This entire issue is dedicated to the COBRA Final Regulations to the 1987 Proposed Regulations and the New Proposed Regulations. These were issued by the Internal Revenue Service on February 3, 1999. ProBusiness will begin to administer the Final and New Proposed Regulations beginning January 1, 2000.

COBRA and Dual Coverage - Geissal Case

As a result of the United States Supreme Court June 1998 decision in the case of Geissal v. Moore Medical Corp., the IRS reversed its position on when other group health plan coverage is a valid reason for termination of COBRA coverage. Final regulations stipulate that a plan may terminate COBRA continuation coverage on the date a qualified beneficiary first becomes covered under any other group health plan (including Medicare A or B, or both), after the date of his/her COBRA election. Group health coverage which exists prior to a COBRA qualifying event does not affect the qualified beneficiary's right to COBRA coverage.

Health Care Provider Inquiries

New obligations have been imposed on plans regarding the disclosure of information to health care providers ( i.e. physician, hospital or pharmacy). If a health care provider inquires about a qualified beneficiary's COBRA status, the new regulations require the plan to make a complete response.

Small Employer Exception

All employers who have less than twenty (20) employees "on at least 50% of their typical business days" during the preceding calendar year are exempt from COBRA requirements under the Small Employer exception . The final regulations clarify that, for the purposes of determining whether an employer is a small employer, all employees of a "controlled group" of corporations that includes the employer maintaining the group health plan must be counted. All employees of corporations in the control group outside of the United States and all foreign employees of a U.S. corporation must be counted. This includes nonresident aliens with no U.S. income (although these individuals do not have to be offered COBRA). Self-employed individuals, independent contractors and directors do not have to be counted.

In determining if a plan is eligible for the small employer exception, part-time employees must be included. Under the new proposed regulations each part-time employee is counted as a fraction of an employee. This fraction is equal to the number of hours the part-time employee works divided by the number of hours that must be worked by full-time employees. For example, if full-time employees must work 40 hours per week and a part-time employee works 20 hours per week, that person would be counted as ½ of an employee. Two part-time employees each working 20 hours per week would be the equivalent of one (1) additional employee to be counted in determining if the small employer exception applies.

NOTE:
Although a small employer plan is excepted from offering COBRA continuation coverage to its former employees when classified as a small employer, it does NOT preclude the responsibility of the plan to offer COBRA to qualified beneficiaries who experience a qualifying event during a period of time when the plan is NOT a small employer plan.

Measuring the Election Period

The final regulations state 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. ProBusiness will begin the 60-day election period with the date the election notice is mailed to the qualified beneficiary. Thus, provided means mailed.

Health Care Flexible Spending Accounts under COBRA

The new proposed regulations significantly reduce the number of situations in which an employer is obliged to offer COBRA continuation coverage for health care flexible spending accounts under cafeteria plans. Generally speaking, if a health care FSA is excepted from HIPAA FSA COBRA continuation need only be offered to qualified beneficiaries who have underspent their account as of the date of the qualifying event, and not be offered to those who have overspent their account as of the qualifying event date. A health care FSA may be treated as exempt from HIPAA if three conditions are met:

1. The employee has other group health plan coverage available to him or her from the employer for the year;
2. The other group coverage cannot consist solely of HIPAA exempt benefits; and
3. The maximum benefit payable to the employee under the health care FSA for the Year cannot exceed the larger of:
   1. Two times the employee's salary reduction election or
   2. The amount of the employee's salary reduction election for the year plus $500.

Also, although COBRA must be offered to those who have underspent their account, it need only be offered through the end of the plan year in which qualifying event took place. Plans will not be required to offer COBRA continuation coverage for FSA's in years after the year of the qualifying event. A qualified beneficiary is considered to have overspent their account if they have received more from the FSA than they have contributed to the FSA considering only claims "submitted" before the date of the qualifying event.

NOTE:
If the Plan is not excepted from HIPAA, COBRA must be offered as usual, regardless of whether the qualified beneficiary has underspent or overspent their health FSA. The qualified beneficiary could elect coverage of up to 18 months and must be allowed the same open enrollment election change rights as active participants.

Core versus Noncore Benefits

Under the final regulations qualified beneficiaries only need to be offered the right to continue the exact coverage they had before the qualifying event. This means that if the employer had one plan that provided medical (a core benefit), dental and vision coverage (noncore benefits), and the qualified beneficiary had all three coverages, they must elect all under COBRA or they can be denied COBRA continuation. However, if medical, dental, and vision coverages are offered through separate plans, a qualified beneficiary who has these types of coverages at the time the qualifying event occurs has the right to make separate COBRA elections for each of these coverages.

