New COBRA Trade Act Election – Implications for Plan Administrators

Earlier this year, President Bush signed into law the Trade Act of 2002 (the "Act"), which expanded trade adjustment assistance ("TAA") benefits available to workers dislocated by import competition or shifts of production to other countries. The Act also amended the Internal Revenue Code ("Code") to create a tax credit for up to 65% of the premiums paid by eligible individuals for certain types of medical coverage (including COBRA medical coverage) for eligible individuals and their qualifying family members. In addition, the Act affects COBRA administration by adding a second COBRA election period for individuals who become eligible for TAA benefits. Both the tax credit and COBRA election provisions recently became effective, and this Legal Alert briefly discusses the new provisions and their implications for plan administrators.

New Federal Tax Credit. The Act added new Code section 35, which authorizes eligible individuals to take a tax credit on their Federal income tax return for up to 65% of the premiums for certain health insurance coverage (including COBRA coverage) for themselves and qualifying family members (e.g., spouses and dependent children). Individuals who are eligible for the tax credit include individuals who are receiving TAA benefits (or who would be eligible to receive TAA benefits but for the requirement that the individual first exhaust unemployment benefits) and individuals who are at least 55 years old and who are receiving pension benefits paid by the Pension Benefit Guaranty Corporation (PBGC). The tax credit is available beginning December 1, 2002. It is available for COBRA coverage premiums, except for COBRA coverage relating to health flexible spending account plans and limited-scope dental and vision plans that are excepted from HIPAA’s portability requirements. The tax credit is also available for group medical plan coverage available through the employment of the eligible individual’s spouse, for individual medical insurance coverage if the eligible individual was covered for the 30 days prior to termination of employment and for certain other medical coverage provided through or by a state program. However, the credit is not available if the individual is covered under any other medical insurance (other than HIPAA-excepted benefits) that is provided by any employer (or former employer) of the individual or the individual’s spouse, if the employer (or former employer) pays at least 50% of the cost of the coverage. (For this purpose, coverage paid for by an employee on a pre-tax basis under a cafeteria plan is deemed to be "employer-paid.")

Implications for Plan Administrators. While the tax credit may be taken by the individual on his or her own Federal income tax return, the Act also instructs the Treasury Department to establish a program for transmitting premium payments (in an amount equal to the credit) directly to the providers of the qualifying health insurance. For example, under the yet-to-be-developed program, the COBRA beneficiary would pay 35% of the COBRA premium to the health insurance provider, and the provider (presumably, the insurer or a self-insured employer plan) would then collect the remaining 65% from the government. The provider is also required to file an information return listing participants receiving the advance credit and other related information. This program is scheduled to be established no later than August 1, 2003. Although program details are not yet available, it appears plan administrators will not be required to participate in this new program unless the plan covers a former employee who is eligible for the credit (i.e., a TAA benefit recipient or a PBGC pension recipient).

Special Second COBRA Election Period. In addition to creating the new tax credit structure, the Act also amended COBRA by adding a new second COBRA election period (the "Second Election Period") for qualifying individuals. An individual will qualify for the Second Election Period if the individual –

  • Receives TAA benefits (or would be eligible to receive TAA benefits but for the requirement that the individual first exhaust unemployment benefits);
  • Lost health coverage due to a termination of employment that resulted in the individual becoming eligible for TAA benefits; and
  • Did not elect COBRA coverage during the regular COBRA election period.

Qualifying individuals may then elect COBRA coverage during the Second Election Period, which is the 60-day period that begins on the first day of the month in which the individual becomes a qualifying individual, but only if the election is made not later than six months after the initial loss of coverage (e.g., the loss of coverage at termination of employment). Once elected, the COBRA coverage commences on the first day of the Second Election Period (coverage is not retroactive to the date of the initial loss of coverage). The Second Election Period rules are effective for individuals who have filed for TAA benefits on or after November 4, 2002. There is no Second Election Period in connection with receiving pension benefits from the PBGC.

Because the Act did not amend COBRA’s maximum coverage period rules, the maximum coverage period for COBRA elected in the Second Election Period appears to still be measured from the initial loss of coverage. Therefore, because qualification for TAA benefits is not immediate, this would mean that affected individuals would not be eligible for the maximum COBRA coverage period. However, some argue that this reading of the statute is inconsistent with the general employee-protective purpose of the Act, and that the date from which the maximum coverage period is calculated should be the first day of the Second Election Period (thereby allowing a full maximum coverage period). Until guidance from the IRS is issued, presumably a good faith interpretation will be acceptable.

Implications for Plan Administrators. The Second Election Period requirements only apply if an employer has a former employee that is eligible for TAA benefits. In practice, therefore, an employer may never need to offer a Second Election Period. However, the Second Election Period is unequivocally a part of COBRA law and, therefore, it appears advisable to include some basic reference to it in a plan’s COBRA notice for the notice to be legally complete. Because former employees file individually for TAA benefits, the notice should advise employees of their obligation to notify the plan administrator of any TAA award. Further, employers in businesses that are very unlikely to trigger TAA eligibility may decide to put off developing election materials for the Second Election Period until there is a need. In this regard, it is noteworthy that an employer is not obligated to provide a Second Election Period because an employee’s spouse receives TAA benefits. In other words, the relevance of the Second Election Period provisions will depend solely on conditions in an employer’s own business.

Employee Benefits Legal Alert is a bulletin of new developments and is not intended as legal advice or as an opinion on specific facts. For more information on employer health and welfare plans, please contact us through our Web site