1. COBRA Changes: Implementing the New COBRA Subsidy and How it Impacts Severance Packages Tuesday April 7, 2009 2:00 - 3:00 p.m. Eastern Audio Access: 1-888-296-1938 Access Code: 805973

2. 2

3. 3 Speakers Stacy Barrow, Counsel Boston Office stacy.barrow@klgates.com 617.951.9178 Mary Turk-Meena, Partner Charlotte Office mary.turk-meena@klgates.com 704.331.7590 Russ Sizemore, Partner Charlotte Office russ.sizemore@klgates.com 704.331.7514

4. 4 Today’s webinar topics include:  Updates on the latest agency guidance  When is a termination of employment involuntary?  Discussion of issues raised by the model notices  Should employers continue to subsidize COBRA as part of severance packages?  Practical thoughts on addressing lingering questions

5. 5 Webinar Start Time  Login open at 1:55 pm Eastern  Presentation begins at 2:00 pm  Questions from Audience at 2:50 pm  Please submit your questions via the CHAT option in your Webex browser. Audio Access: 1-888-296-1938 Access Code: 805973

6. 6 Did You Know?  K&L Gates’ Employee Benefits, ESOPs and Executive Compensation Practice  Includes over 35 full-time employee benefits lawyers located across the world  Includes over 100 lawyers in related fields of employment law, tax, health care law, corporate mergers and acquisitions and public policy  Our clients include plan sponsors, plan trustees, investment managers and third-party administrators  We have assisted many clients in implementing consumer-driven health plans, handling employee benefits issues in corporate transactions and structuring executive agreements and executive benefit programs

7. 7 Did You Know?  K&L Gates has more than 120 labor and employment lawyers, from Anchorage to Los Angeles and Boston to Miami, and in Asia and Europe  Over the past five years, K&L Gates has handled the labor and employment aspects of over 100 major acquisitions or divestitures  Each year we advise more than 1,000 clients of all sizes, representing virtually every industry sector  K&L Gates has handled employment litigation and related disputes in 45 of the 50 United States

8. 8 COBRA Subsidy  Created by American Recovery and Reinvestment Act (ARRA)  Provides federal subsidy of 65% of cost of COBRA continuation coverage for assistance eligible individuals (AEIs)  Subsidy extends for up to 9 months

9. 9 Affected Coverage  “COBRA continuation coverage” under ARRA defined as:  All employer-sponsored group health plan coverage subject to federal COBRA except health flexible spending arrangements (“Health FSAs”)  State “mini-COBRA” coverage  Continued coverage under health plans maintained by the federal government or a state government

10. 10 Who Is An Assistance Eligible Individual (AEI)?  Any COBRA qualified beneficiary (QB) who:  Is eligible for COBRA:  Between September 1, 2008 and December 31, 2009  Because of an employee’s involuntary termination of employment that occurs between September 1, 2008 and December 31, 2009, and  Elects COBRA

11. 11 Who Is An Assistance Eligible Individual (AEI)?  QB must be covered by the plan on the day before the involuntary termination  Exception: a child adopted by or born to a covered employee during the COBRA period  QB is:  Covered employee  Covered spouse  Covered child

12. 12 Who Is An Assistance Eligible Individual (AEI)?  QB is not  Domestic partner  Spouse or dependent child added through open enrollment or special enrollment

13. 13 Paying the COBRA Premium  AEI must pay 35% of COBRA premium charged to AEI  Can include 2% COBRA administrative fee  Subsidy is available for remaining 65% of COBRA premium charged to AEI  Subsidy does not apply to any portion of COBRA premium paid by employer  Subsidy does not apply to extended, non-COBRA coverage

14. 14 Paying the COBRA Premium EXAMPLE 1 – Extended active coverage  Facts  Employer continues active coverage for 6 months following involuntary termination THEN offers 18 months of COBRA at full COBRA rate  Result  Subsidy does not apply to the 6 months of active coverage  Beginning in month 7 a full 9 months of subsidy-eligible COBRA coverage is available

