IRS announces penalty for misuse of COBRA subsidy
August 14, 2009 by Kerry IsbergPosted in: COBRA, Special Report
If you haven’t heard of the Internal Revenue Service’s “6720C” penalty, you will soon — and so will ex-employees who don’t follow the rules when accepting COBRA.
And it’s something you’ll want to be sure you mention to ex-employees who are taking COBRA.
In a conference call with reporters, the IRS just announced that — under the 6720C provision – terminated employees who accept a COBRA subsidy will end up paying a price if they don’t adhere to strict eligibility rules.
Not only will they lose their health insurance, but they’ll also face a penalty for 110% of the subsidy if they’re later offered insurance coverage from another company or plan, and fail to inform their former employer.
The penalty was designed to help recapture subsidy payments (and then some) from people who accept the help but don’t qualify, IRS’ Joe Tiberio said in the conference call.
To illustrate how it works:
- Let’s say former employee Fred gets laid off and accepts a COBRA subsidy valued at $5,000 to continue his insurance.
- Six months later, he’s offered coverage from a new employer but decides to keep his current policy intact because it’s less expensive.
- His former employer finds out about the insurance and contacts IRS.
- Fred not only can lose his insurance, he must pay $5,500 — $5,000 to repay the subsidy amount plus the $500 additional penalty.
While Tiberio admits IRS doesn’t expect to frequently apply this penalty, it’s good news for struggling companies still carrying a lot of former workers on their insurance plans. By letting terminated employees know about the potential penalty when they sign up for coverage, you’ll not only save your company’s resources, but maybe also help employees already down on their luck resist the temptation of insurance fraud.
Always an exception
It’s important to note that not everyone who accepts the subsidy but isn’t eligible will be penalized. For example, the subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, don’t qualify for the subsidy at all. In these cases, the subsidy amounts will be recaptured when the former employee files a personal tax return (Form 1040).
Tags: 6720C, COBRA, internal revenue service, IRS
August 17th, 2009 at 9:25 am
So, does anyone know how this applies when “former employee Fred” has a pre-existing medical condition that wouldn’t be covered under his new employer’s policy for the first year? It seems reasonable that Fred would want to continue coverage as long as he can if the condition was serious – let’s say he previously had some heart problems. Or, perhaps he just had a child with allergies. Any pre-existing condition may not be covered under his new policy. Is he then entitled to keep the subsidy for the remaining period?
August 17th, 2009 at 10:01 am
I believe this only applies to the subsidy, not to COBRA coverage itself. Poor Fred with the pre-existing condition can continue on COBRA through the end of the COBRA period but would have to pay the entire premium.
August 17th, 2009 at 10:22 am
It is my belief that if Fred’s new company has a Wait period, and he waits it out and then goes on their plan, the pre-existing conditions would not apply.
August 17th, 2009 at 10:24 am
How does an employer find out that someone is cheating?
August 17th, 2009 at 10:27 am
What about the employee who has coverage available to him/her through the spouse’s coverage?
We have employees signing up for the subsidy but I’m sure they could be added to the spouse’s employer’s plan.
August 17th, 2009 at 10:37 am
Christine,
We have a wait period and the pre-existing condition only applies to the PPO plan. Anyone taking the HMO does not have to worry about pre-existing condition provisions.
Marvin,
The only way you are going to find out is by the employee volunteering the information to you or through one of his/her ex-workmates. Then the responsibility will be yours to notify them. It will help out your company because then you don’t have to have your Payroll Department do all the work in applying for the subsidy credit through your quarterly tax processing.
August 17th, 2009 at 10:37 am
As long as he has had continuous coverage with no gap in coverage of more than 63 days, an employers pre-ex clause would not apply (per HIPAA). Now if there was no coverage under the new policy for a certain condition and he decided to keep COBRA, he would not be eligible for the subsidy but could pay the full cost for COBRA.
August 17th, 2009 at 10:51 am
Does anyone have an answer to Susan’s question on if they have coverage available through their spouse’s insurance?
August 17th, 2009 at 11:08 am
Susan & S Knight,
If the spouse’s coverage is available to the terminated employee, he/she is NOT eligible for the subsidy. They are eligible for Cobra, but they don’t don’t get the reduced rates for the 9 months.
The rule is that if they are in any way eligible for any other coverage, they are not eligible for the reduced rates. The employee is not required to take the spouse’s coverage, but it leaves him/her ineligible for the reduced rates. He/she is still eligible for Cobra.
