PLR 1024032: Retiree health coverage qualified for the Health Coverage Tax Credit

Plain-English summary

The IRS ruled that health coverage offered to retirees after an employer's bankruptcy was qualified health insurance for purposes of the Health Coverage Tax Credit. The coverage was provided through a VEBA and replaced retiree benefits that had been renegotiated through collective bargaining. Although the coverage did not satisfy all of the ordinary COBRA continuation-coverage requirements, the IRS treated it as coverage provided in settlement of the employer's COBRA obligation. The ruling also concluded that independent management of the VEBA and advance election of the coverage would not change its status as qualified health insurance.

Ruling snapshot

• Question: Does post-bankruptcy retiree health coverage offered through an independent VEBA qualify for the Health Coverage Tax Credit?
• Outcome: Approved
• Key authorities: IRC §§ 35, 4980B, 5000, and 9832; Treas. Reg. §§ 54.4980B-4, 54.4980B-5, and 54.4980B-7

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024032 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 35.00-00 ------------------, ID No. -----------------
Telephone Number:
---------------------
------------------- Refer Reply To:
---------------------------------------------- CC:TEGE:EB:HW
------------------------------- PLR-140881-09
---------------------------- Date:
March 04, 2010

Legend

Employer = ----------------------------------------------

Union A = --------------------------------------------------------------------------------

Union B = --------------------------------------------------------------------------------

Date A = --------------------------

Date B = --------------------------

Date C = --------------------------

Dear --------------:

   This is in reply to the ruling request dated September 9, 2009, and subsequent

correspondence, which was submitted by your authorized representative. Based on the
information submitted, we understand the relevant facts to be as follows.

    Pursuant to collective bargaining agreements with Union A and Union B,

Employer provided group health plan coverage to eligible retired employees and their
dependents. Employer became the subject of a bankruptcy proceeding under Title 11
of the United States Code. In connection with Employer’s bankruptcy, Employer, Union
A and Union B renegotiated the retiree health benefits. A VEBA trust was established
PLR-140881-09 2

to fund the renegotiated benefits. Employer is required to make ongoing contributions
to the VEBA trust pursuant to a negotiated formula. The plan and VEBA trust is
administered by a board of trustees, the members of which are independent of
Employer. Employer continues to provide a group health plan to active employees.

  Currently, Employer provides former employees or their beneficiaries with

medical, dental, and prescription drug coverage. Employer provides retiree benefits to
a number of groups of retirees pursuant to various plans and collective bargaining
agreements.

   Employer proposes to modify the current retiree benefits. The proposal

terminates the current retiree benefits and creates a VEBA that funds plans providing
health benefits to Employer’s retirees. The VEBA is independent of Employer and
managed by a board of trustees made up of retirees or representatives of retirees.
Coverage under the proposal is less generous than pre-bankruptcy coverage provided
by Employer. Retiree contributions are higher and coverage under the plan differs from
the coverage offered to active employees. Coverage is offered to retirees in lieu of
COBRA continuation coverage and available solely to individuals to whom an obligation
to make COBRA continuation coverage exists.

  Employer represents that the bankruptcy court issued an order approving the

agreements between Employer and Union A and Union B on Date A; that Employer’s
plan was terminated on Date B; and that the PBGC became the trustee of the plan on
Date C.

   Section 35 provides an 80 percent tax credit for amounts paid by an eligible

individual for qualified health insurance during eligible coverage months for coverage of
the individual and qualifying family members through the end of 2010. Under current
law, the credit is 65 percent beginning January 1, 2011.

   Section 35(e) defines 11 categories of health coverage that are qualified health

insurance, including coverage under a COBRA continuation provision (as defined in
section 9832(d)) and, through the end of 2010, coverage under an employee benefit
plan funded by a VEBA (as defined in section 501(c)(9)) established pursuant to an
order of a bankruptcy court. Section 9832(d)(1) defines a COBRA continuation
provision as section 4980B (other than subsection (f)(1) insofar as it relates to pediatric
vaccines), part 6 of subtitle B of Title I of the Employee Retirement Income Security Act
of 1974 (other than section 609), or Title XXII of the Public Health Service Act.

