This document summarizes new provisions related to COBRA health insurance coverage included in the American Recovery and Reinvestment Act of 2009 stimulus package. It discusses that employees involuntarily terminated between September 2008 and December 2009, and their families, will only have to pay 35% of premiums for up to 9 months of continued coverage, with employers reimbursed for the remaining 65% through tax credits. It also outlines requirements for employers to provide updated notices to qualified beneficiaries about their options by April 18, 2009.

1. COBRA Changes in the Stimulus Package Immediate Employer Action Required Wendy C. Carmichael, Esq. USI Southwest April 14, 2009

2. Agenda Overview of COBRA New COBRA Provisions COBRA Subsidy Alternative Coverage Option Special Enrollment Notice Requirements Employer Reimbursement Action Items

3. Disclaimer This presentation is intended to convey general information and may not take into account all the circumstances relevant to a particular person’s situation.

4. Overview of COBRA

5. Why COBRA Is a Big Deal Mistakes can result in an employer having to: self-fund large claims; pay attorney’s fees; pay excise tax penalties of up to $200 per day for failure to comply with COBRA; and pay statutory penalties of up to $110 per day for failure to provide certain notices. Who handles COBRA administration? If a vendor, is it a quality vendor? Are you still liable for any errors?

6. In General Per the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), a qualified beneficiary who loses group health plan coverage due to a qualifying event may elect to continue that coverage for a limited time on a self-pay basis. Almost all group health plans of private and public employers must comply with COBRA. Certain small employer plans (fewer than 20 employees), certain church plans, and federal government plans are not subject to COBRA.

7. Group Health Plans Group health plans are plans maintained by an employer that provide medical care and include medical, dental, vision, drug plans and some wellness programs and employee assistance programs (“EAPs”). Health flexible spending arrangements (“FSAs”) are group health plans subject to COBRA, but they raise many difficulties in interpreting and complying with COBRA because health FSAs are not typical health insurance arrangements. Employers that sponsor health reimbursement arrangements (“HRAs”) generally must offer COBRA to all qualified beneficiaries (not just those who have underspent their accounts).

8. Qualifying Events COBRA has a list of seven specific triggering events. They are: termination of a covered employee’s employment (other than for gross misconduct); a reduction of a covered employee’s hours of employment; the death of a covered employee; a divorce or legal separation from the covered employee; ceasing to be a dependent child under the terms of the plan; and employer bankruptcy (only relates to retiree plans).

9. Qualified Beneficiaries To be a qualified beneficiary, a person generally must satisfy two conditions: the person must be a covered employee, the spouse of a covered employee, or the dependent child of a covered employee; and the person must be covered by a group health plan immediately before the qualifying event (the triggering event). Each qualified beneficiary is independently eligible to continue coverage.

10. Length of COBRA Coverage The maximum coverage period for a loss of coverage due to a termination of employment or reduction of hours is 18 months. The maximum coverage period for any other loss of coverage is 36 months. If, after a qualifying event that is a termination of employment or reduction of hours, one of the other qualifying events occurs during the initial 18-month coverage period, then the maximum coverage period for the spouse or dependent child who is a qualified beneficiary is extended to 36 months. In the case of disability, the maximum coverage period can be extended to 29 months.

11. Length of COBRA Coverage (cont.) A plan can terminate a qualified beneficiary’s COBRA coverage before the maximum coverage period with written notice if: the required premium for the qualified beneficiary’s coverage is not paid on time (taking into account any grace periods and other special rules); the qualified beneficiary becomes enrolled in Medicare after electing COBRA; the qualified beneficiary becomes covered by another group health plan after electing COBRA (except that if the other plan’s preexisting condition exclusion or limitation applies to a condition of the qualified beneficiary, COBRA coverage can be terminated early only after the other plan’s exclusion or limitation is satisfied);

12. Length of COBRA Coverage (cont.) the employer ceases to maintain any group health plan for any employee (for these purposes, the employer is defined to include affiliated entities in the employer’s “controlled group”); if the maximum coverage period has been extended under the disability extension, the qualified beneficiary who had been disabled is determined not to be disabled (COBRA coverage may be terminated for all qualified beneficiaries enjoying extended COBRA coverage under the disability extension); or for cause (i.e., if the plan could terminate an active employee’s coverage for cause such as for filing a false benefit claim, then the plan may terminate COBRA coverage for the same reason).