August 17th, 2009 at 11:12 am
If Fred’s new company offers medical insurance throught the same carrier (ie. Excellus/BCBS or Preffered Care/MVP) and he elects coverage through the same carrier the pre-exsisting waiting period can be waived. I had this happen with my heart condition coverage. My new employer offered Excellus so I elected this company for medical coverage. I then called Excellus and they linked my previous plan to the new plan so that I did not have to wait a full 2 years for my medication and continued testing to be covered by the new plan.
August 17th, 2009 at 11:36 am
S Knight and Susan:
If the ex-employee has “access” to a spouse’s medical coverage, they arent eligible for the subsidy plan. This includes if they have to pay for coverage if added on their spouse’s plan. The question as Marvin asks is how do we find out they are cheating?
August 17th, 2009 at 11:43 am
What if Fred wasn’t laid off, but was involuntarily terminated for cause. Not gross misconduct, so he is eligible for COBRA in itself; but ample cause leading to involuntary termination. The Subsidy appears to extend to these individuals – however, was that the intent? If an employee terminates an employee because they have poor performance and/or other well documented disciplinary issues – was the intent of the law to have the employer pay a portion of the COBRA and enact the subsidy?
August 17th, 2009 at 12:15 pm
I would be interested in Susan’s question about involuntary terminations. We have something like that possibly coming up.
August 17th, 2009 at 1:37 pm
Susan/Tere
Both regular COBRA and the COBRA subsidy eligibility can be taken away if an employee is terminated for gross misconduct only. It is the responsibility of the employer to make a clear and reasonable definition of gross misconduct (i.e. assaulting another employee or theft could maybe be gross misconduct, but showing up late all the time is probably not) and uniformly apply it to termination situations.
You should also remember that if you tell someone he/she is ineligible for the subsidy, they have the right to expedited review by the Department of Labor and you may end up carrying the subsidy on that person anyway.
Also, since you can claim the portion of the coverage as a credit against payroll taxes, you as the employer are not actually paying this subsidy, you are acting more like a government vehicle for a loan to the employee and are only bearing the burden of tracking/reporting (which is why you can include the 2% administration fee).
August 17th, 2009 at 1:43 pm
So help me understand. If ex-employee had single coverage with our company, however, spouse has insurance coverage that is avialalbe to ex-employee, they would not be eligible for the Cobra subsidy program? It was our understanding that the subsidy was available to each ex-employee at the same level of coverage they had as an employee, i.e. singe, family, employee & spouse. Is that not a correct interruptation?
August 17th, 2009 at 1:45 pm
Be careful with resignations, here is our story. An employee had received several warnings for taking extra smoke breaks and smoking in unauthorized areas. He had an overall very negative attitude, had threatened resignation twice before when faced with discipline and had a history of turning off sensors that validated our product as accurate. He was a good operator with baggage so we were trying to turn him around before termination. We found him by-passing security doors and smoking in an unauthorized area. He threatened to resign if we wrote him up. We issued a Final Warning and he presented his notice of resignation, hand written giving a date 2 weeks out. We had already discussed that we would accept his resignation and because we are an “employment at will” state we would make it effective the day received. The employee told us he had already found another job and was leaving us in two weeks so he was escorted out. The DOL ruled that because we “prevented” (Key word) him from working his notice then we had terminated his employment. When we presented pages of documentation to support that this employee had a history of problems, had knowingly violated policies, he had taken actions to conceal his extra breaks by-passing our security system and he was a risk to our business it was thrown out. Going forward when we accept a resignation the day presented we will pay for the 2 week notice period to avoid this cost. Turns out the threat of the new job fell through and now he is unemployed. We did beat his unemployment claim but the ESC and the DOL don’t always follow the same guidelines.
August 17th, 2009 at 1:53 pm
Susan & Tere,
If the termination is not for gross misconduct, the subsidy would apply according to DOL information.
http://www.dol.gov/ebsa/faqs/faq-cobra-premiumreductioner.html
Q3: Who is eligible to receive the COBRA premium reduction?
ARRA makes the premium reduction available for “assistance eligible individuals.” An Assistance Eligible Individual is a COBRA qualified beneficiary who meets the following requirements:
* Is eligible for COBRA continuation coverage at any time during the period from September 1, 2008 through December 31, 2009;
* Elects COBRA coverage (when first offered or during the additional election period provided by ARRA); and
* The COBRA election opportunity relates to an involuntary termination of employment that occurred at some time from September 1, 2008 through December 31, 2009.
