REVENUE RULING DETERMINES MEDICARE ENTITLEMENT is NOT a COBRA SECONDARY QUALIFYING EVENT

Recently, because of past ambiguities, the Internal Revenue Service (IRS) was requested to determine whether a former employee becoming entitled to Medicare would entitle the former employee's spouse and/or dependents to an additional 18-months of COBRA coverage for a total of 36 months. Revenue Ruling 2004-22 determined that Medicare entitlement in cases where COBRA coverage began prior to Medicare entitlement would NOT entitle the spouse and dependent to an extension of COBRA, unless under the terms of the group health plan the spouse or dependent would lose coverage based on the former employee's Medicare entitlement. The "Holding" in Revenue Ruling 2004-22 stated the following:

"The Medicare entitlement of a covered employee is not a second qualifying event for a qualified beneficiary unless the Medicare entitlement would have resulted (if COBRA continuation coverage, including COBRA continuation coverage due to the first qualifying event, is disregarded) in a loss of coverage for the qualified beneficiary under the group health plan that is providing the COBRA continuation coverage."

IMPORTANT INFORMATION - PLEASE REVIEW!

Generally, group health plans do not terminate coverage based on the event of Medicare entitlement. Consequently, in order to follow the most recent ruling, ADP/ProBusiness standard offering will not include an extension of COBRA to spouses and dependents based on a covered employee's Medicare entitlement (unless otherwise reasonably directed by the client). If a former employee on COBRA becomes Medicare entitled, the former employee will be terminated from COBRA coverage while the spouse and dependent(s) will be allowed to finish the initial 18-month COBRA coverage period. If your plan, under its terms, terminate coverage for spouses and dependents based on Medicare entitlement, please notify ADP/ProBusiness as soon as possible regarding this issue.

For a copy of Revenue Ruling 2004-22, please go to the following Web site where the IRS has indicated a copy will be posted as of March 8, 2004.

http://www.irs.ustreas.gov/

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CALIFORNIA HEALTH COVERAGE EXTENSIONS COMMENCE JULY 1, 2004

As of July 1, 2004, certain COBRA participants covered under group policies issued in the state of California will have the opportunity to extend their health coverage up to an additional 18 months following the exhaustion of federal COBRA. A brief history, rules and roles surrounding this legislation is set out below:

History, Rules and Roles:

On September 22, 2002, California Assembly Bill 1401 (AB 1401) was signed into law. AB 1401 is now codified under Section 1366.29 of the California Health and Safety Code and Section 10128.59 of the California Insurance Code. This law requires health care service plans (HMOs) and health insurers (indemnity plans) to offer specified individuals an opportunity to extend the term of their coverage to a total of 36 months IF they began receiving COBRA coverage on or after January 1, 2003, and exhaust their continuation coverage under COBRA where their maximum coverage would have been less than 36 months.

Specifically, in relation to Health Maintenance Organizations, Section 1366.29 stipulates:

"A heath care service plan shall offer an enrollee who has exhausted continuation coverage under COBRA the opportunity to continue coverage for up to 36 months from the date the enrollee's continuation coverage began, if the enrollee is entitled to less than 36 months of continuation coverage under COBRA."

In relation to Indemnity Plans, Section 10128.59 states the following:

"A health insurer that provides coverage under a group benefit plan to an employer shall offer an insured who has exhausted continuation coverage under COBRA the opportunity to continue coverage for up to 36 months from the date the insured's continuation coverage began if the insured is entitled to less than 36 months of continuation coverage under COBRA."

What this means is that health care service plans and group hospital surgical medical insurance policies issued, amended or renewed in California on or after September 1, 2003 (date set out in the law), must allow individuals who have exhausted their 18 month COBRA continuation period (or 29 months, in the case of disability), to continue on the group policy for up to an additional 18 months (or an additional 7 months in the case of disability).

Health Care Service Plan/Health Insurer Responsibilities:

Under the California continuation coverage regulations, health care service plans and health insurers are responsible for including the required continuation clause in their policies and are responsible for the collection of the required premiums.

Section 1366.26 states the following in relation to health care service plans:

"A qualified beneficiary electing continuation coverage shall pay to the health care service plan on or before the due date of each payment but not more frequently than on a monthly basis, not more than 110 percent of the applicable rate charged to a similarly situated individual under the group benefit plan being continued under the group contract. In the case of a qualified beneficiary who is determined to be disabled pursuant to Title II or Title XVI of the United States Social Security Act, the qualified beneficiary shall be required to pay to the health care service an amount no greater than 150 percent of the of the group rate after the first 18 months of continuation coverage."

