As we noted in a previous post, the recently issued final 2015 Instructions for Forms 1094-C and 1095-C changed certain of the rules relating to the reporting for offers of COBRA coverage where the COBRA qualifying event occurs in the reporting year. This post explains these changes in detail and also covers the reporting of COBRA in years subsequent to the year in which the qualifying event occurs.
Background—COBRA’s Place in the Code § 4980H Scheme
The publication of final regulations under the Affordable Care Act’s employer shared responsibility rules in February 2014 resulted in some initial confusion concerning the place of COBRA in the regulatory scheme. The source of the confusion, and how it manifested, was illustrated in 2015 American Bar Association/Joint Committee on Employee Benefits Q&As with the Treasury Department/IRS, Question 23.
NOTE: Representative members of the ABA Joint Committee on Employee Benefits and personnel from the Treasury Department and the IRS meet in May of each year for an informal Q&A session to discuss questions and proposed answers on current topics of interest submitted to the regulators in advance. The ABA members and their Treasury and IRS interlocutors spend a good deal of time and effort in soliciting, curating and responding to these questions, and participation by the regulators is particularly welcome. The sessions are transcribed and are posted to the ABA website. Importantly, the regulators’ responses reflect their unofficial, individual views. The responses are not official guidance, and they may not be relied on. Nevertheless, they provide useful insight into the way the government representatives view a particular matter.
The facts in the Q&A are as follows:
Employer B (who has elected to use the look-back measurement method) utilizes a standard measurement period that begins on January 1 and ends on December 31 for purposes of determining its full-time employees. The corresponding standard stability period begins on the immediately following January 1 and ends on the following December 31. Employee A was hired as a full-time employee (i.e., 30 or more hours per week) on April 12, 2014. Employee A elected to enroll in Employer B’s group health plan effective as of July 1, 2014. Employee A transferred to a part-time position on February 28, 2015 and became ineligible for coverage. Employee A’s group health plan coverage terminates on February 28, 2015 in accordance with the terms of the plan.
The questioner asks, “What measurement period applies to Employee A when he becomes a part-time employee? How does COBRA interact with subsequent offers of coverage that may have to be made during 2015?”
In the proposed response, the questioner correctly assumes that Employee A must be offered COBRA coverage if he loses coverage as a result of his transfer to part-time status. The proposed response next assumes that “[i]f Employee A averages 30 hours of service per week during March 2015, Employer B must offer to reinstate Employee A’s group health plan coverage immediately retroactively back to March 1, 2015.” The proposed answer also assumes that, thereafter, any coverage that Employee A lost because he did not work 30 hours per week for a particular month would trigger a new offer of COBRA coverage.
The question is a thoughtful one. One need not stray too far (if at all) from the text of the final regulations to find support for it. Nevertheless, the IRS disagreed with the questioner’s last two assumptions. Here, in relevant part, is what they had to say:
Based on the stated facts, Employee A was ineligible for group health plan coverage under the terms of the plan beginning February 28, 2015. Accordingly, Employer B may owe an assessable payment under Section 4980H(b) for any calendar month in which Employee A averages at least 30 hours a week, assuming that Employee A has purchased coverage on an exchange and receives a premium tax credit for that month. The offer of COBRA continuation coverage does count as an offer of coverage for Section 4980H purposes; however, this offer of coverage would be sufficient to avoid a Section 4980H(b) assessable payment only if the offer was affordable and provided minimum value. If Employer B wishes to avoid an assessable payment under Section 4980H(b), one option would be to offer subsidized COBRA coverage at a low enough cost to satisfy one of the affordability safe harbors. (Emphasis added).
The IRS goes on to observe that, “[t]he proposed answer as initially drafted seems to assume that Section 4980H could override the plan terms and require coverage in any month in which the employee is full-time for Section 4980H purposes. This is not the case.” The response explains that Code § 4980H is relevant only for purposes of whether an assessable payment is owed. It does not dictate plan eligibility. The offer of COBRA coverage in the case of a reduction in hours may, however, affect affordability.