However, if the individual is eligible for other group health coverage (such as through a new employer’s plan or a spouse’s plan) or Medicare he/she is not eligible for the premium reduction.
If the employee’s termination of employment was for gross misconduct, the employee and any dependents generally would not qualify for COBRA or the premium reduction.
Electing the premium reduction disqualifies the individual for the Health Coverage Tax Credit. Additionally, certain high-income individual may have to repay the amount of the premium reduction through an increase in their income taxes. If the amount earned for the year is more than $125,000 (or $250,000 for married couples filing a joint federal income tax return), individuals may have to repay all or part of the premium reduction through an increase in their income tax liability for the year. For more information, visit the IRS web page on ARRA.
In addition to this, if a termination is voluntary, but results from changes made to the employment situation by the employer, the individual may also be eligible for subsidy.
http://www.irs.gov/pub/irs-drop/n-09-27.pdf
What circumstances constitute an involuntary termination for purposes of the definition of an assistance eligible individual?
A-1. An involuntary termination means 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. An involuntary
termination may include the employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services. ****In addition, an employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee.****
August 17th, 2009 at 1:59 pm
In answer to Susan’s question:
According to the DOL “If you are eligible for other group health coverage (such as through a new employer’s plan, or a spouse’s plan) or Medicare you are not eligible for the premium reduction. This is under the FAQ’s on Q3
August 17th, 2009 at 2:03 pm
Jessica,
Good information for the most part, but please realize, employers are subject to audit. Anyone given subsidy in error will not be reimbursed. IRS has not been completely clear on the impact of errors. Being too free with approving questionable subsidy situations might result in penalties in addition to loss of reimbursement. I would highly advise contacting the EBSA.
Guidance and other information is available on the Department of Labor’s dedicated COBRA web site at http://www.dol.gov/COBRA. You are encouraged to subscribe to this page so that you will receive updates as new information is added to the site. You can also call 1.866.444.3272 to speak to an Employee Benefits Security Administration Benefits Advisor.
If still in doubt after speaking with the EBSA advisor, who cannot/will not tell you a firm yea or nay, let the appeal process do its job.
August 17th, 2009 at 2:06 pm
Patrick,
Was this finding based on an appeal for COBRA subsidy or a ruling on some other matter?
August 17th, 2009 at 2:12 pm
Sherrie,
Eligibility for COBRA is not the same as being eligible for the subsidized premium. If other coverage is available, they are not eligible for the subsidy. Makes no difference how expensive the other coverage may be, just that they are eligible to enroll in it.
If you have offered subsidy to individuals with other coverage available, act now to resolve. They can keep their COBRA, but you need to reverse the premium subsidy. Hopefully, you haven’t taken the tax deduction yet.
http://www.efast.dol.gov/ebsa/faqs/faq-cobra-premiumreductionER.html
Q#……. However, if the individual is eligible for other group health coverage (such as through a new employer’s plan or a spouse’s plan) or Medicare he/she is not eligible for the premium reduction.
August 17th, 2009 at 2:14 pm
MKH,
This was the DOL process of collecting information about the case then their final decision based on the information provided. I asked about filing an appeal but our legal counsel said don’t fight the DOL, we would be better off filing the COBRA subsidy and taking the tax write off.
August 17th, 2009 at 2:24 pm
“Fred” would not be subject to a pre-existing condition clause unless he had a lapse in coverage of more than 63 days. Also the waiting period at his new employer does not count towards the 63 days. So “Fred” would not ned to continue on COBRA for that reason.
August 17th, 2009 at 2:32 pm
Patrick,
So, the individual appealed a denial of COBRA premium subsidy, and the DOL found the individual eligible for the subsidy?
August 17th, 2009 at 3:08 pm
mkh,
No, the DOL granted the ex-employee the COBRA subsidy after their initial investigation. We considered an appeal but our legal counsel recommended against it.
August 17th, 2009 at 3:46 pm
This article recommends informing former employees about the IRS’s penalizing COBRA subsidy misuse. Is anyone doing that, and if so, are you doing so in writing?