Section 10128.56 contains the same provisions and requirements in relation to health insurers who underwrite indemnity plans.

Health care service plans and health insurers are allowed to outsource the billing and collection of premiums responsibility.

Employer Responsibilities:

Employers are responsible for notifying the COBRA qualified beneficiaries of their rights under the California extension and for directing them to the appropriate health care service plan or health insurer. The law states in Sections 1366.29 and 10128.59 that "notification of the coverage available under this section shall be included in the pending termination of COBRA coverage that is required to be provided to COBRA beneficiaries."

ADP National Account Services, ProBusiness Division will modify our COBRA participant notifications as required.

COBRA Participant Responsibilities

In order to exercise the coverage continuation rights afforded under the California law, an election to purchase the extended coverage must be made in writing to the carrier, no later than 30 calendar days prior to the end of the 18-month COBRA continuation period.

Cost of Continuation Coverage:

Under California law, specifically Section 1366.26 (HMO plans) and Section 10128.56 (indemnity plans) the premium for such extended coverage may not exceed "110 percent of the applicable rate charged for a covered employee or, in the case of dependent coverage, not more than 110 percent of the applicable rate charged to a similarly situated individual under the group benefit plan being continued under the group contract." Those individuals deemed to be disabled by the Social Security Administration may be charged up to 150% of the applicable rate.

Maximum Period of Coverage:

The California statutes extend the continuation coverage to a total of 36 months from the date the original COBRA coverage commences. For individuals who qualify for extended COBRA (to 29 months) due to Social Security Administration disability determination, the maximum period of coverage will also be 36 months from the date of the original COBRA commencement for them and covered family members who have exhausted COBRA.

California Extension Upon Exhaustion of Federal COBRA Quick Facts:

• The California extension shall apply to individuals who begin receiving COBRA coverage on or after January 1, 2003.
• COBRA participant must exhaust initial 18-month (or 29-month in case of disability) COBRA coverage period. Consequently, no individual shall be covered under the California continuation coverage rules until July 1, 2004.
• Pertains only to insured plans, not self-insured plans.
• Pertains only to medical plans, not stand alone dental or vision plans.
• Extension of coverage only needs to be offered if original COBRA coverage was less than 36 months. Spouses and dependent children who originally are offered 36 months of COBRA coverage are not eligible for the extension of coverage.
• Premiums cannot exceed 110% of applicable rate (except in relation to disability where it is up to 150%).
• Maximum coverage period under the California extension coverage is 36 months from the original COBRA commencement date.

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PAYROLL DEDUCTIONS IN EFFECT FOR CALIFORNIA PAID FAMILY LEAVE

Beginning January 1, 2004, and through the end of 2005, the California State Disability Insurance (SDI) payroll deduction withholding rate will include an additional 0.08 percent to pay for the initial cost of Paid Family Leave (PFL) benefits. The taxable wage limit for SDI withholding for the year 2004 will be $68,829.

PFL Background:

On September 23, 2002, Governor Gray Davis signed California Senate Bill 1661 (SB 1661) which makes California the first state in the union to establish a comprehensive leave program for workers. This new legislation allows workers to take six weeks off to care for a newborn, a newly adopted child or ill family member. Workers are eligible to begin taking leaves beginning July 1, 2004. SB 1661 is now codified under Section 3301 of the California Unemployment Insurance Code.

Section 3301 states:

"The purpose of this chapter is to establish, within the state disability insurance program, a family temporary disability insurance program. Family temporary disability insurance shall provide up to six weeks of wage replacement benefits to workers who take time off work to care for a seriously ill child, spouse, parent, domestic partner, or to bond with a minor child within one year of the birth or placement of the child in connection with foster care or adoption."

PFL will be funded entirely by employee payroll deductions and will average around $27.00 a year ranging up to $70.00 per year for workers making in excess of $72,000 annually.

Employees under the program are eligible to collect up to 55 percent of their wages with a maximum payment of $728.00 per week. No more than six weeks of family leave benefits shall be paid within any 12-month period. Furthermore, as a condition of the employee's initial receipt of paid family leave, an employer may require an employee to take up to two weeks of earned but unused vacation leave prior to the employee's initial receipt of paid family leave benefits.

It is important to note that employees are not eligible for benefits if they are also receiving other unemployment or disability benefits. Also, where an employee is eligible for Family Medical Leave Act (FMLA) and/or California Family Rights Act (CFRA) leave, any leave for which PFL benefits are paid must be taken concurrently with FMLA and/or CFRA leaves.