   Under section 35, an eligible individual is not entitled to the Health Coverage Tax

Credit (HCTC) for a month in which the eligible individual has other specified coverage
(and is not entitled to the HCTC with respect to a family member for a month in which
the family member has other specified coverage). Section 35(f)(1) provides that a plan
under which an employer pays or incurs at least 50 percent of the cost of coverage is
PLR-140881-09 3

other specified coverage for any individual receiving coverage under the plan. Section
35(f)(1) also provides additional circumstances under which eligible alternative TAA
recipients are considered to have other specified coverage, namely, if the employer
pays or incurs any portion of the cost of coverage under certain plans or if the eligible
alternative TAA recipient is merely eligible for coverage under certain plans for which an
employer pays or incurs at least 50 percent of the cost of coverage.

   Section 4980B requires group health plans (with some exceptions) to make

COBRA continuation coverage available to qualified beneficiaries in connection with the
occurrence of qualifying events. A bankruptcy proceeding under Title 11 of the United
States Code with respect to an employer that, but for the COBRA continuation coverage
required under section 4980B, results in a loss of coverage for a retired employee (or a
spouse, dependent child, or surviving spouse of a retired employee) is one of the
qualifying events. Under §54.4980B-4 Q&A-1(c) of the Miscellaneous Excise Tax
Regulations, to lose coverage in this context means to cease to be covered under the
same terms and conditions as in effect immediately before the qualifying event.

   Section 54.4980B-7 of the regulations sets forth the rules for how long a plan

must make COBRA continuation coverage available. In connection with a qualifying
event that is the bankruptcy of the employer, under Q&A-4(e) of §54.4980B-7, a plan
may be obligated to make COBRA continuation coverage available to the retired
employee until the retired employee’s death, and, in the case of any other qualified
beneficiary, until the earlier of the qualified beneficiary’s death or the date that is 36
months after the retired employee’s death. However, under Q&A-1 of §54.4980B-7, the
obligation to make COBRA continuation coverage available can end on various earlier
dates, including the date that the employer ceases to provide a group health plan to any
employee.

    Under Q&A-1 of §54.4980B-5 of the regulations, the coverage that must be made

available to a qualified beneficiary is the same coverage that is made available to
similarly situated nonCOBRA beneficiaries.

   Under section 4980B(g)(2) of the Code, a group health plan has the same

meaning under section 4980B as under section 5000(b)(1). Under section 5000(b)(1), a
group health plan is a plan of, or contributed to by, an employer or employee
organization to provide health care to one or more listed classes of individuals, including
current and former employees.

   The plan was established by Employer and Union A and Union B to provide

health care to former employees of Employer. Employer contributes to the plan. The
plan is clearly a group health plan within the meaning of sections 5000(b)(1) and
4980B(g)(2) of the Code.
PLR-140881-09 4

    There is nothing in the facts to indicate that any of the exceptions to the COBRA

continuation coverage requirements of section 4980B applies to either the plan or to any
other group health plan maintained by Employer for any relevant period described in
this ruling. The benefits the retirees of Union A and Union B are receiving from the plan
are different from the benefits they were receiving before those benefits were
renegotiated. Any change in the terms or conditions under which benefits are provided
constitutes a loss of coverage for purposes of the COBRA continuation coverage
requirements of section 4980B. Accordingly, the bankruptcy of Employer is a qualifying
event for any Union A or Union B retiree who was receiving retiree coverage before the
change in benefits occurred (and for any spouse or dependent child or surviving spouse
of such a retired employee receiving benefits under a group health plan of Employer on
the day before the bankruptcy proceeding commenced with respect to Employer).

    The obligation of Employer under section 4980B is to make available to the

qualified beneficiaries in connection with the employer’s bankruptcy the same coverage
it makes available to similarly situated beneficiaries who have not experienced a
qualifying event. Coverage under the plan does not satisfy this requirement. Coverage
that does not satisfy the requirements of section 4980B can nevertheless be considered
coverage provided pursuant to section 4980B if the coverage is made available in
settlement of an obligation to make COBRA continuation coverage available. Under the
facts described, coverage made available under the plan to those individuals who are
qualified beneficiaries in connection with Employer’s bankruptcy is being made available
at least in part in settlement of whatever obligations Employer may have had under the
COBRA continuation coverage requirements by changing the terms under which retiree
coverage would be made available. Because the bankruptcy proceeding is a qualifying
event and Employer is obligated under section 4980B to make continuation coverage
available to qualified beneficiaries, the coverage made available under the plan to
qualified beneficiaries in connection with Employer’s bankruptcy is in settlement of an
obligation to make COBRA continuation coverage available.