15. 15 Paying the COBRA Premium EXAMPLE 2 – Less than full COBRA premium is charged  Facts  Full COBRA premium (including 2% admin fee) = $1,000/month  Employer charges $500/month for COBRA coverage  Result  AEI pays $175/month for COBRA coverage (35% of $500)  Employer is eligible to recoup remaining 65% of COBRA premium ($325)

16. 16 Paying the COBRA Premium EXAMPLE 3 – COBRA premium changes during subsidy period  Facts  Full COBRA premium (including 2% admin fee) = $1,000/month  Employer charges $500/month for COBRA coverage for first 3 months of COBRA coverage  Employer charges $1,000/month for COBRA coverage beginning in 4 th month  Result  AEI pays $175/month for COBRA coverage (35% of $500) for first 3 months and $350/month beginning in 4 th month  Employer is eligible to recoup remaining 65% of COBRA premium ($325 for first 3 months; $650 beginning in 4 th month)

17. 17 Paying the COBRA Premium EXAMPLE 4 – COBRA covers AEIs and non-AEIs  Facts  Covered employee and 1 dependent child (both AEIs)  COBRA also covers non AEI (e.g., domestic partner)  COBRA premium for self + one coverage = $800  COBRA premium for self + 2 or more = $1,000  Result  Premium subsidy applies to $800 (35% of $800 = $280)  100% of difference must be paid for non-AEI ($200)  Total COBRA premium due from AEI = $480  Employer eligible to recoup 65% of $800 ($520)

18. 18 Paying the Subsidized COBRA Premium  35% premium payment subject to all applicable COBRA premium payment rules, including grace period for payment  If 35% not paid in full and on time, COBRA coverage may terminate  Insignificant underpayment rules apply based on the 35% premium payment amount

19. 19 Duration of Subsidy  Subsidy is generally available for the first 9 months of COBRA  Subsidy ends when:  AEI is eligible for other group health coverage or Medicare  Maximum COBRA duration expires  COBRA coverage is lost (e.g., for nonpayment of premium)

20. 20 Notification of Other Group Health Coverage  AEI must notify plan of any other available coverage or Medicare  Form for notifying employer provided in DOL model notices  Penalty of 110% of subsidy received for failure to notify unless failure is due to reasonable cause and not willful neglect

21. 21 Recouping the Subsidy  65% subsidy is recouped as a payroll tax credit  Offsets FICA/income tax withholding  Credit can be claimed only after receipt of AEI premium payment  Reconciled on Form 941 each quarter  If subsidy exceeds tax liabilities, refund is issued

22. 22 Who Can Recoup the Subsidy?  There are three entities that can receive the payroll tax credit:  Employer  If subject to federal COBRA or partially/fully self-insured  Insurer  Applies if plan is fully insured and not subject to federal COBRA – typically small employer plans (under 20 employees) and insured church plans  Multiemployer plan  Multiemployer plans get a direct refund if no payroll

23. 23 Required documentation  Information on the receipt, including dates and amounts, of the AEI’s 35% share of the premium 2.For insured plans, copy of invoices or other supporting statements from insurance carrier and proof of timely payment of the full premium to the insurance carrier 3.For self-insured plans, proof of the premium amount and the coverage provided to AEIs 4.Attestation of involuntary termination, including the date of the involuntary termination, for applicable covered employee 5.Proof of each AEI’s eligibility for COBRA coverage at any time during the period from September 1, 2008, to December 31, 2009, and election of COBRA coverage 6.A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed for each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals 7.Other documents necessary to verify the correct amount of reimbursement

24. 24 Recapture of Subsidy for High Income AEIs  High income AEIs must repay all or a portion of subsidy as increased income tax  High income AEI – based on modified adjusted gross income  $125,000 for single filer  $250,000 for joint filer  Subsidy is reflected as additional income on AEI’s Form 1040

25. 25 Recapture of Subsidy for High Income AEIs  Employers (or others claiming payroll credit) do not have to track income  High income AEI may waive subsidy eligibility  One-time, permanent waiver  Waiver must be in writing

