COBRA - Consolidated Omnibus Budget
Reconciliation Act

Employers which sponsor a group health plan must give qualified beneficiaries the opportunity to continue their group health care coverage at their own cost if a loss of coverage would result from a qualifying event.  Continuation coverage may last for 18, 29, or 36 months.

 

Key Definitions

Qualified beneficiaries include:

• Covered employees who are terminated for reasons other than gross misconduct or who have their working hours reduced.
  
  
• The spouse or dependent child of a covered employee who is a qualified beneficiary on the day before the qualifying event.
  
  
• Retirees, independent contractors, corporate directors, and members of a partnership who are covered under a group health plan on the day before a qualifying event.
  

Loss of coverage occurs when the same terms and conditions in effect immediately before a qualifying event are not in effect after the event.

Qualifying events which trigger COBRA coverage include those which affect:

1. Covered employees.
   
   
   1. Voluntary or involuntary termination of employment for any reason other than gross misconduct.
      
      
   2. Reduction in the number of hours worked.
      
      
   3. Failure to return to work following FMLA leave.
      
      
2. Spouses and dependent children. 
   
   
   1. Death of the covered employee.
      
      
   2. Voluntary or involuntary termination of the covered employee’s employment for any reason other than gross misconduct.
      
      
   3. Reduction in the covered employee’s hours of employment.
      
      
   4. Divorce or legal separation from the covered employee.
      
      
   5. The covered employee becomes eligible for Medicare.
      
      
   6. The employee fails to return to work following FMLA leave.  
      
      
   7. Loss of dependent child status under the plan rules.
      
      
3. Retirees, their spouses, and dependents.
   
   
   1. Special bankruptcy rule.
      

Coverage

If an employer provides health coverage, it is required to comply with COBRA unless it falls within the following exceptions.

• Small businesses that employ fewer than 20 employees on at least 50% of its working days during the preceding calendar year.
  
  Note: Employers must provide COBRA-type coverage to employees on uniformed service leave, pursuant to the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), regardless of the number of employees they have.
  
  
• Churches (but not other tax-exempt employers).
  
  
• The federal government.

In 1999, the IRS issued final regulations on COBRA, which fleshed out the proposed regulations issued by the IRS 12 years earlier.  The IRS’s regulations affect the rules for counting employees when determining eligibility for COBRA’s small-employer exemption.  Here are the key points.

1. Only common-law employees need to be counted for purposes of determining small-employer exemption eligibility.  Self-employed workers, such as independent contractors, do not have to be counted — even if they are covered by the same plan as common-law employees.
   
   
2. Part-time workers must be counted.  However, they don’t count as “full employees.”  Rather, every part-time worker counts as a fraction of a full-time employee, based on the number of hours the part-timer works divided by the number of hours he/she would have to work to be considered full-time.  Keep in mind that the number of hours needed to be considered full-time is based on the employer’s business practices, but cannot be more than eight hours per day or 40 hours per week.
   
   
3. Employers may count employees by pay period, instead of on a day-to-day basis, and apply that number to each typical business day in the pay period.  The only stipulation is that no matter which counting method an employer uses, it must apply the same method to all employees for the whole year.
   
   Note: If an employer fails to meet the requirements for the small-employer exemption for a period, then it is liable for any COBRA coverage triggered during that period — even if it later becomes qualified for the small-employer exemption.

COBRA applies to employer-maintained group health plans which provide medical care to employees, former employees, and their families.  Group health plans include, but are not limited to:

• HMOs (health maintenance organizations) and PPOs (preferred provider organizations),
  
  
• insured and self-insured plans providing medical benefits,
  
  
• retiree health plans,
  
  
• on-site facilities providing more than first aid,
  
  
• prescription drug plans,
  
  
• cafeteria plans providing medical benefits,
  
  
• vision, hearing, and dental plans,
  
  
• alcohol and drug plans,
  
  
• health care flexible spending accounts (FSAs),
  
  
• mental health plans.
  

Election Requirements

A qualified beneficiary must have a minimum of 60 days to elect COBRA coverage, and the election period can end no sooner than 60 days of the later of:

• the date coverage is lost; or
  
  
• the date that notice to the qualified beneficiary is sent.

