Cobra Subsidy--Everyone Must Comply!

Written by Jereme Bates

The American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009 by President Obama. The new law includes a federal subsidy for COBRA premiums for up to 9 months that will reduce qualified participant’s COBRA premiums up to 65%. Our hope in this article is to outline who is eligible, convey the employer’s role throughout this process and provide the appropriate resources to implement these changes.

What is the subsidy; when does it start; and who does it effect?

The subsidy will be available beginning on March 1, 2009 for individuals with a COBRA-qualifying event between September 1, 2008 and December 31, 2009 . For individuals making less than $125,000 per year and couples making less than $250,000 annually, 65% of their COBRA premiums will be subsidized by the Federal government. For individuals making between $125,000 and $145,000, and couples making between $250,000 and $290,000, the subsidy will be reduced. At this time we do not know the reduced amount.

Employees who voluntarily terminated from employment or individuals who did not participate in the employer-sponsored medical and dental plan are not eligible for the subsidy. The COBRA subsidy is available for up to 9 months of COBRA coverage or until individuals are eligible for coverage under another employer’s plan, or Medicare. The standard COBRA window of 18 months does not change.

Continuation coverage provided to a qualified individual and any dependents (including family members) also qualifies for the subsidy. The dependent must, however, qualify for the continuation coverage as specified by COBRA, FEHB or the State continuation coverage requirements.

Because the subsidy will begin March 1, 2009, individuals will not be able to receive reimbursement for premiums they paid for COBRA coverage prior to this date. Individuals with COBRA coverage will be eligible on March 1, 2009 and will receive the subsidy. There is a 60-day window to reimburse or credit after enactment to give employers and insurers time to put the process in place. Employers are required to notify all individuals with a COBRA-qualifying event of the subsidy. Individuals have the right to elect the subsidized COBRA coverage even if they previously declined coverage back to September 1, 2008. They have 60 days following the date they receive the COBRA notification to elect coverage. However, the effective date will be retroactive to March 1, 2009 and the individual must pay premiums back to that date.

What is the employer’s role?

The subsidy must be communicated to individuals with a COBRA– qualifying event that occurred between September 1, 2008 and December 31, 2009. Employer’s COBRA notices must be revised to contain additional information about the subsidy. The Department of Labor has provided model notice language. These samples can be found at the Department of Labor or the Bates Insurance Group’s websites for your convenience. Individuals who would have been eligible for the subsidy, but either didn’t elect COBRA or elected it and let it lapse, must be given a special 60-day period in which to elect coverage. The subsidy will be administered as follows:

Employers with 20 or more employees – the employer will administer the subsidy and will be entitled to reimbursement through their 941 reporting.

Employers with up to 20 employees – the insurance company will administer the subsidy and will be entitled to reimbursement by the government. (Note: this issue has been submitted by several industry groups as problematic in states where employers collect continuation premiums from employees. Further clarification in federal rules may be forthcoming)

A typical example of how this will work for most employers:

• 102% of the active employee premium is $1,000

• Employer charges $1,000 to purchase COBRA

• 35% of $1,000 = $350 - the individual is required to pay $350

• The employer will pay $650 (65%) and then be reimbursed via a payroll tax credit on their 941 report.

The new law requires the federal Department of Labor to provide an expedited review of any employer’s refusal to allow a worker to elect group continuation coverage and receive the subsidy. Once the denied individual submits an application for review, the Department of Labor shall make an eligibility determination within 15 business days.

What to do next

All employers will need to contact their COBRA administrator to inform them of eligible COBRA candidates. For employers that self administer COBRA, eligible candidates need to be identified and letters need to be sent. At this time employers are encouraged to use the Department of Labor’s sample forms posted on the Department of Labor and the Bates Insurance Group websites.

To assist our clients throughout this transition, the Bates Insurance Group has posted a number of useful tools at www.batesinsurancegrp.com. Click “Client Resources” in the top right corner of our Home Page, for everything you need.

You will find the Department of Labor’s sample COBRA notices, the general information websites for the IRS and Department of Labor, various insurance company press releases on the COBRA changes, useful phone numbers and more. As always we would encourage those of you with additional questions to contact us for assistance.

“COBRA Subsidy Frequent Asked Questions” HealthPartners, March 2009

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401K Plans--Too Simple to be Good!

Written by Pete Thoresen

It sounds so simple. You need some quick cash because of a financial emergency and you decide to borrow from your 401(k) retirement plan. After all, it's your money and the interest and principal you pay goes back into your account. But as with most financial issues, it's not as simple as it sounds.

In fact, for most people, borrowing from a 401(k) is not the best solution. Yet, if you've got a financial emergency, and your only choice is between borrowing from your 401(k) plan and pulling the money before you're age 59 1/2, then it's a no-brainer. By all means, borrow the money. That's because there is no penalty on borrowing, yet there is a 10% penalty on early distributions, plus tax liabilities.

If your 401(k) plan allows loans (many do), you can borrow up to 50% of your vested account balance or $50,000, and whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.

Now, let's go through the pros and cons of borrowing from your 401(k):

The pros:

There is no credit check. You don't have to apply for the loan, and you can make plans knowing that you will get the loan.