The “old” rules for COBRA reporting
The 2014 Instructions for Forms 1094-C and 1095-C provided rules (explained below) that applied where COBRA coverage is provided to an employee who was employed during any month of the reporting year. In Q&As posted to the IRS website, the IRS established two sets of rules, one for terminating employees and another for employees with a reduction in hours.
- Terminated employees
For an employee who lost coverage as a result of termination, the proper reporting treatment depended on whether the employee enrolled in coverage, and who else enrolled (e.g., employee only, employee and spouse, etc.). Under this rule, an offer of COBRA continuation coverage made due to termination of employment was reported as an offer of coverage on Form 1095-C, Part II only if the former employee enrolled in the COBRA coverage. If COBRA coverage was offered to the former employee’s spouse or dependents as well as the former employee, but only the former employee enrolled, the correct series-1 indicator code for Line 14 was 1B (Minimum essential coverage providing minimum value offered to employee only) (assuming, of course, that the coverage qualified as minimum essential coverage). But if the former employee elected COBRA coverage for additional family members, the series-1 indicator code for Line 14 indicated the type of coverage offered to the former employee, dependents and spouse. Lastly, if the former employee did not elect COBRA coverage, but a previously covered individual such as a spouse or dependent elected COBRA coverage, the coverage was not reported on Form 1095-C, Part II.
- Reduction in hours
Where an employer makes an offer of COBRA continuation coverage to an employee who lost eligibility due to a reduction in hours (e.g., a change from full-time to part-time status resulting in loss of eligibility under the plan) the employer was instructed to report the offer of COBRA coverage as an offer of coverage in Part II of Form 1095-C.
The “new” rules for COBRA reporting
The 2015 instructions simplify the reporting for offers of COBRA coverage in the case of terminated employees. An offer of COBRA coverage made to a former employee upon termination of employment is no longer reported as an offer of coverage on line 14. Instead, series-1 code 1H (No offer of coverage) must be entered for any month for which the offer of COBRA continuation coverage applies. The 2015 instructions complete the reporting treatment for terminated employees as follows: “Do not enter code 2C in line 16 for any month in which a terminated employee is enrolled in COBRA continuation coverage (enter code 2A).”
An offer of COBRA continuation coverage that is made to an active employee (e.g., as a result of a reduction in hours resulting in the loss of eligibility for coverage under the plan) is reported in the same manner and using the same code as an offer of that type of coverage to any other active employee. Of course, if the employee cost increases (as it would if there is no employer subsidy—which is the common case) then the affordability calculus will change. This will be reflected in Form 1095-C, Part II, Line 15, and if the coverage is thereby rendered unaffordable Line 16 may also be affected.
NOTE: As of the date of this post, the IRS’s Q&As cited above have not been updated to reflect the new COBRA reporting rules.
COBRA coverage provided to employees not employed during any month of the reporting year
The 2015 instructions cover the subject of COBRA coverage provided to employees not employed during any month of the reporting year under the heading of “Reporting of Enrollment Information for Non-Employees.” There is no requirement to provide a Form 1095-C to a non-employee, but where coverage is provided, there is an obligation to provide a Form 1095-B and transmit on a Form 1094-B. In the case of a fully-insured plan, the carrier will have the obligation to provide the Form 1095-B and transmit on Form 1094-B.
In the case of a self-funded plan, employers that offer coverage to non-employees who enroll in the coverage (e.g., COBRA, retiree coverage, or coverage provided to non-employee directors) have an option: they may use Forms 1094-B and 1095-B, rather than Form 1095-C, Part III, to report the coverage provided to those individuals and family members, where appropriate. If the employer chooses to use Form 1095-C, Part III to report the coverage, the proper series-1 reporting code is 1G (offer of coverage to employee who was not a full-time employee for any month of the calendar year (which may include one or more months in which the individual was not an employee) and who enrolled in self-funded coverage for one or more months of the calendar year). The instructions hasten to add that, “[t]he Form 1095-C may be used only if the individual identified on line 1 has an SSN.”