Also, what kind of responsibility do employers have in terms of determining whether an ex-employee has access to other health coverage (e.g., a spouse’s plan)? If he/she checks the box in the model form, indicating that he/she is NOT eligible for other group coverage, may we simply accept that as true? My concern is that because the model notice is very lengthy, employees may not a) either read the entire document; or b) not completely understand it.
August 17th, 2009 at 8:59 pm
We had an employee who was already on his wife’s plan, medicare and ours when he was laid off. He wanted to continue COBRA since he was waiting for a transplant. We were informed by legal advise that he was also entitled to COBRA subsidy. Since he was previously covered under his wife’s plan and medicare and this was not a new eligibilty following the lay off, he was not disqualified.
August 18th, 2009 at 7:51 am
What is the time frame from when I send a cobra subsidy and when the terminated employee can turn in the form for approval? Thanks
August 18th, 2009 at 8:53 am
Hi Karen. In your scenario regarding Fred’s pre-existing condition, you failed to realize that this would not apply to him since he didn’t have a lapse in coverage. This is why it is crucial for individuals to accept COBRA when they have a pre-existing health condition.
August 18th, 2009 at 9:07 am
Wow, Marjorie, I thought I had it down, but your scenario makes me second guess myself. I was under the impression that because your employee had a life event of losing coverage, that he would be able to hop back on his wife’s plan or pick up cobra, but that he wouldn’t be eligible for the subsidy.
August 18th, 2009 at 2:20 pm
Marjorie,
I am confused how your legal counsel could come to this conclusion. ARRA explicitly prohibits an individual from receiving the subsidy if they are eligible for other coverage, and/or eligible for Medicare. You may be confusing eligibility for COBRA? An individual who’s Medicare eligibility date preceeds their Qualifying Event date does not lose eligibility for COBRA (such as would an individual who had these dates flipped) but they DO lose eligibility for the subsidy.
Sherri,
Depending on the tier structure of your health plans, you could potentially have a family containing individuals who are not eligible for the subsidy enrolled in COBRA family coverage taking advantage of the subsidy. For example, if your plan offers one-party, two-party, or three-or-more coverage, you could have a family of seven enrolled and receiving the subsidy so long as at least three of them qualified for the subsidy. This follows the incremental cost credit method explained in IRS Notice 2005-50. This notice relates specifically to HCTC payments, however it was referred to by the IRS representative in the EBSA webcast on March 24, 2009 as the method that would be followed in calculating the ARRA subsidy. In the example above, the incremental cost for family members 4 through 7 is $0.
August 18th, 2009 at 5:34 pm
Job security for lawyers?
August 18th, 2009 at 5:40 pm
An illustration of mkh’s comment “if a termination is voluntary, but results from changes made to the employment situation by the employer, the individual may also be eligible for subsidy”, and also his later comment, “If other coverage is available, they are not eligible for the subsidy. Makes no difference how expensive the other coverage may be, just that they are eligible to enroll in it.”. A friend was working at a rather low-paying job which provided full benefits. She was notified of a reduction of her hours, which would have made her no longer eligible for the benefits, and reduced her take-home pay enough that she would have been making little more than the amount of her COBRA payments, so she quit. Based on this, she would have been eligible to receive the subsidy, as her voluntary termination resulted from changes made by the employer. However, her husband had insurance that she could have been added to – at an added premium rate higher than her COBRA payment – so she was no longer considered eligible for the subsidy.
August 18th, 2009 at 6:39 pm
Re: SUSAN What if Fred wasn’t laid off, but was involuntarily terminated for cause. Not gross misconduct, so he is eligible for COBRA in itself; but ample cause leading to involuntary termination. The Subsidy appears to extend to these individuals – however, was that the intent? If an employee terminates an employee because they have poor performance and/or other well documented disciplinary issues – was the intent of the law to have the employer pay a portion of the COBRA and enact the subsidy?
The company does not pay for the subsidy, the government does; that money is reimbursed to the company. Involuntary termination unless for gross misconduct has no effect on benefits.
August 18th, 2009 at 10:38 pm
Who do employers need to contact about an ex-employee who signed up for the COBRA subsidy but is eligible for their spouse’s plan? We’ve contacted the ex-employee several times and informed them of the rules but they still insist on the subsidy. I had another HR contact say they’d tried to notify the correct people about a a similiar situation with their employer and no one wanted to act on it.