    In general, it is inconsistent with the policies reflected in the rules of section

4980B to allow an effective waiver of an individual’s future rights as a potential qualified
beneficiary before a qualifying event for that individual has occurred. If such a waiver
could be effective, a plan could avoid any COBRA continuation coverage obligation
merely by requiring all enrolling participants to waive all COBRA continuation coverage
rights as a condition of enrollment. The regulations acknowledge the right of a qualified
beneficiary to waive the right to COBRA continuation coverage once a qualifying event
has occurred, and the right to revoke that waiver before the end of the election period.

   Although the regulations do not acknowledge the possibility of a waiver before

the right to elect COBRA continuation coverage arises, we believe that in limited
circumstances such a waiver can be effective. If a waiver is entered into shortly before
and in anticipation of a qualifying event, with the waiving party being fully informed of
the right to COBRA continuation coverage in connection with the anticipated qualifying
PLR-140881-09 5

event, then the waiver is not contrary to the policies reflected in section 4980B. In these
limited circumstances in which an anticipatory waiver of COBRA continuation coverage
is not contrary to public policy, the provisions in the regulations allowing revocation of
the waiver until the end of the election period apply. Thus, although an individual may
effectively waive some or all of the individual’s COBRA continuation coverage rights
shortly before the occurrence of the qualifying event that gives rise to those rights,
under the Code provisions and regulations relating to COBRA continuation coverage
the individual may revoke that waiver at any time before the end of the COBRA election
period. However, the effect of other laws (such as law under Title 11 of the United
States Code) may affect the individual’s right under the Code to revoke the waiver.

    In the facts described, Union A and Union B negotiated the terms of the plan with

Employer after the bankruptcy proceeding commenced but before it had resulted in a
loss of health coverage for the retirees, and thus before a qualifying event had occurred.
The terms of the plan (because the coverage is not the same as that provided to
similarly situated nonCOBRA beneficiaries) do not satisfy the requirements for COBRA
continuation coverage. The agreement by Union A and Union B to accept the plan in
lieu of the coverage required under section 4980B was an effective waiver of the
retirees’ COBRA continuation coverage rights. The Code and the regulations alone
would not prevent an individual subject to the agreement negotiated by Union A and
Union B from revoking that waiver at any time before the end of the COBRA election
period. However, applicable law under Title 11 of the United States Code may prevent
such a revocation from taking effect.

   Coverage provided pursuant to the requirements of section 4980B is coverage

provided under a COBRA continuation provision within the meaning of section 9832(d)
even if the coverage does not satisfy the requirements of section 4980B. Such
coverage is also qualified health insurance within the meaning of section 35.

   Accordingly, based on the information presented and representations made, we

rule as follows:

   1. Coverage under the plan, while not satisfying the requirements of section

4980B, is qualified health insurance for purposes of section 35 with respect to those
individuals to whom Employer had the obligation to make COBRA continuation
coverage available under section 4980B in connection with Employer’s bankruptcy.

  2. Management of the VEBA trust by the Board of Trustees, which is

independent of Employer or any other entity, will not affect the status of the health
coverage as qualified health insurance under section 35.

   3. Election of the health coverage in advance of the applicable COBRA

continuation period will not affect the health coverage’s status as qualified health
insurance under section 35.
PLR-140881-09 6

    Except as specifically ruled, no opinion is expressed or implied concerning the

tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. No opinion is expressed about how the Employee Retirement Income
Security Act of 1974 applies to the facts described in this letter. Further, no opinion is
expressed concerning the tax-exempt status of the VEBA.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                   Sincerely,



                                   Harry Beker, Branch Chief
                                   Health and Welfare
                                   Office of Division Counsel/Associate Chief
                                   Counsel (Tax Exempt & Government Entities)