13. New COBRA Provisions

14. Summary Employees involuntarily terminated between September 1, 2008 and December 31, 2009 and their family members will only have to pay 35% of the premium amount (rather than the usual 102%) for up to 9 months to continue group health coverage. Employers pay 65% of the premium, then take a payroll tax credit for that amount. If the premium assistance is provided to high income individuals, then their income tax will be increased by the amount of the subsidy. Individuals who did not elect COBRA when eligible have 60 days after notice is provided to elect coverage on a “go-forward” basis. The employer must offer the same health coverage the individual had at the time of the qualifying event in accordance with COBRA, but may also offer other less expensive health coverage options. Updated COBRA election notices must be provided by April 18, 2009 . The DOL issued model notices.

15. Premium Subsidy For a maximum of 9 months, an “assistance eligible individual” must only pay 35% of the premium amount to continue COBRA coverage.

16. Assistance Eligible Individual An assistance eligible individual (“AEI”) is any qualified beneficiary who elects to continue COBRA coverage where: the qualifying event causing loss of coverage is involuntary termination of employment (excluding termination of employment for gross misconduct); and the qualifying event occurs between September 1, 2008 and December 31, 2009. Each qualified beneficiary (covered employee, spouse, dependent)* is independently eligible for the subsidy. *Qualified beneficiaries who do not elect COBRA when they are entitled to do so are no longer qualified beneficiaries when the COBRA election period expires. Exceptions for new child, court orders. Family members enrolled at open enrollment are not qualified beneficiaries.

17. Involuntary Termination The term “involuntary termination” is not defined in the new law. While there is no definition, the determination of whether a termination is involuntary is based on all the facts and circumstances. For example, if a termination is designated as voluntary or as a resignation, but the facts and circumstances indicate that, absent such voluntary termination, the employer would have terminated the employee’s services, and that the employee had knowledge that the employee would be terminated, the termination is involuntary. A determination that an employee was involuntarily terminated can impact eligibility for other benefits, including severance benefits and unemployment benefits.

18. Involuntary Termination (cont.) Examples of involuntary termination are: a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services; termination of employment for cause unless the due to gross misconduct; an involuntary reduction to zero hours, such as a lay-off, furlough, or other suspension of employment; an employee-initiated termination from employment for good reason due to employer action that causes a material negative change in the employment relationship for the employee; retirement if, absent retirement, the employer would have terminated the employee’s services and the employee had knowledge that the employee would be terminated; resignation as the result of a material change in the geographic location of employment for the employee; when the employer takes action to end the individual’s employment status; termination elected by the employee in return for a severance package (a “buy-out”) 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.

19. Involuntary Termination (cont.) Examples of no involuntary termination are: a work stoppage as the result of a strike initiated by employees or their representatives; an absence from work due to illness or disability before the employer has taken action to end the individual’s employment status; death; a reduction of hours to more than zero.

20. Gross Misconduct COBRA contains no definition of “gross misconduct” and no consistent standard has been articulated by the courts or regulators. It is clear that termination for gross misconduct is not the same as termination simply “for cause.” Except for the most flagrant conduct that clearly constitutes a substantial and willful disregard of the employer’s interests, denying COBRA coverage and the subsidy on account of gross misconduct should be avoided.

21. Taxability of the Subsidy to the Recipient The subsidy is not taxable to the individual receiving it unless provided to an individual with a modified gross income of $125,000 ($250,000 in the case of a joint return) for the taxable year in which the subsidy is received (2009 or 2010). In this case, the individual’s taxes will be increased by the amount of the subsidy. However, if the individual’s modified adjusted gross income is between $125,000 and $145,000 ($250,000 and $290,000 in the case of a joint return), the increase in tax will be limited to a ratio of such increase obtained by dividing the amount over the modified gross income limit by $20,000 ($40,000 in the case of a joint return). High income individuals can permanently waive premium assistance to avoid this recapture.

22. Type of Coverage The applicable coverage is group health coverage under COBRA, similar state continuation laws (e.g., those applying to small employer plans), and continuation laws that apply to Federal or State governmental health plans. With respect to COBRA, it includes all COBRA benefits (e.g., major medical, dental, vision, and drug plans; some wellness programs and employee assistance programs (“EAPs”); and most health reimbursement arrangements (“HRAs”)), but does not include health FSAs.

23. Type of Coverage (cont.) With respect to non-COBRA coverage, it includes whatever health benefits can be continued. For example, for insured Texas and Louisiana plans, only major medical benefits may be continued. Therefore, only major medical benefits are subject to the subsidy.

24. Alternative Coverage An AEI may elect to continue the same coverage. He may alternatively elect other coverage offered by the employer if: the employer agrees; the premium is not more than the premium for the coverage in which the AEI was enrolled at the time of the qualifying event; the other coverage is offered to active employees at the time such election is made; and the other coverage is not: only dental, vision, counseling, referral services (or a combination of such services); a health FSA; or on-site medical facility services. The election for other coverage may be made within 90 days after the date of notice of the plan enrollment option.