Each qualified beneficiary has an independent right to elect COBRA coverage.  A covered employee or their spouse may elect COBRA coverage on behalf of another qualified beneficiary.  An election by a parent or legal guardian may be made for their minor child.

A qualified beneficiary who waives COBRA coverage may revoke that waiver before the end of the election period.  Then, COBRA coverage begins on the date the waiver is revoked.

 

Duration Of Continuation Coverage

The length of coverage depends on the type of qualifying event that occurs.

1. 18-month period.  Qualifying events include termination of employment (other than for gross misconduct) or a reduction of hours.
   
   
2. 29-month period.  A qualified beneficiary is determined under Title II or XVI of the Social Security Act to have a disability at the time of a termination of employment or reduction in hours.
   
   In order to receive the full 29 months of coverage, the qualified beneficiary must notify the plan administrator within 60 days of the determination of disability and before the end of the 18-month period.  If, during the additional 11 months, the Social Security Administration finds that the qualified beneficiary is no longer disabled, the beneficiary must notify the plan administrator within 30 days of the decision.  The employer has the right to terminate coverage as of the first month that begins more than 30 days after the date of determination.
   
   
3. 36-month period.  If any of the following qualifying events occur, COBRA coverage is extended to 36 months.

• The death of the covered employee.
  
  
• The loss of dependent child status under the plan.
  
  
• The covered employee becomes entitled to Medicare.
  
  
• The covered employee and his/her spouse divorce or go through a legal separation.
  
  
• Multiple qualifying events occur.  If a 36-month qualifying event occurs during a qualified beneficiary’s 18- or 29-month continuation period, it entitles the beneficiary to a total of 36 months of continued coverage starting from the date of the initial qualifying event.
  
  Note: A termination of employment following a reduction of hours does not constitute a secondary qualifying event that would extend the maximum coverage.

Paying For Continuation Coverage

Electing qualified beneficiaries may be required to pay 102% of the premium (normal plan cost plus a 2% administrative charge).  Premiums may be increased once every 12 months if the cost of the plan increases.  Premiums may be increased after 18 months to 150% of the plan’s total cost of coverage for qualified beneficiaries with disabilities receiving 29 months of coverage.

A group health plan which charges different premiums based on employees’ marital status may also set COBRA rates based on marital status.  For example, a terminated employee who had family coverage when he was working can elect family coverage under COBRA and be charged the family premium.  On the other hand, if an employee who had family coverage when she was working elects only to cover her child under COBRA, the child must be charged the individual rate, not the family rate, for coverage.

 

Notification Requirements

On May 26, 2004, the Department of Labor (DOL) issued final regulations that set minimum standards for content, timing, and other issues for the administration of six notices regarding continuation coverage under COBRA.  Four of these notices are familiar to employers since the statute requires them.  The new DOL rules have added two new notices that plan administrators must provide — an Unavailability Notice and an Early Termination Notice.  All the notice obligations start with the first plan year beginning on or after November 26, 2004.

Here’s an overview of the six notices, as well as the timing requirements for each.

1. General Notice: Plans must provide a written General Notice to employees and spouses within 90 days after health plan coverage begins.  A summary plan description (SPD) containing required COBRA information may be used to satisfy the COBRA General Notice requirement, as long as it is furnished within that 90-day period.
   
   
2. Employer Notice to Plan Administrator: Employers have 30 days to notify plan administrators after an employee experiences a qualifying event (QE) of termination (for reasons other than gross conduct), a reduction in hours, death, enrollment in Medicare, or if the employer begins bankruptcy proceedings.
   
   
3. QB Notice to Plan Administrator: Qualified beneficiaries (QBs), covered employees, or a representative of either party, must notify plan administrators of a QE (divorce, legal separation, or loss of dependent status), a second QE, a disability determination by the Social Security Administration (SSA) that occurs within the first 60 days of COBRA coverage, or a change in disability status.
   
   QBs must have a minimum of 60 days to provide notices of first and second QEs, which should be measured from the latest of:
   
   -- the date of the QE;
   
   -- the date coverage is lost due to a QE; or
   
   -- the date that the QB is notified either through an SPD or a General Notice of the obligation to provide this notice to the plan administrator.
   