26. 26 What Constitutes Involuntary Termination?  An employer’s unilateral dismissal of an employee when the employee is otherwise willing and able to work  IRS Notice 2009-27: “An involuntary termination means a severance from employment due to the independent exercise of the unilateral authority of the employer …”  Facts and Circumstances Test: even if a termination is designated as voluntary, when the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee’s services, then the termination is deemed involuntary

27. 27 What Constitutes Involuntary Termination?  Includes any employer-initiated, involuntary termination, such as a layoff, furlough, or other suspension of employment, resulting in loss of health coverage  Failure to renew an employment agreement when it expires, if employee was willing and able to continue under terms and conditions similar to those of the expiring contract, will be deemed an involuntary termination

28. 28 What Constitutes Involuntary Termination?  Examples of “involuntary terminations” include:  Performance-based terminations, layoffs, reductions in force  Terminations for “cause” (excluding special instances of “gross misconduct”)  An employee-initiated termination for “good reason,” where employer action causes a “material negative change” in the employment relationship for the employee  Employee resignation as a result of a material change in the geographic location of employment

29. 29 What Constitutes Involuntary Termination?  More examples of “involuntary termination:”  Mere reduction of hours by an employer is not an involuntary termination.  However, an employee’s voluntary resignation in response to an employer-imposed reduction of hours, if the reduction is a “material negative change” in the employment relationship, will constitute an involuntary termination.  Absences from work due to employee illness or disability do not constitute an involuntary termination  However, actions taken by employer to terminate an individual’s employment, while the employee is absent from work due to illness or disability will be deemed an involuntary termination (be aware of other statutory considerations).

30. 30 What Constitutes Involuntary Termination?  Involuntary Terminations would not include:  Terminations of employment due to death of employee  Retirements or employee resignations that are fully and unequivocally voluntary (but document these carefully!)  Terminations for “gross misconduct” – for the purposes of Federal COBRA, such a termination would not be a qualifying event and the employee and other covered individuals would not be eligible for COBRA

31. 31 What Constitutes Involuntary Termination?  More Examples of “Involuntary Terminations”  Does not include a work stoppage as a result of a strike initiated by employees or their representatives  Does include a lockout initiated by the employer

32. 32 Appeals  Ex-employee may challenge employer’s determination of AEI qualification  DOL has 15 business days to resolve the issue  DOL review is de novo and entitled to deference in court

33. 33 Restructuring Severance Programs  Employers might consider re-structuring severance programs  Could offer employees additional taxable compensation in lieu of employer-subsidized COBRA premiums  However, if the employer provides a tax-free premium subsidy it is not considered paid by the AEI

34. 34 What Coverage Changes are Permitted?  New special enrollment option (NOT required)  Under COBRA, generally continue coverage in effect at qualifying event (QE) date until next open enrollment  Under ARRA, plan may allow QBs to change coverage to cheaper (lower premium) coverage  Does not apply to small-employer plans or church plans subject to State COBRA-like rules  Election made during special 90-day period after notice

35. 35 Special Election Period  Rules apply to “periods of coverage” on or after February 17, 2009  If plan offers COBRA coverage by the month, March 1, 2009  If plan offers COBRA coverage by the day, February 17, 2009

36. 36 Special Election Period  Three groups of potential AEIs on February 17, 2009:  Group 1: Those affected by involuntary termination back to September 1, 2008 who are not on COBRA coverage as of February 17, 2009  Group 2: Subset of Group 1 affected by termination close to February 17 (e.g., in December 2008/January 2009)  Group 3: Those affected by involuntary termination back to September 1, 2008 who are on COBRA coverage as of February 17, 2009

37. 37 Special Election Period  Special election period for Group 1:  Group 1 AEIs may elect the subsidy at any time after February 17, 2009 and before 60 days after notice of the election right  I.e., once notified, AEI has 60 days to elect

38. 38 Special Election Period  Special election period for Group 1:  Applies to QBs who never elected COBRA coverage but were involuntarily terminated between September 1, 2008 and December 31, 2009  Also applies to AEIs who elected COBRA coverage due to post-September 1, 2008 involuntary termination but dropped it before February 17, 2009  DOL view is that QBs who terminated COBRA coverage because they obtained other coverage after their initial COBRA election cannot re-elect under the special election period