25. Premium Amount The premium amount is whatever is actually charged to the COBRA continuee. Most COBRA continuees pay 102% of the cost of coverage (the premium for insured plans and the premium equivalent for self-funded plans). The employee will pay 35% and the employer will pay 65% of that 102% amount. Arrangements made by the employer to pay a portion of the COBRA premium (e.g., certain severance agreements) are not considered for purposes of the subsidy. Therefore, if the employer agrees to pay a portion of the COBRA premiums, the subsidy is based only on the COBRA continuee’s portion of the premium and not the employer’s contribution or the total premium.

26. Premium Amount (cont.) Example 1. Assume COBRA continuees pay 102% of the applicable premium which is $800. Under the new law, the individual must be entitled to continue coverage upon a payment of 35% of that amount ($280). This means the employer must pay $520 and is entitled to a payroll tax credit of $520. Example 2. Same facts as above except that the employer subsidizes 70% of the $800 premium as part of a severance agreement. So, the employer pays $560 and the individual pays the remaining $240. Under the new law, the individual must be entitled to COBRA coverage upon a payment of 35% of the $240 amount ($84). This means the employer must pay a total of $716 ($800 minus $84) and is entitled to a payroll tax credit of $156 ($240 minus $84). This result significantly punishes the employer for having subsidized COBRA premiums.

27. Premium Amount (cont.) Example 3. Same facts as above except that the employer subsidizes 100% of the $800 premium as part of a severance agreement. The employer is not eligible for any reimbursement. The premium can be paid by anyone other than the entity claiming reimbursement.

28. Duration of Subsidy The subsidy will begin the “first period of coverage” following February 17, 2009. A “period of coverage” is a monthly or shorter period with respect to which premiums are charged. Most plans use a calendar month for the period of coverage. In this case, the subsidy begins March 1, 2009 . The subsidy terminates with the first month beginning on or after the earlier of: the date which is 9 months after the first day for which the subsidy applies; the end of the maximum continuation period for the qualified beneficiary under the COBRA rules or the relevant State or Federal law; or the date that the AEI becomes eligible for Medicare or health coverage under another group health plan (including, for example, a group health plan maintained by the new employer of the individual or a plan maintained by the employer of the individual’s spouse).

29. Qualified Beneficiary Notice to Plan If a qualified beneficiary paying a reduced premium becomes eligible for coverage under another group health plan or Medicare, he or she must notify the group health plan providing the COBRA coverage of such eligibility in writing or pay a penalty equal to 110% of the subsidy provided after termination of eligibility. The notice should be made at the time and in the manner specified by the DOL.

30. Reimbursement of Overpayment For the first two months (March and April of 2009), if the full premium amount is paid for an AEI, the person who received the payment (e.g., the employer or the carrier) must reimburse the overpayment to the individual who paid the premium (e.g., the qualified individual) or provide a credit to the individual for future payments. In general, the plan sponsor may choose the credit approach as long as it is reasonable to believe that the credit will be used within 180 days of the date of the overpayment. Refunds must be made within 60 days. Obviously, if an eligible assistance individual ceases to be covered by COBRA, it is no longer reasonable to believe that the credit approach will work, triggering an obligation to pay a refund.

31. Special Enrollment For a qualified beneficiary who is eligible for a reduced premium and who has not elected COBRA coverage as of the date of enactment, a special 60 day election period begins on the date that notice is provided to the qualified beneficiary of the special election period. The coverage is not retroactive. It will begin the “first period of coverage” following February 17, 2009 and the coverage period is not extended beyond that required by COBRA. For purposes of preexisting condition exclusions, the period between the qualifying event and the date coverage is continued via the special enrollment period is not counted against participants for purposes of the 63-day break in coverage rules. No special enrollment with respect to state continuation.

32. Employer Notice to Qualified Beneficiaries Election notices must be changed to describe these provisions – either by amendment of existing forms or by inclusion of a separate document with the existing notice. The notice must include: the forms necessary for establishing eligibility for premium subsidy; the name, address, and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with such premium subsidy; a description of the special election period; a description of the obligation to notify the plan of subsequent eligibility for other group coverage or for Medicare and the penalty associated with failure to notify; a description, displayed in a prominent manner, of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the subsidy; and a description of the option of the qualified beneficiary to enroll in different coverage options, if the employer so permits.

33. Employer Notice to Qualified Beneficiaries (cont.) Notices describing the new rules must be provided by April 18, 2009. Failure to provide such notice is treated as a failure to meet the notice requirements under the applicable COBRA provisions.