   Note: The final regulations clarify that time limits set in the COBRA statute for this notice are minimums.  Plan administrators may set and enforce deadlines for this notice if the time limits have been communicated in the SPD and General Notice.  The plan may have more liberal notice requirements if acceptable to insurers.
   
   Disability status: As a condition for receiving an 11-month disability extension, a QB must have 60 days to notify the plan administrator of an SSA disability determination, which should be measured after the latest of:
   
   -- the date of the SSA disability determination;
   
   -- the date of the qualifying event; 
   
   -- the date on which the QB would lose coverage under the plan; or
   
   -- the date on which the QB is informed of the obligation to provide the disability notice through the plan’s SPD or General Notice.
   
   Note: The final rules reflect Treasury regulations for workers who are disabled before a QE.  In that case, they must have 60 days from the date of the QE (or date coverage is lost) to notify the plan administrator of their disability status. 
   
   Change in disability status: QBs must have 30 days to notify a plan administrator of a final SSA determination, which is measured from the later of: 1) the date of the final SSA determination that the QB is no longer disabled; or 2) the date on which the QB is informed, through the SPD or General Notice, of the responsibility to provide the notice to the plan administrator.
   
   
4. COBRA Election Notice: The plan administrator must provide this written notice to individuals qualified to elect COBRA within 14 days after receiving notice of a qualifying event.  In the case where an employer provides notice of a QE and acts as plan administrator, it must provide notice within 44 days.  The election period can end no sooner than 60 days from the later of the date the Election Notice is provided, or the date coverage is lost.
   
   Note: The QE date and the date coverage is lost may be different.  Employers often continue coverage until the end of the month in which an employee terminates, or in severance arrangements for three to six months after termination. 
   
   
5. Unavailability Notice: The plan administrator must send a notice that coverage isn’t available within 14 days of receiving a request for COBRA coverage, whether it relates to a first or second QE, or an SSA disability determination.
   
   
6. Early Termination Notice: If the plan administrator determines that COBRA coverage will end before the maximum COBRA coverage period ends, it must notify the affected QBs “as soon as practicable” after a decision to terminate coverage is made.
   
   Note: The preamble to the final regulations notes that the early termination notice does not have to precede termination of COBRA coverage.  It can be retroactive.  Plan administrators are encouraged to combine this notice with a certification of creditable coverage required by the Health Insurance Portability and Accountability Act (HIPAA).
   

The DOL’s final regulations also contain detailed content requirements for each of the six notices.  Here’s a brief rundown.

1. General Notice: A model General Notice has been provided for single employer plans.  The DOL maintains that use of the model General Notice would constitute compliance with regulations.  The model notice has to be customized in certain places.  For instance, it requires inserting the name, address, and phone number of the party or parties who will provide information about the plan and COBRA upon request.
   
   The DOL modified the Model General Notice in its final rules to include an explanation of the special rule regarding the maximum coverage period for dependents when an employee terminates employment less than 18 months after becoming entitled to Medicare.  The Model General Notice also contains language clarifying the position taken by the Internal Revenue Service in Revenue Ruling 2004-22 that Medicare entitlement is not a second QE if it would not have resulted in a loss of coverage had the first QE not occurred.
   
   The DOL’s final rules require the General Notice to be written in a manner calculated to be understood by the average plan participant.  It should contain the following information:
   
   
   1. the name of the plan;
      
      
   2. the name, address, and telephone number of the party or parties administering continuation coverage;
      
      
   3. a general description of continuation coverage, including classes of people who may become QBs, types of QEs that trigger coverage, the employer’s obligation to notify the plan administrator of certain QEs, maximum time periods that COBRA coverage is available, any events extending time periods, and premium payment information;
      the participant’s obligation to notify the plan administrator of a QE, a second QE, and SSA determination of a QB’s disability;
      
      
   4. a description of the plan’s procedures for QBs notice of QEs;
      
      
   5. the importance of keeping the plan administrator informed of the participant’s and QB’s current addresses; and
      
      
   6. a statement that the General Notice doesn’t fully describe continuation coverage or other rights under the plan and that more complete information is available from the plan administrator and the plan’s SPD.
      