39. 39 Special Election Period  Special election period for Group 1:  Notice of election period must be provided  Within 60 days of February 17, 2009 (by April 18, 2009)  Only to QBs who could be AEIs going back to September 1, 2008  Those who voluntarily quit and received proper COBRA notice before February 17, 2009 do not have to receive this notice

40. 40 Special Election Period  Special election period for Group 1:  If elected, coverage is retroactive to post-February 17, 2009 periods of coverage (generally March 1)  Period between QE/loss of coverage and new coverage not treated as a break in coverage for HIPAA purposes  Grace period for payment of premium during special election period is the 45-day period  Not available to small-employer plans/church plans which are subject to State COBRA-like rules

41. 41 Special Election Period  Special election period for Group 2:  Interplay between new COBRA subsidy 60-day election period and regular QE 60-day election period for events occurring in December 2008/January 2009  COBRA election is retroactive to QE date or March 1 (QB may elect)  Subsidy election is not retroactive beyond February 17, 2009

42. 42 Special Election Period  Special rule for Group 3: AEIs enrolled in COBRA on February 17, 2009  Entitled to be credited with subsidy amount for first 2 periods of coverage after February 17, 2009  Either refund subsidy to individual and claim a credit for the refund, or  Apply credit to future premium payments within 180 days

43. 43 Notice and Documentation for Non-AEIs  Need new QE notices for all post-February 16, 2009 COBRA notices  Could use an ARRA insert  New general COBRA/ARRA notice not required for pre-ARRA QEs if valid COBRA election notice was already provided before February 17, 2009  Need notice for those “on” COBRA coverage on February 17 to advise them about subsidy (even though not eligible)

44. 44 DOL Model Notices  DOL has provided four model notices  Notice of Extended Election Period  General Notice – Abbreviated Version  General Notice – Full Version  Alternative Notice

45. 45 DOL Model Notices  Notice of Extended Election Period  Sent to individuals who are AEIs and whose QE occurred between September 1, 2008 and February 17, 2009 and  who did not elect COBRA coverage, or  who elected, and subsequently dropped, COBRA coverage

46. 46 DOL Model Notices  General Notice – Abbreviated Version  Sent to QBs already on COBRA as a result of a QE that occurred on or after September 1, 2008  Not limited to AEIs

47. 47 DOL Model Notices  General Notice – Full Version  Sent to all QBs whose QE occurs between September 1, 2008 and December 31, 2009, regardless of the event, unless  the QB has received the Notice of Extended Election Period, or  the QB has received the Abbreviated Version of the General Notice

48. 48 DOL Model Notices  Alternative Notice  Sent if coverage is not subject to federal COBRA but is subject to state law continuation (“mini-COBRA”)  Sent by the insurer

49. 49 Notice Content Requirements  COBRA notices are not considered complete unless employee is notified of availability of premium reduction  Calculation of 35% must be included in the notice  DOL has established rules for delivery of COBRA notices

50. 50 Fines and Penalties  Failure to provide required notice is subject to COBRA notice penalties (up to $110/day)

51. 51 American Recovery and Reinvestment Act (ARRA)  Available Guidance  CMS, DOL and IRS have published guidance on special websites devoted to information on the COBRA premium subsidy:  CMS information (concerning state continuation coverage): http://www.cms.hhs.gov/COBRAContinuationofCov/ http://www.cms.hhs.gov/COBRAContinuationofCov/  DOL information: http://www.dol.gov/ebsa/COBRA.html http://www.dol.gov/ebsa/COBRA.html  IRS information: http://www.irs.gov/newsroom/article/0,,id=204708,00.html http://www.irs.gov/newsroom/article/0,,id=204708,00.html http://www.irs.gov/newsroom/article/0,,id=204505,00.html

52. 52 Questions – Please contact us for information Benefits and Compensation http://www.klgates.com/practices/ServiceDetail.aspx?service=13 Executive Compensation http://www.klgates.com/practices/ServiceDetail.aspx?service=20 Labor and Employment http://www.klgates.com/practices/ServiceDetail.aspx?service=15