There is a low interest rate. You pay the rate set by the plan, usually a couple of percentage points above the prime rate.

It's convenient. Some plans only require you to make a phone call, while others require a short loan form.

The cons:

You're spending your own money. Remember that you aren't really borrowing. All you are doing is using money from your 401k account, and creating an obligation to pay it back, like a credit card. Like a credit card, it is not tax deductible.

It's not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all paid back into the 401(k) with after-tax dollars . So, let's say your monthly payment is $300 and you're in the 25% tax bracket. You'll have to make $400 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again! TWICE !!

Unless you repay the loan, it is considered a premature distribution. You will owe federal and state income taxes as well as that 10% penalty if you are under age 59 1/2.

It affects your psychology and habits toward retirement saving. If possible, your retirement money should sit untouched until you retire.

The bottom line: the 401(k) should be the last resort. Like your “root cellar”, you should only eat from it when you must; otherwise it might not be there when you need it most.

Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Advisory services offered through Focus Financial Network, Inc., a registered investment advisor.

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Children's Health Insurance--Reauthorized

Written by Mary Bates

“On February 4, 2009, President Obama signed the Children’s Health Insurance Program (CHIP) Reauthorization Act into law. Among other things, the new law increases funding for state Children’s Health Insurance Programs (CHIPs) and makes a number of administrative changes to the program. In addition, the act allows states to subsidize premiums for employer-sponsored group health coverage, (not the same as the federal COBRA subsidy), and establishes new HIPAA special enrollment rights for individuals who either lose Medicaid or CHIP-funded medical coverage, or those who become eligible for a premium subsidy. Groups are required to provide an annual notice of these special enrollment rights to employees. Groups are also required to disclose benefit information to a state Medicaid agency upon request”.

The Internal Revenue Code, ERISA and the Public Health Service Act are amended to permit a HIPPA special enrollment effective April 1, 2009 under two circumstances.

Loss of Medicaid or CHIP eligibility. An employee or dependent enrolled in one of these programs and loses their eligibility, may enroll in the group plan within 60 days of the loss, and is eligible for your group benefits.

Becoming eligible for premium assistance. When an “eligible” employee or dependent that is not in your group plan becomes eligible for premium assistance, they may enroll within 60 days of becoming eligible.

“Groups in states like Minnesota with Medicaid and CHIP must annually notify each employee about the potential opportunities for premium assistance for the employee or the employee’s dependents. The Secretary of Health and Human Services, in consultation with the Medicaid directors, must jointly develop model notices for employers to use.” While groups are not required to notify employees of the new special enrollment right until the model notice is ready (beginning in 2010), Blue Cross has developed model notice language an employer could use to alert their employees now. This language can be found on our website and copied to your company stationery.

Information is trickling in as I write this. Special enrollment periods are a moot point for those of you with less than 50 employees because in Minnesota “small reformed group” allows for an eligible employee or dependent to enroll at any time. The pre-existing limitation period can be affected if one does not enroll in a timely fashion, but the enrollment option has always been there. For companies with more than 50 employees (working 20+ hours a week), the loss of CHIP or Medicaid eligibility, or qualifying for premium assistance, would entitle an “eligible” employee or dependent to a special enrollment period. If you have questions or concerns, please feel free to contact me at your convenience.

“Children’s Health Insurance Program (CHIP) Reauthorization Act and special enrollment eligibility period”

Homeowners--Replacement Costs vs. Other Values

Written by Ed Bates

Insuring your home up to now has been a relatively easy process. Your agent would come up with a replacement cost estimate and you would then mentally compare that to relative market value, the value on your tax statement, and possibly your investment in the home. Well folks, thanks to the unique times we are in, all of these numbers may now be miles apart. Construction material continues to escalate while labor may or may not be affected by a slow-down in residential housing. Those costs will affect your replacement cost. With housing sales where they are at this time, and the excess of available houses on the market, the price you can get for your home is generally lower, compared to where they were just 24 months ago. Thus market value is down. Many homeowners have 90-125% of their current home market value in outstanding mortgage obligations. Numerous appraisals were done during the peak of the real estate market where unfortunately, appraisers simply set values at sale price or higher, depending on the objective of the buyer. Finally, with diminishing tax roles, counties are hesitant to value homes at their current market values, thus creating yet another value for the home.

So in these scenarios, you could have four different values. An example is as follows: your agent tells you that your home’s rebuild cost is $400,000. An appraised market value as of March 2009 for the same structure might be $300,000. The Mortgage/s placed on the home total $350,000 and finally the County is hesitant to reduce the value due to loss of tax revenue and considers the value $325,000. What then is the proper amount to insure your home for?

Believe it or not, the only value that matters when properly insuring your home is the replacement cost value . That represents building your house new , without considering property, utilities, foundation, etc... The other values we discussed, consider all of these things and also factor in the depreciation and location of your home. The key is to make sure your agent and insuring company are estimating your replacement cost correctly. Our agency would be more than happy to help you with this process and offer you a competitive premium for your homeowner’s policy. We certainly understand that the inconsistency between these values can be confusing, but with economic times being what they are, it’s critical to properly insure your home. Call or email us. We have the tools to help you.