August 19th, 2009 at 8:04 am
Pre-existing conditions do not apply here. As long as he has not had a break in coverage of more than 63 days there is no pre-existing coverage issue. Even if he had a heart condition previously it would be covered under his new medical plan. If he did not elect COBRA and had a break in coverage for more than 63 days then he would be subject to the the pre-existing condition waiting period before those conditions would be covered under his new plan.
August 19th, 2009 at 9:36 am
One of my students was laid off from her job and would have been eligible for the subsidy. However, it was possible for her husband to add her to his plan at full cost, which was unaffordable so she could not have the subsidy. She did not take the coverage. Then he got laid off. Now they are both in trouble. Seems to me that the SPIRIT of this law was to help people maintain coverage, not to make them pay more. Stupid laws! We as employers should be less concerned with administration, since the actual cost to us is small and be trying to implement the underlying purpose of the COBRA subsidy.
August 19th, 2009 at 9:48 am
The cost to employers who are self-insured is not necessarily small. This allows people to have the coverage at minimal cost yet we are still paying the claims. If they have the coverage available through a spouse’s plan, they should be on their plan.
August 24th, 2009 at 10:33 am
Regarding Fred’s pre-existing issue; with a certificate of continuing coverage uninterrupted over the period of pre-COBRA insurance while employed, then progressing to COBRA enrollment with no coverage lapse for the obviously post employment period, Fred and his pre-existing and covered health issues, relative to any just beginning and new health insurance is covered. This is one advantage of COBRA, and Fred could thus accept new health insurance without fear of coverage lapses for pre-existing conditions. This eliminates any consideration Fred may surface regarding pre-existing rationale and therefore could not refuse this new policy as offered.
August 26th, 2009 at 9:12 pm
Re. Mary B. “Makes no difference how expensive the other coverage may be, just that they are eligible to enroll in it”
I have started a new position (6 month contract) that is offering insurance. It is bad insurance, with significantly worse coverage than my current Cobra insurance. The premiums for the insurance are also very high, basically the same as my current Cobra insurance without the reduction. I think it stinks that I have to drop my reduced-rate on Cobra (which I still have 8 months remaining) due to being offered this crummy insurance!
September 14th, 2009 at 3:31 pm
To the first responder above. If Fred had insurance with his former employer, and then was able come onto another group plan, his pre-existing condition would be waived. As long as you can show proof of prior coverage, pre-existing clauses do not apply.
September 15th, 2009 at 11:50 am
Wow, lots of different questions and issues.
Involuntary terminations are subsidy eligible even for cause. I told my assistant to offer COBRA to those terminated that are marked as gross misconduct. We still get managers who mark a termination as gross misconduct because the employee swore at them. There is no clear legal definition of gross misconduct and it isn’t worth the fight. Unless there was physical violence or murder, it is safer to send them the COBRA paperwork.
Everyone is correct about no pre-ex issues if there is no lapse in coverage per HIPAA. He could carry the COBRA at the subsidized rate until he is eligible for coverage under the new insurance and then he would not be eligible for the subsidy.
I did some digging regarding someone who already has Medicare Part A or other coverage and according to the ARRA FAQs, it doesn’t matter. If someone has other coverage, they do not qualify for the subsidy. Even if someone was able to enroll in spousal coverage and denied it and now is ineligible for spousal coverage, they do not qualify for the subsidy. I believe the exception is military/veteran Tricare coverage. I believe I read you cannot exclude them.
Those who say it isn’t costing the employer anything because of the tax break must not be self insured. The fully insured plans won’t see the impact until their renewal. We pay the employee claims out of our company funds. The 65% we can deduct from our taxes won’t be much of a dent if someone has a $50,000 claim. Even those who are fully insured will feel the pain when they get their rate renewals. If COBRA participation significantly increases and those enrolled on COBRA have large claims, a fully insured company will get hit with an abnormally high renewal.
Everyone is paying for the subsidy either in direct claim dollars or significantly increased renewal costs or both. I do think it is nice the government is helping with some of the costs via the payroll tax deductions but under no circumstance can anyone assume the 65% tax break will fully cover the cost of having all these additional people enrolled in COBRA.
I believe the IRS/DOL just published the info on how to notify them if someone is on the subsidy and is not eligible. There is a form or something to submit. This is VERY recent.
Patricia
September 21st, 2009 at 9:51 am
I was told by our “Cobra company” and State UI, if you have a police report (for theft, murder, etc) that would definitely be a gross misconduct termination situation.