Payroll Articles
COBRA Health Insurance Continuation
The Consolidated Omnibus Budget Reconciliation Act of 1985 requires health plan sponsors to provide Employees and their beneficiaries with the opportunity to elect continued group health coverage for a given time period should their coverage be lost due to certain Qualifying Events. The requirements apply to employers with 20 or more Employees on a typical business day (part-time Employees must be converted to fulltime equivalents for this determination). The time period for continued group coverage is generally 18 or 36 months depending on the Qualifying Event, and an option to switch to individual coverage must be provided before the continued group coverage expires.
Type of coverage required. The continuation coverage must be the same as that provided to similarly situated beneficiaries (i.e., Employees, spouses, and dependents) under the health insurance plan who have not suffered a Qualifying Event. If such coverage is changed in any way during the continuation period for the similarly situated beneficiaries, the changes must also be applied to beneficiaries receiving continuation coverage.
WHAT ABOUT Cafeteria Plans? Employees who have opted to purchase health care coverage under an employer's Cafeteria Plan, including flexible spending arrangements, are eligible for COBRA continuation coverage at the level of coverage they are receiving at the time of a Qualifying Event.
Qualified beneficiaries entitled to coverage. The term "qualified beneficiary's" means the spouse and/or dependents of an Employee covered by the plan on the day before a Qualifying Event occurs as well as children born to or adopted by the covered Employee during the period of continuation coverage. The term also includes the Employee if the Qualifying Event causing a loss of coverage is the Employee's termination or a reduction in hours worked.
Qualifying Events. A Qualifying Event is any of the following that would result in the loss of group health
insurance coverage (which includes increased premiums caused by the event) for a qualified beneficiary:
- death of the covered Employee;
- the covered Employee's termination of employment (for reasons other than gross misconduct) or reduction in hours worked;
- divorce or separation of the covered Employee;
- entitlement of the covered Employee to Medicare benefits (upon enrolling in the program);
- a dependent child losing that status; and
- bankruptcy proceedings that cause a retired covered Employee or the Employee's dependents to lose coverage.
The IRS clarified that, where an Employee eliminates the health coverage of a spouse after a divorce decree has been issued but before the date of the divorce, the COBRA Qualifying Event occurs on the date of the divorce, and the group health plan must make continuation coverage available as of that date.
Period of coverage. The following maximum periods of continuation coverage apply once group coverage would have been lost because of a Qualifying Event:
- where the Qualifying Event is the Employee's termination or reduction in work hours - 18 months; but if another Qualifying Event occurs during the 18-month period (other than the commencement of bankruptcy proceedings), the period is extended to 36 months;
- where the Qualifying Event is the employer's bankruptcySthe life of the retiree or the retiree's spouse; but once the retiree dies, the period of continuation coverage for the retiree's spouse and children is 36 months from the retiree's death;
- where the Qualifying Event is the Employee's termination or reduction in work hours and a qualified beneficiary (Employee or dependent) is disabled under the Social Security Act at any time during the first 60 days of continued coverageS29 months for all qualified beneficiaries entitled to continued coverage because of the same Qualifying Event (36 months if another Qualifying Event (other than bankruptcy) occurs during the 29-month period);
- where the Qualifying Event is the covered Employee's death, divorce, separation, or entitlement to Medicare, or a dependent child's loss of dependent child statusS36 months. Continuation coverage ends before these maximum coverage periods are reached if:
- the employer ceases to provide group health coverage to its Employees;
- the required premium for the continuation coverage is not paid within 30 days of the due date;
- the qualified beneficiary becomes covered under any other group health plan which does not impose pre-existing condition restrictions on the beneficiary (unless the restriction does not apply to the beneficiary or the beneficiary satisfies the conditions of the restriction); or
- the qualified beneficiary becomes entitled to Medicare benefits, unless the employer's bankruptcy is the Qualifying Event.
For children born to or adopted by the covered Employee during the period of continued coverage, their period of coverage ends at the same time as for other family members. The U.S. Supreme Court ruled that COBRA coverage could not be denied to an otherwise eligible Employee or family member because he or she is already covered under another group health plan when the COBRA election is made (e.g., a terminated Employee who is covered under his spouse's health plan). The Court said the language allowing COBRA coverage to be cut off if an Employee becomes covered under another plan after COBRA coverage is elected cannot be used to deny COBRA coverage before an election has been made. The IRS adopted this conclusion in its COBRA regulations.
Premium requirements. The group health plan can require the Employee or other qualified beneficiary to pay a premium for the continuation coverage of up to 102% of the group premium paid for similar coverage under the plan by the employer and its Employees. The individual can choose to pay the premiums in monthly installments. The maximum premium increases to 150% for disabled qualified beneficiaries after the 18th month of their continuation coverage, whether the maximum coverage period becomes 29 or 36 months. The first premium payment may not be required earlier than 45 days after the qualified beneficiary elects continuation coverage.
