for the subsidy will end for months of coverage beginning on or after the earlier of: —Eligibility for Medicare or another group health plan (other than health FSA, employer on-site medical facility, dental/vision/referral services only) —Nine months after the subsidy became available —The end of the maximum COBRA coverage period —COBRA coverage no longer required  E.g., non-payment of premium  Employee must notify the plan in writing if eligible for other coverage —Penalty: 110% of subsidy (unless reasonable cause)

14. 13  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

15. 14  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 —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 (cont’d)

16. 15  Which entity claims the payroll tax credit? —Single employer plans: the employer  NOT the insurance company unless insured plan covered only by state mini-COBRA —Multiemployer plans: the plan  Applies for payroll tax credit even if no employees Mechanics of Reimbursement (cont’d)

17. 16  Reporting requirements —Entities will be required to submit reports to the IRS verifying their claims for reimbursement  Attestation of involuntary termination  Amount of subsidy claimed and estimated amount for the next reporting period  SSNs of employees receiving subsidy, amount of subsidy reimbursed for each qualified beneficiary and whether coverage was employee only, employee + 1/2 or family —Excess reimbursement is treated as an underpayment of payroll taxes  Interest and penalties may apply  Does not apply where individual was not eligible for subsidy because of income limitations Mechanics of Reimbursement (cont’d)

18. 17 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 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  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

19. 18 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  May apply to all qualified beneficiaries, regardless of qualifying event

20. 19  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 —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  Normal COBRA notice penalties apply Notice Requirements (cont’d)

21. 20  Content of notice —Forms necessary for establishing eligibility for the subsidy —Contact information for the plan administrator (and other relevant individuals) —Description of the special COBRA enrollment election period for eligible individuals not on COBRA on February 17, 2009 —Description of obligation to notify the plan of eligibility of other coverage and penalty for not doing so —Description, displayed prominently, of the right to a subsidy and any conditions —Description of the option to enroll in alternative coverage, if any is available  Model notice to be issued within 30 days Notice Requirements (cont’d)

22. 21 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 is reasonable to believe that it will be used within 180 days from the date the full premium was received  Consider whether making that individualized determination will be overly burdensome —Where credit not permitted, refund must be within 60 days of the full payment

23. 22 Next 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 —Calculate and recover subsidy  Identify and aggregate amount of subsidies provided and capture timing of each individual’s premium payment  Systems must track 9-month period for each eligible individual —Report to employees and the government  Forms W-2 will likely need to be generated to show the subsidy  Systems must capture required government reporting

24. 23 Next Steps (cont’d)  Revise qualifying event COBRA notice/prepare supplement —Options  Revise notices immediately  Delay COBRA notice distribution until end of 44-day period, pending model notice  Use existing notice and transition rule  Decide whether to reduce COBRA premiums as required or use transition rule for two billing periods  Decide whether to permit qualified beneficiaries to elect an alternative same/lower-cost option

25. 24 Next Steps (cont’d)  Consider eliminating 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 —Should be able to have employer subsidy after 9-month government subsidy —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 ensuring that COBRA begins before December 31, 2009

26. The American Recovery and Reinvestment Act of 2009 COBRA Provisions Peter J. Marathas, Jr. Compliance Director, BAN Partner, Proskauer Rose LLP 617-526-9704 pmarathas@proskauer.com February 20, 2009