Employer Notification Responsibility:

Beginning January 1, 2004, the employer must provide Publication DE 2511 titled "Paid Family Leave" to each newly hired employee. As of July 1, 2004, the employer must provide this same notice to each employee leaving work to care for a seriously ill family member or to bond with a new child. DE 2511 may be printed from the following link and used for distribution to employees.

http://www.edd.ca.gov/direp/pflpub.asp

Employee Claim Filing Responsibility:

In order to be eligible for PFL benefits, an employee must file form DE 2501F, titled "Claim for Paid Family Leave Benefits" within 49 days of the first day of the employee's leave. This form will be made available for ordering after April 15, 2004.

Further PFL information can be found at the following link:

http://www.edd.ca.gov/

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ELECTRONIC WAGE STATEMENTS NOW OFFICIALLY PERMITTED IN DELAWARE

With the adoption of the Uniform Electronic Transaction Act (Act), Delaware has now officially codified the allowance of electronic wage statements to employees. The Act has clarified the previous language set out under 19 Del. C. Sec. 1108 (4), which stated that the employer shall "furnish to each employee at the time of payment a statement, either on the check or by separate slip." Many interpreted the "separate slip" to be the printed version of an electronic pay check, however, there is no interpretive issue now under the Act. The language set out under the Act, specifically 6 Del. C. Sec. 107(c), states:

"If a law requires a record to be in writing, an electronic record satisfies the law."

As reported by the American Payroll Association (APA), the state of Delaware confirmed in a letter to the APA dated December 18, 2003, that a wage statement may be delivered electronically if the following criteria are satisfied:

1. the statement provides the same information required by the Delaware Wage Payment and Collection Act;
2. the statement is in a form capable of being retained by the employee;
3. employees have the option of receiving the statement in written form.

To review the Delaware Uniform Electronic Transaction Act, please click on the link below:

http://www.delcode.state.de.us/title6/c012a/index.htm

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MASSACHUSETTS NOW REQUIRES EFT CHILD SUPPORT PAYMENTS

As of January 1, 2004, Massachusetts law mandates that employers who are required to withhold from employee paychecks and remit child support payments for five or more employees must remit the deductions to the Massachusetts Department of Revenue utilizing electronic funds transfer (EFT).

830 Code of Mass. Regs. Sec. 119A.5.1 states:

"As of January 1, 2004, any employer required to withhold and remit child support payments…for five or more employees shall make all child support payments through the Child Support Enforcement program."

In addition, an employer who has previously submitted two or more insufficient funds checks or who has a history of irregular or untimely payments in relation to child support payment submissions shall be required to utilize EFT regardless of the number of employees for which the employer is withholding payments for child support.

Finally, once an employer is enrolled in the EFT program as required, the employer may not withdraw from the program even if the number of employees for which payroll deductions are withheld falls below five.

830 Code of Mass. Regs. Sec. 119A.5.1 (3)(a)(1) states:

"Once an employer is registered as a mandatory participant in the Child Support Enforcement EFT program, the employer may not withdraw from the Child Support Enforcement EFT program even if the number of employees for whom the employer is required to withhold and remit child support payments decreases to less than five."

Employer instructions for enrolling into the Child Support Enforcement EFT program can be found on the link below:

http://www.cse.state.ma.us/programs/employer/eftmanual.pdf

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RETROACTIVE RELIEF GRANTED TO FSA and HRA DEBIT,
CREDIT and other STORED VALUE CARDS FOR 1099s

On February 12, 2004, the Internal Revenue Service (IRS) issued IRS Notice 2004-16. This communication confirms that payments made for medical care through flexible spending arrangements (FSA) or health reimbursement arrangements (HRA) via a debit, credit or stored value card are not subject to the Form 1099 information reporting requirements. The guidance further states that such relief is retroactive - the 1099 reporting requirements "will not apply to payments made pursuant to flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs) prior to January 1, 2003." Initially, the Form 1099 requirement was going to be a significant burden on employers and administrators offering debit, credit or shared value cards to FSA and/or HRA participants, but this notice clarifies that the requirement does not apply, either going forward, or retroactively. This is very good news in relation to debit, credit and stored value card administration.

A copy of IRS Notice 2004-16 may be found at the link provided below:

http://www.irs.gov/pub/irs-drop/n-04-16.pdf

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Please contact ADP National Account Services, ProBusiness Division for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 · Fax: (425) 417-4795 · e-mail: bsa@probusiness.com

(ADP National Account Services, ProBusiness Division does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

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