      
2. Employer Notice to Plan Administrator: The DOL’s final rules only require that the notice include enough information to enable the plan administrator to determine the specific plan, the covered employee, and nature and date of the qualifying event.  Employers that use an outside COBRA administrator should coordinate with their vendor to find out if it wants additional information and specify the content and delivery requirements in the service agreement.
   
   
3. QB Notice to Plan Administrator: The DOL’s final regs require that plan administrators establish “reasonable procedures” for qualified beneficiaries to give notice of qualifying events.  For procedures to be “reasonable,” they must be described in the SPD, specify the individual or entity who receives such notices; specify the means by which notice may be given; and describe the information concerning the qualifying event or disability determination that the plan deems necessary in order to provide continuation coverage rights. 
   
   One way to ensure that notices contain the required content is to provide forms that are readily available and free of cost.  If you have set up reasonable procedures and a qualified beneficiary fails to notify the representative designated to receive the notices, then it may be safe to deny him/her the right to elect COBRA.
   
   
4. COBRA Election Notice: The content requirements are more detailed than for the General Notice.  Again, the DOL has provided a model Election Notice for single employer plans, the use of which the DOL says would constitute compliance with regulations.
   
   The model Election Notice contains three parts — a letter to the QB, an election form that must be filled out, and several pages of information about COBRA rights.  In some places, plan administrators will need to select among alternative language provided in the model.
   
   The Election Notice should be written in language that is easily understood by a plan participant.  It should contain the following information:
   
   
   1. the name of the plan, address, and telephone number of the party that administers COBRA coverage;
      
      
   2. the qualifying event;
      
      
   3. identification, by status or name, of each QB entitled to elect continuation coverage and the date the plan’s coverage will end if continuation coverage isn’t elected;
      
      
   4. a statement that each QB has an independent right to elect continuation coverage, that the covered employee or a QB who is the spouse of the covered employee (or was the spouse on the day before the QE) may elect coverage on behalf of all other QBs, and that a parent or legal guardian may elect coverage on behalf of a minor child;
      
      
   5. the plan’s procedures for electing continuation coverage, including the election time period, and the date by which the election must be made;
      
      
   6. an explanation of the effects of failing to elect or waive COBRA coverage on future rights to portability of group health coverage, guaranteed access to individual health coverage, special enrollment under HIPAA, and where to get additional information about HIPAA rights;
      
      
   7. the plan’s procedures for revoking a waiver of COBRA coverage before the election period ends;
      
      
   8. a description of continuation coverage (or reference to the plan’s SPD), that includes the date on which coverage will begin;
      
      
   9. the maximum period of coverage, the termination date, and an explanation of any events that might cause coverage to be terminated earlier than the end of the maximum period;
      
      
   10. the circumstances under which the coverage period may be extended due to a second QE or a SSA disability determination, and the length of any such extension;
       
       
   11. the plan’s procedures for QBs to provide notices of a second QE, SSA disability determination, and change in disability, including  time periods and the consequences of failing to provide notice;
       
       
   12. premium payment information, including the premium amount to be paid by each QB, due dates for premium payments, the QBs’ right to pay on a monthly basis, the grace periods for premium payments, the address to which payments should be sent, and the consequences of delayed payment and non-payment;
       
       
   13. an explanation of the importance of keeping the plan administrator informed of the participant’s and QBs’ current addresses;
       
       
   14. statement that the notice does not fully describe continuation coverage or other rights under the plan and that more complete information is available in the SPD or from the plan administrator; and
       
       
   15. an optional Trade Act paragraph that may be used to notify potential eligible individuals of their rights under the Trade Act as they relate to COBRA coverage.
       
       
5. Unavailability Notice: The notice must explain that COBRA isn’t available and why.  COBRA coverage may be denied if a plan administrator determines that no QE occurred, or the QB did not furnish a QE notice in a timely manner.
   
   
6. Early Termination Notice: Early termination may occur for failure to pay the premium; if the employer ceases to offer group health coverage; or when the qualified beneficiary becomes enrolled in another health plan.  The notice must explain the reason for the early termination; the date of the termination; and the rights to alternative coverage that may be available.
   
   
   

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