Election and notice provisions. Employees and other qualified beneficiaries who wish to take advantage of continued group health plan coverage must make an election of such coverage. The election period must last for at least 60 days and can begin no earlier than the date on which coverage was terminated because of the Qualifying Event (which may be later than the date of the Qualifying Event itself). The election period also cannot end before 60 days after the qualified beneficiary receives notice of the termination of coverage, if the notice was received after the date coverage was terminated. An election of continuation coverage by an Employee or other qualified beneficiary is generally binding on other qualified beneficiaries who would have lost coverage without the election, unless the election specifically provides otherwise. Once continuation coverage is elected, other qualified beneficiaries who are subject to the election may elect a different type of coverage if more than one type is available. The failure to elect continuation coverage, however, does not affect the right of other qualified beneficiaries to elect such coverage. There are also several notice requirements under COBRA that apply to employers, group health plans, plan administrators, Employees, and qualified beneficiaries:
- When an Employee and his or her spouse first become covered under a group health plan, the plan must provide written notice of the COBRA continuation coverage rights.
- Where the Qualifying Event is the Employee's death, termination, reduction in hours, or entitlement to Medicare, or the employer's bankruptcy, the employer must notify the plan administrator of the Qualifying Event within 30 days after it occurs (unless a multiemployer plan provides a longer period). Where the Qualifying Event is the Employee's divorce or separation, or a dependent child's loss of dependent child status, the Employee or qualified beneficiary must notify the plan administrator of the Qualifying Event within 60 days after it occurs.
- Where a qualified beneficiary is determined to have been disabled under the Social Security Act at the time of the Employee's termination or reduction in hours, any qualified beneficiary affected by the Qualifying Event must notify the plan administrator of the determination within 60 days (and before the end of the original 18-month period of continued coverage) and within 30 days of any determination that the qualified beneficiary is no longer disabled.
- Once it becomes aware of a Qualifying Event, the plan administrator has 14 days to notify qualified beneficiaries of their rights concerning continuation coverage (unless a multiemployer plan provides a longer period), and notification of an Employee's spouse serves as notification of dependent children living with the spouse.
Penalties for noncompliance. Employers that fail to comply with the COBRA continuation coverage requirements are subject to a tax of $100 per day of noncompliance for each qualified beneficiary (maximum of $200 per day per family affected by the same Qualifying Event). The tax will not be imposed if the failure to comply is due to reasonable cause and is corrected within 30 days of when the noncompliance was discovered or should have been discovered. For unintentional failures which are due to reasonable cause and not willful neglect, the maximum penalty for a single employer plan during a taxable year is the lesser of 10% of the amount paid by the employer for group health plans during the preceding taxable year or $500,000. For multiemployer plans, the maximum penalty is the lesser of 10% of the amount the plan trust paid to obtain medical care during the taxable year or $500,000.
FMLA/COBRA interaction. Employers have raised serious questions about the effect on their COBRA obligation to provide continuation coverage caused by the requirements imposed by the Family and Medical Leave Act (FMLASsee Section 4.2). The IRS answered many of these questions in its final COBRA regulations issued early in 2001.
Is there a Qualifying Event when an Employee does not return to work after FMLA leave?
The FMLA leave in itself does not constitute a Qualifying Event. A Qualifying Event would occur with respect to a covered Employee or qualified beneficiary when the Employee does not return to work at the end of the FMLA leave and the Employee or beneficiary would therefore lose coverage before the end of the maximum coverage period (generally 18 months). NO PLAN, NO COVERAGE Even if the above conditions are met, there is no Qualifying Event if the employer eliminates group health coverage for the class of Employees that would have included the covered Employee had he or she not taken FMLA leave.
When does a Qualifying Event occur under these circumstances?
If the conditions described above are met, the Qualifying Event occurs on the last day of FMLA leave, and the maximum continuation coverage period is measured from that date. However, if the plan provides that coverage is lost at a later date and that COBRA continuation coverage does not begin until that later date, the maximum coverage period is also measured from that later date.
Example 1: Employee Jane is covered by Ace Bandaid Co.Ts group health plan on January 31. She begins FMLA leave on February 1, and her last day of leave is 12 weeks later on April 25. She does not return to work at the end of her leave and will lose her group health coverage on April 26. Jane experiences a Qualifying Event on April 25 and the maximum coverage period (18 months) is measured from that date.
Example 2: Employee Peter and his spouse are covered by Pharmaceutical, Inc.'s group health plan on August 15. Peter begins FMLA leave on August 16 and informs Pharmaceutical on September 28 (less than 7 weeks later) that he will not be returning to work. Under FMLA regulations, Peter's last day of FMLA leave is September 28. Peter and his spouse will lose their group health coverage on September 29. They experience a Qualifying Event on September 28 and the maximum coverage period is measured from that date.
What happens if the Employee does not pay the required premium while on FMLA leave or declines overage while on leave?
The rules described earlier still apply. A lapse of coverage under a group health plan during FMLA leave is irrelevant in determining whether a Qualifying Event has occurred.
Can continuation coverage be conditioned on the repayment of employer-paid premiums by Employees who do not return to work after FMLA leave?
Even if recovery of premiums is permitted under FMLA regulations in such circumstances, the right to COBRA continuation coverage cannot be conditioned on the Employees reimbursement of the premiums.
How do state laws requiring longer family or medical leaves with health coverage affect these rules?
State or local laws that require group health plan coverage to be maintained for a longer period of time than under the FMLA are disregarded for purposes of determining when a Qualifying Event occurs under COBRA.