34. Employer Notice to Qualified Beneficiaries (cont.) The DOL issued model notices which should be sent as follows: 1. Revised Election Notice. This notice should be sent to all qualified beneficiaries (employees, opposite sex spouses, and dependent children who were covered by the group health plan on the date of the qualifying event) who: have not yet received an election notice (or who were provided an election notice on or after February 17, 2009 that did not include the additional information on the premium subsidy); and have experienced any qualifying event at any time from September 1, 2008 through December 31, 2009. 2. Subsidy-Only Notice. This notice should be sent instead of the Revised Election Notice to qualified beneficiaries currently enrolled in COBRA coverage with any qualifying event (not just termination of employment or involuntary termination of employment) that occurred on or after September 1, 2008.

35. Employer Notice to Qualified Beneficiaries (cont.) 3. Special Enrollment Notice. This notice should be sent to all qualified beneficiaries where: the qualifying event causing loss of coverage is involuntary termination of employment that occurred between September 1, 2008 and February 16, 2009; and the qualified beneficiary either did not elect COBRA coverage or elected it but subsequently discontinued it.

36. For AEIs Currently on COBRA For example, if an AEI was involuntarily terminated on September 30, 2008 and elected to continue coverage at that time: he gets a notice by April 18, 2009; the subsidy will kick in March 1, 2009; the subsidy will end November 30, 2009, assuming no early termination event; coverage will end March 31, 2010 (18 months following September 30, 2008 – the regular COBRA period), assuming no early termination event.

37. For AEIs Not Currently on COBRA For example, if an AEI was involuntarily terminated on September 30, 2008 and did not elect to continue coverage at that time: he gets a notice by April 18, 2009; he has 60 days after date of notification of this new election right to elect coverage; his coverage will start March 1, 2009; the subsidy will kick in March 1, 2009; the subsidy will end November 30, 2009, assuming no early termination event; coverage will end March 31, 2010 (18 months following September 30, 2008 – the regular COBRA period), assuming no early termination event. The AEI will have 45 days from the date of election to make premium payment. For purposes of preexisting condition exclusions, the period between September 30, 2008 and March 1, 2009 is not counted against the AEI for purposes of preexisting condition exclusions (i.e., the 63-day break in coverage).

38. Reimbursement The employer is reimbursed by the amount of the premium that it pays on account of the subsidy. To the extent that such employer has liability for income tax withholding from wages or FICA taxes with respect to its employees, the employer is reimbursed by treating the amount that is reimbursable to the employer as a credit against its liability for these payroll taxes. To the extent that the amount exceeds the amount of tax liability, the IRS will credit or refund such excess in the same manner as if there were an overpayment of taxes. Any overstatement of the reimbursement amount is treated as an underpayment of payroll taxes and employers may be assessed and collected by the IRS in the same manner as it does for payroll taxes. For non-COBRA (e.g., state continuation) fully insured coverage, the carrier takes the credit. For multiemployer plans, the plan takes the credit.

39. Reimbursement (cont.) No payroll tax credit may be claimed until the reduced premium (35%) has been received for an AEI. An employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter. Amounts are claimed on revised Form 941.

40. Employer Notice to IRS Employers entitled to reimbursement may be required to submit a report with: Information on the receipt, including dates and amounts, of the AEIs’ 35% share of the premium. In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA. In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the AEIs. Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to December 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy. 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. A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals. Other documents necessary to verify the correct amount of reimbursement.

41. Employer Notice to IRS (cont.) A report must be submitted at such time and in such manner as the IRS requires. Guidance on this timing and form issue is needed quickly. There is not a current mechanism to submit such information under the current payroll tax deposit rules, nor under the quarterly employment tax returns. Form W-2 will likely be amended to contain a box for the subsidy amount.

42. Denials If individuals request treatment as AEIs and are denied such treatment, they can request an expedited review from the DOL (or the Health and Human Services (“HHS”) in connection with non-COBRA continuation) in consultation with the IRS.

43. Websites The IRS website is: http://www.irs.gov/newsroom/article/0,,id=204505,00.html The DOL website is: http:// www.dol.gov/ebsa/cobra.html

44. Action Items Attend this seminar. If applicable, discuss these requirements with your COBRA administrator to ensure it has the proper notices and reporting process in place to assist you in your compliance obligations. Discuss subsidy reporting with your payroll department or payroll vendor. Review all the individuals with qualifying events on and after September 1, 2008 to determine who gets a notice. Review all the individuals that terminated employment on and after September 1, 2008 and determine who was involuntarily terminated. If applicable, determine whether you will make alternative coverage options available. Look out for additional guidance. Be prepared to send out notices by April 18, 2009. Be prepared to track qualified beneficiaries receiving the subsidy. Be prepared to collect waivers from highly compensated individuals forgoing the subsidy. Be prepared to comply with the proper reporting requirements to the IRS.

45. Questions?

46. Contact Information Wendy C. Carmichael ▪ USI Southwest [email_address] 713-490-4730