Recent Developments In Employee Benefits And Executive Compensation

Health Care Reform provides for a tax credit equal to a percentage of the health insurance premium actually paid by an employer on behalf of employees electing to receive health care coverage. The IRS has provided guidance in the form of questions and answers to assist small businesses to determine eligibility for and the amount of the tax credit. Although the tax credit is available to tax-exempt organizations, this initial guidance applies only to taxable entities. The tax credit is only available to small employers, defined as any employer with fewer than 25 full-time equivalent employees averaging less than $50,000 in wages. The tax credit is graduated, beginning with the full credit granted to employers with fewer than 10 FTEs averaging less than $25,000 in wages. For taxable years beginning in 2011 through 2013, the tax credit is equal to 35% of the premiums actually paid by the employer. The tax credit increases to 50% for taxable years beginning in 2014. The IRS guidance clarifies how to calculate the number of FTEs, average wages, eligible expenses and the tax credit. Small businesses should keep in mind the following:

• The calculation of FTEs will include part-time, but not seasonal employees.
• Self-employed individuals, 2% shareholders in S Corporations, and 5% owners of the employer do not count as employees.
• The requirement that the employer pay a uniform percentage of not less than 50% of the premium for health care coverage applies to employee-only coverage. An employer may charge a different amount for employee plus spouse or family coverage.
• Both the FTE and average wage calculation will reduce the available tax credit to the extent the calculation exceeds 10 FTEs and $25,000 respectively. Therefore a small employer could be ineligible for the tax credit altogether.

Comment: Small employers that currently offer health care coverage, but do not pay 50% of the employee-only coverage should consider whether increasing the amount of the employer contribution would be offset by the tax credit.

Cobra Subsidy Extended. . . . Again

On April 15, 2010, the President signed into law the third in a series of extensions to the Federal COBRA subsidy, which was initially enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”). The 15-month, 65%, federal subsidy would have expired on March 31, 2010. As a result of the Continuation Extension Act of 2010 (“CEA”), however, the COBRA subsidy is extended through May 31, 2010 and is retroactively effective to April 1, 2010.

For individuals who experienced a termination of employment on or after April 1, 2010 but before April 16, 2010, the CEA requires plan administrators to notify such individuals by June 15, 2010 of their ARRA rights (including the COBRA subsidy) and to allow them to elect COBRA coverage up to 60 days following receipt of such notice. As clarified by the prior extension, the COBRA subsidy is available both to individuals who experience an involuntary termination resulting in a loss of group health coverage and to those individuals who experience a loss of group health coverage due to a reduction in hours that is followed by an involuntary termination.

Comment: Administration of COBRA continuation coverage has become increasingly challenging for employers and plan administrators due to the numerous extensions and notice requirements associated with the COBRA subsidy. To avoid the pitfalls of these challenges, employers and plan administrators should review their COBRA notice and practices to make sure they accurately reflect the most up-to-date COBRA subsidy requirements. Additional extensions to the COBRA subsidy are expected. Legislation is currently pending, which, if passed, could extend the COBRA subsidy through December 31, 2010.

Final Tricare Incentive Prohibition Regulations Issued

On April 9, 2010, the Department of Defense (“DOD”) issued final regulations regarding the TRICARE incentive prohibition. TRICARE is the DOD’s health care program for military members, their families, or survivors. Under the TRICARE prohibition, employers are prohibited from offering TRICARE beneficiaries financial or other incentives not to enroll in (or to terminate enrollment in) employer-sponsored group health plans, which are primary to TRICARE. The final regulations confirm that the TRICARE incentive prohibition “applies in the same manner” as the prohibition against offering incentives under the Medicare Secondary Payer rules.

According to the final regulations, employers are precluded from offering TRICARE beneficiaries an alternative to the employer’s group health plan unless:

• The beneficiary has primary coverage other than TRICARE; or
• The benefit is offered under a cafeteria plan under section 125 of the Internal Revenue Code and is offered to all similarly situated employees, including non-TRICARE-eligible employees; or
• The benefit is offered under section 125 of the Internal Revenue Code and, although offered only to TRICARE-eligible employees, the employer does not provide any payment for the benefit nor receive any direct or indirect consideration or compensation for offering the benefit; the employer’s only involvement is providing administrative support for the benefit under the cafeteria plan, and the employee’s participation in the plan is completely voluntary.

All employers, except those with less than 20 employees, are subject to the TRICARE incentive prohibition. Employers who violate the TRICARE incentive prohibition could be subject to a penalty of up to $5,000.00

Comment: Employers subject to the TRICARE incentive prohibition should become familiar with the final regulations, which become effective June 18, 2010. Employers should further consider how the exceptions to the TRICARE incentive prohibition impact on their group health plans and interact with other laws applicable to such plans including ERISA, COBRA and HIPAA.

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.