Number of Plans

The new proposed regulations give an employer discretion in defining the number of plans it has. Generally, an employer may state if its medical, dental and vision coverages constitute one plan or if they are three separate plans. If there is one plan with multiple benefits the employer may require that a qualified beneficiary take all (assuming they were covered under all benefits prior to the event)or none of these coverages upon a COBRA qualifying event. However, if each of the benefits are offered under a separate plan, the qualified beneficiary has the right under COBRA to elect any or all of the coverages that they had prior to the event. The employer should state in its plan documents how many plans it has for COBRA purposes, however, if the employer does not, the default rule is the employer has just one plan.

NOTE:
At open enrollment, the COBRA qualified beneficiary must be given the same options as given to the active employees.

Loss of Coverage

The final regulations provide that a loss of coverage" occurs when an event causes an employee to no longer be covered under the same terms and conditions as existed before the event. , An increase in premiums, reduction of benefits, or any other change in the terms and conditions of coverage would qualify as a "loss of coverage" for COBRA purposes. For example, if an employer's unpaid leave policy permits an employee to continue coverage under the group health plan, but requires the employee to pay a greater share of the premium while on leave, or where retirees must pay more than active employees for identical coverage, a loss of coverage occurs and COBRA must be offered.

Alternative Coverage

Under the final regulations, an employer may offer alternative coverage - that is, coverage that is an alternative to COBRA. If that alternative coverage is different than the COBRA coverage they would have chosen (costs more or has lesser benefits), then the employer must offer both the alternative coverage and the COBRA coverage.

Also, if alternative coverage is being provided through a covered employee (due to a termination or reduction of hours) and after the original qualifying event another event occurs that would cause a spouse or dependent child to lose the alternative coverage, (divorce of the employee and spouse or death of employee), the spouse or child must be given the right to elect COBRA for up to 36 months measured from the date of the second event, regardless of when it occurs.

"In Anticipation" Rule

The "in anticipation" rule which existed in the proposed regulations has been clarified. This rule states that if coverage is lost "in anticipation" of a qualifying event, the event is still a qualifying event. For example if an employer cancels a group health plan for a division of employees and subsequently sells that division, the termination of the group health plan is a qualifying event because it was "in anticipation" of the sale of the division and the affected employees must be offered COBRA. The final regulations clarify that this rule also applies to other qualifying events, such as divorce. For example if an employee drops a spouse from coverage in anticipation of a divorce, the divorce is still a qualifying event, even though it occurs after the loss of coverage. The employer must offer COBRA to the ex-spouse upon being notified of the divorce, provided notice is received within 60 days of the divorce; COBRA continuation coverage would be effective with the date of the divorce. Unfortunately the final regulations provide no time limit on when loss of coverage should be considered "in anticipation" of an event and, therefore, this rule could potentially apply to an event that occurs six or even 12 months after coverage was discontinued.

Deductible, Co-Pays, Limits

If a COBRA qualifying event, such as a divorce, divides a family into two or more units then any deductibles , co-payments and limits are applied only to the individual who incurred them prior to the COBRA qualifying event. For example, if Joe and Susan divorced 5 months into the plan year and at this point Susan had satisfied $100 of her plan deductible, this $100 would be applied to Susan's deductible under COBRA continuation coverage.

Mergers and Acquisitions

The proposed regulations allow the parties involved in a merger or acquisition transaction to contract among themselves which party will be responsible for COBRA obligations. However, there are detailed rules for allocating the COBRA liability if the contract is silent in this area, or in the event one party fails to carry out its obligations under the agreement. Generally, in either a stock or asset sale, the seller retains the COBRA obligations to its existing qualified beneficiaries. However, if the seller ceases to provide coverage to all its employees in connection with the sale, a buyer that acquires stock, or that purchases substantial assets and continues business operations without interruption or substantial change, "inherits" the liability for COBRA continuation coverage for the seller's qualified beneficiaries.

Newborn and Adopted Children

The final regulations state that a newborn or adopted child will obtain the status of a qualified beneficiary only if the initial qualifying event was the covered employee's termination of employment or reduction in hours, and only if the covered employee elected COBRA continuation.

The newborn or adopted child is then entitled to COBRA for as long as other family members of the covered employee. However, if a second qualifying event should take place before the birth or adoption of the child, or after the birth or adoption but within the 18-month period, then the coverage period is extended to 36 months beginning on the initial qualifying event date.

Open Enrollment and HIPAA rights of Qualified Beneficiaries

Qualified beneficiaries have the same open enrollment rights and HIPAA special enrollment rights as similarly situated active employees. If active employees are allowed to change coverage in the middle of a plan year for other than HIPAA related reasons, this same opportunity must be granted to COBRA participants.

Region-Specific Plans

In the event a COBRA beneficiary relocates out of the service area of a region-specific plan (i.e. Health Maintenance Organization), the employer must offer the qualified beneficiary coverage under any other plan maintained by it or its controlled group that could cover the area of relocation - This is true even if the employer has no employees working at that site.

