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| IRS Issues Final and Proposed COBRA Regulations Earlier this year, the IRS issued final regulations interpreting the health care continuation coverage requirements under the law commonly known by the acronym COBRA. The final regulations also update COBRA's proposed regulations that the IRS originally published in 1987. The updated proposed regulations are intended to incorporate legislative changes to COBRA and judicial interpretations of its provisions, as well as provide new guidance on COBRA. The final regulations are effective for plan years beginning on or after January 1, 2000. Prior to this effective date, plan sponsors can, absent a contrary law change or judicial interpretation, rely on either the 1987 proposed regulations or the new regulations. Below is an executive summary of the significant changes and clarifications contained in the final and proposed regulations. The regulations clarify that COBRA continuation rights can not be terminated based on health care coverage (including Medicare coverage) that existed before the COBRA continuation coverage was elected. The proposed regulations also clarify that a participant's subsequent "eligibility" for Medicare after a COBRA election is made is not sufficient to terminate COBRA rights. The participant must become "entitled" to Medicare (such as by submitting an approved application) in order to terminate COBRA. If an individual is denied coverage under an employer's health plan in violation of law (for example, the law commonly known by the acronym HIPAA), the individual is entitled to COBRA continuation coverage upon experiencing a qualifying event. The regulations clarify when a qualified beneficiary "loses coverage." Generally, a qualified beneficiary will "lose coverage" if the qualified beneficiary ceases to be covered under the same terms and conditions that existed before the qualifying event. As a result, if a qualified beneficiary does not actually lose coverage, but is instead required to pay a higher premium as a result of a qualifying event, then the qualified beneficiary will still be deemed to "lose coverage" for purposes of COBRA. A reduction or elimination of coverage in anticipation of a qualifying event is disregarded in determining COBRA rights. For example, even if an employee discontinues coverage for a spouse in anticipation of a divorce, the plan must offer COBRA continuation coverage to the ex-spouse upon being notified timely of the divorce. However, COBRA need only be offered from the date of the event (such as the date of the divorce). The regulations reduce the employer's obligation to offer COBRA continuation coverage for health care flexible spending accounts under cafeteria plans. Generally, in the year that a qualifying event occurs, an employer is not required to offer COBRA continuation coverage if the qualified beneficiary has a zero or negative account balance. However, if the qualified beneficiary has a positive account balance, COBRA must still be offered for the remainder of the year. Additionally, most cafeteria plans will not be required to offer any COBRA continuation coverage in years subsequent to the year in which the qualifying event occurred. The regulations clarify that multiple qualifying events do not automatically require an extension of the maximum coverage period. Accordingly, a termination of employment following a reduction in hours does not require an extension of the maximum coverage period. However, multiple qualifying events do occur where a qualifying event that causes an employer to offer an 18-month maximum coverage period is followed, within that 18-month period, by a second qualifying event that involves a 36-month maximum coverage period. Prior to the regulations, a plan that provided both core coverage, such as medical coverage, and noncore coverage, such as dental and/or vision care, was required to offer a separate COBRA election to continue only the core coverage. The regulations have revoked that requirement. Now employers are only required to offer COBRA coverage to qualified beneficiaries for the same coverage that such qualified beneficiaries had before the qualifying event (subject to a right to change the election at the next open enrollment period). Note, however, that if a qualified beneficiary has core coverage under one plan and noncore coverage under another plan, the qualified beneficiary must be given the right to elect COBRA continuation coverage separately under each plan. The regulations provide that a change or elimination of coverage gives qualified beneficiaries entitled to COBRA the right to choose coverage only from among the options offered to "similarly situation nonCOBRA beneficiaries," as opposed to any coverage offered by the employer. Note, however, that if all of the options offered to "similarly situated nonCOBRA beneficiaries" are eliminated, such qualified beneficiary has the right to choose coverage under any other plan of the employer. COBRA, as amended, provides that children born or placed for adoption during a period of COBRA continuation coverage are eligible for COBRA benefits. The regulations state that if a second qualifying event occurs before the child is born (such as if the former employee dies), the second event also applies to the child, thus granting rights under COBRA to such child for up to 36 months from the date of the original qualifying event. In addition, the 60-day period during which a qualified beneficiary may be disabled and eligible for the 29-month COBRA period is measured from the date of birth or placement for adoption, which allows a second chance at the extension. Note, however, that if the covered employee who was eligible for COBRA continuation coverage does not elect COBRA during the election period, then any child born to or placed for adoption with such covered employee on or after the date of the qualifying event is not a qualified beneficiary. If a qualifying event under COBRA splits the coverage into multiple family units, such as in the event of a divorce, deductibles and other limits applicable to each unit are to be based upon only those expenses incurred before the event by the members of each unit. The 1987 proposed regulations provided that the period for electing COBRA coverage ends 60 days after the election notice is "sent to" the qualified beneficiary. The final regulations now provide that the period for electing COBRA coverage ends 60 days after the election notice is "provided to" the qualified beneficiary or, if later, 60 days from the loss of coverage. Accordingly, the election period does not end earlier than 60 days after the date on which the qualified beneficiary receives the election notice. A COBRA election is effective on the date that it is sent within the 60-day election period. The qualified beneficiary need not send the COBRA election personally. Any third party can make the COBRA election on behalf of the qualified beneficiary. In addition, a COBRA election that does not specify the type of coverage, such as individual coverage, will be deemed to include all eligible COBRA beneficiaries covered at the time of the qualifying event. The regulations provide that if a COBRA beneficiary relocates to an area outside of the service area of a plan, such as when a COBRA beneficiary moves out of a region covered by an HMO, the employer generally is required to offer coverage to such COBRA beneficiary under a plan currently offered by the employer that offers coverage for the new region. The regulations provide that COBRA premiums can be paid in installments that are more frequently than monthly, i.e., weekly. A plan is required to accept payment of COBRA premiums from any third party, including a hospital or a new employer. A COBRA premium is deemed to be paid on the date that it is sent. A plan that receives a timely COBRA premium payment cannot terminate COBRA coverage if the payment is insufficient by an "insignificant" amount unless the qualified beneficiary fails to pay the deficiency within a reasonable period of time (30 days is deemed to be reasonable) after the plan gives notice to such qualified beneficiary. The parties to a corporate transaction, such as a merger or acquisition, are permitted to contract and allocate COBRA obligations between or among themselves. However, if the transaction agreement is silent or if a party fails to carry out its obligations under the contract, the regulations provide rules for allocating COBRA liability. In such instances, for both stock and asset transactions, the seller generally retains the COBRA obligations. However, if the seller fails to satisfy its COBRA obligations, the buyer will generally have secondary liability for COBRA coverage. Pursuant to the final regulations, if a form of coverage other than COBRA, such as retiree medical coverage, is provided as an alternate COBRA, the occurrence of an event that would end the right of a spouse and/or dependents to such alternate coverageis a qualifying event that gives COBRA rights to such spouse and/or dependents. The regulations adopt the rules relating to family leave pursuant to the FMLA. For example, taking leave pursuant to the FMLA is not a qualifying event. Note that an employer cannot condition the employee's rights to COBRA coverage on the employee's reimbursement of any premiums paid by the employer to maintain the employee's group health plan coverage during the FMLA leave period. © 2000 Davis & Gilbert LLP |
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