Multiple Qualifying Events

The final regulations confirm that termination of employment following a reduction in hours does not result in multiple qualifying events requiring extension of the maximum coverage period for COBRA continuation coverage. Multiple qualifying events occur only where a qualifying event that gives rise to another 18-month coverage period is followed, within that 18-month period, by a second qualifying event that involves a 36-month maximum coverage period (i.e. divorce or death) .

NOTE:
Only an event that gives rise to a 36-month maximum coverage period (for example, death of covered employee, divorce from covered employee, a child ceasing to be a dependent) can be a second qualifying event under the multiple qualifying event rule.

Duration of Disability Extension

The proposed regulations state that when a qualified beneficiary is entitled to an 11-month disability extension , all qualified beneficiaries of that family are given the additional 11 months. In the event the disabled qualified beneficiary is subsequently deemed no longer disabled the 29 month extension no longer applies and COBRA continuation may be terminated. However, COBRA continuation may not be terminated prior to the end of the 18 month initial COBRA time period.

Also the 11-month disability extension period applies for the whole family upon the birth or adoption of a disabled child if the plan is notified within the 60 day notification window which starts at the date of birth or adoption Finally, if a 36-month qualifying event (i.e. divorce or death) occurs during the 11-month disability extension, the affected qualified beneficiary is entitled to 36 months of coverage from the date of the initial COBRA qualifying event date (an additional 7 months). Furthermore, the extended period of coverage cannot be cut back to 29 months total coverage if the disabled qualified beneficiary is subsequently deemed not to be disabled by Social Security.

Premiums During Disability Extension

The final regulations continue to allow a plan to charge 150% of the premium to all enrollees continuing coverage during the 11-month disability extension only if the disabled qualified beneficiary is also receiving COBRA continuation coverage. If the disabled qualified beneficiary does not elect COBRA continuation coverage for the extension period, however, or is no longer on COBRA, then the plan may only charge 102% of the premium for those in the family who elected COBRA coverage for the extended period.

Termination of COBRA Continuation Coverage "For Cause"

The final regulations state that a plan may terminate a qualified beneficiary's COBRA continuation coverage before the end of the coverage period "for cause". For instance, the submission of fraudulent claims would allow a plan to terminate the COBRA coverage, if this same rules is applied to those covered under the active plan.

Independent Election Rights

The final regulations confirm that each qualified beneficiary has an independent election right. Furthermore, a former employee cannot decline COBRA continuation coverage for any other qualified beneficiary.

Election Deemed Made For All Qualified Beneficiaries

Under the final regulations, a new default rule has been instituted that states that coverage is elected for all qualified beneficiaries unless the election form includes a self-election option. That is, if a spouse or employee elects COBRA on a form that does not have a self-only election option, this election is deemed to be made for all family members who are qualified beneficiaries.

Who is Entitled to Make COBRA Elections and Pay COBRA Premiums

COBRA elections can be made and COBRA premiums can be paid by a third party.

Qualified Beneficiary COBRA Election and Payment Deadline

The final regulations state that a qualified beneficiary is considered to have satisfied any election or payment deadline if the qualified beneficiary's election or full payment is "sent" on or before the deadline. "Sent" is generally defined as the date the election form or payment check envelope was postmarked. For example if the COBRA premium payment deadline is April 30 and the qualified beneficiary mails the check for the appropriate amount on April 29th, this would be considered timely payment regardless of the date it is received by the administrator as the payment was "sent" before or on the deadline.

Insignificant Premium Payment Shortfall

Under the final regulations, COBRA continuation coverage cannot be terminated if the COBRA premium due is short by an "insignificant" amount. The plan may either accept the short payment amount as payment in full or notify the qualified beneficiary of the premium deficiency and grant a reasonable period of time for payment of the deficiency. If the premium is short by more than an insignificant amount, coverage may be canceled at the expiration of any grace period. Generally, it is in the employer's interest not to disclose this policy on election forms, but rather apply the rules when short payments are received.

Premium Increases

Generally, the COBRA continuation coverage premium must be fixed for a 12-month determination period. This determination period must be established by the plan in advance, and must be applied consistently from year to year.

Once the premium is fixed for a determination period, it cannot be increased except in three situations:

1. If the plan has not been charging the full premium and chooses to increase the COBRA premium to an amount that does not exceed the maximum premium amount, the plan is allowed to do so.
2. If the increased premium amount is due to the disability extension (the 150% premium), the increase may occur during a determination period.
3. If a qualified beneficiary changes the coverage elected, the plan may pass through any increase for the coverage elected and it must pass through any decreased premium.

Payment of Claims

The final regulations clarify that claims incurred by a qualified beneficiary during the COBRA continuation coverage 60-day election period are not required to be paid by the insurance carrier prior to the election of COBRA continuation coverage and payment for the elected coverage is made by the participant.

Please contact ProBusiness 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

(ProBusiness 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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