COBRA

What is COBRA?

Congress passed the landmark Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions in 1986. The law amends the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage that otherwise might be terminated.

COBRA contains provisions giving certain former employees, retirees, spouses and dependent children the right to temporary continuation of health coverage at group rates. This coverage, however, is only available in specific instances. Group health coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer pays a part of the premium for active employees while COBRA participants generally pay the entire premium themselves. It is ordinarily less expensive, though, than individual health coverage.

The law generally covers group health plans maintained by employers with 20 or more employees in the prior year. It applies to plans in the private sector and those sponsored by state and local governments. The law does not, however, apply to plans sponsored by the Federal government and certain church-related organizations.

Group health plans sponsored by private sector employers generally are welfare benefit plans governed by ERISA and subject to its requirements for reporting and disclosure, fiduciary standards and enforcement. ERISA neither establishes minimum standards or benefit eligibility for welfare plans nor mandates the type or level of benefits offered to plan participants. It does, however, require that these plans have rules outlining how workers become entitled to benefits.

Under COBRA, a group health plan ordinarily is defined as a plan that provides medical benefits for the employer's own employees and their dependents through insurance or another mechanism such as a trust, health maintenance organization, self-funded pay-as-you-go basis, reimbursement or combination of these. Medical benefits provided under the terms of the plan and available to COBRA beneficiaries may include:

• Inpatient and outpatient hospital care
• Physician care
• Surgery and other major medical benefits
• Prescription drugs
• Any other medical benefits, such as dental and vision care

Life insurance, however, is not covered under COBRA.

COBRA – Employer Responsibilities

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most employers to offer group health continuation coverage rights to persons whose insurance would otherwise end due to a "qualifying event." Group health plans include medical/prescription drug, dental and vision coverages that employers offer to employees and eligible dependents. COBRA does not affect group life, AD&D and disability coverages.

Who is Covered

COBRA requires employers that employ 20 or more (full or part-time) employees on at least 50% of the working days in the preceding calendar year to offer employees and their eligible dependents a temporary extension of health coverage at group rates in certain cases in which coverage would other wise end.

Entitlement to Benefits

There are three elements to qualifying for COBRA benefits. COBRA establishes specific criteria for plans, qualified beneficiaries, and qualifying events.

1. Plan Coverage

Group health plans for employers with 20 or more employees on more than 50 percent of its typical business days in the previous calendar year are subject to COBRA. Both full- and part-time employees are counted to determine whether a plan is subject to COBRA. Each part-time employee counts as a fraction of an employee, with the fraction equal to the number of hours that the part-time employee worked divided by the hours an employee must work to be considered full-time.

1. Qualified Beneficiaries

A qualified beneficiary generally is an individual covered by a group health plan on the day before a qualifying event who is either an employee, the employee's spouse, or an employee's dependent child. In certain cases, a retired employee, the retired employee's spouse, and the retired employee's dependent children may be qualified beneficiaries. In addition, any child born to or placed for adoption with a covered employee during the period of COBRA coverage is considered a qualified beneficiary. Agents, independent contractors, and directors who participate in the group health plan may also be qualified beneficiaries.

1. Qualifying Events

"Qualifying events" are certain events that would cause an individual to lose health coverage. The type of qualifying event will determine who the qualified beneficiaries are and the amount of time that a plan must offer the health coverage to them under COBRA. A qualifying event that may occur and the maximum coverage period are as follows:

• Voluntary or involuntary termination of employment for reasons other than "gross misconduct". The employee, spouse and/or dependent children may receive up to 18 months. Disability Extension – Following a termination of employment or reduction in work hours, a qualified person (Member or Dependent) who has been determined Disabled by the Social Security Administration either before or within 60 days after the initial qualifying event may request an extension of COBRA continuation from 18 months to 29 months. The Disabled person must submit a written request for the extension to the planholder (employer) within 60 days after receiving the Social Security determination and before the 18-month continuation period ends.
• Employee reduction of hours (e.g. due to strike, layoff, full-time to part-time, approved leave of absence). The spouse and/or dependent children may receive up to 18 months.
• Active Employee entitlement to Medicare. When a Member becomes enrolled (entitled) under Medicare before employment terminates, work hours are reduced, or a decision to drop group coverage, the maximum continuation period for the dependents will be the longer of: (a) 36 months dating back to the Member’s enrollment under Medicare; or (b) 18 months from the date of the qualifying event (termination of employment, reduction in work hours, or decision to drop group coverage).
• Death of a Covered Employee. The spouse and/or dependent children may receive up to 36 months.
• Employee divorce or legal separation of the covered employee from the employee’s spouse. The spouse and/or dependent children may receive up to 36 months.
• Dependent ceases to be a dependent as defined by the plan. The dependent may receive up to 36 months.

Notice Requirements

General COBRA rights must be described in the summary plan description (SPD) that all participants receive. ERISA requires employers to furnish modified and updated SPDs containing certain plan information and summaries of material changes in plan requirements. Plan administrators must automatically furnish the SPD 90 days after a person becomes a participant or a beneficiary begins receiving benefits or within 120 days after the plan is first subject to the reporting and disclosure provisions of ERISA.

Initial Notices: Generally, an initial notice describing COBRA rights must be furnished to covered employees and their spouses at the time coverage under the plan commences.

Other Notices: These notice requirements are triggered for employers, qualified beneficiaries and plan administrators when a qualifying event occurs. Employers must notify plan administrators of a qualifying event within 30 days after an employee's death, termination, reduced hours of employment or entitlement to Medicare.

A qualified beneficiary must notify the plan administrator of a qualifying event within 60 days after divorce or legal separation or a child's ceasing to be covered as a dependent under plan rules.

Plan administrators, upon receiving notice of a qualifying event, must provide an election notice to the qualified beneficiaries of their right to elect COBRA coverage. The notice must be provided in person or by first class mail within 14 days after the plan administrator receives notice that a qualifying event has occurred.

Qualified beneficiaries who are determined by the Social Security Administration to be disabled are required to provide notice of the disability determination to the employer within 18 months of the COBRA eligibility date and no later than 60 days after the date of Social Security disability determination.

Election Requirements

The qualified beneficiary must make written election within 60 days after the later of (1) the date coverage would otherwise end, or (2) the date of the employer’s notice. The election form must be returned to the employer within the 60-day period; otherwise, the continuation option expires.

Each qualified beneficiary may independently elect COBRA coverage. A covered employee or the covered employee's spouse, however, may elect COBRA coverage on behalf of all other qualified beneficiaries. A parent or legal guardian may elect on behalf of a minor child.

If a qualified beneficiary waives COBRA coverage during the election period, he or she may revoke the waiver of coverage before the end of the election period. A beneficiary may then elect COBRA coverage. Then, the plan need only provide continuation coverage beginning on the date the waiver is revoked.

Covered Benefits

Qualified beneficiaries must be offered coverage identical to that available to similarly situated beneficiaries who are not receiving COBRA coverage under the plan (generally, the same coverage that the qualified beneficiary had immediately before qualifying for continuation coverage).

For example, a beneficiary may have had medical, hospitalization, dental, vision and prescription benefits under single or multiple plans maintained by the employer. Assuming a qualified beneficiary had been covered by three separate health plans of his former employer on the day preceding the qualifying event, that individual generally will have the right to elect to continue coverage in any or all of the three health plans.

A change in the benefits under the plan for active employees will also apply to qualified beneficiaries. Qualified beneficiaries must be allowed to make the same choices given to non-COBRA beneficiaries under the plan, such as during periods of open enrollment by the plan.

Duration of Coverage

COBRA continuation coverage may be terminated on the earliest of the following:

• The last day of the maximum coverage period;
• The first day for which timely payment is not made;
• The date upon which the employer ceases to maintain any group health plan;
• The date the qualified beneficiary is covered under another group health plan whose exclusion or limitation with respect to any preexisting condition no longer applies;
• The date the qualified beneficiary is entitled to Medicare benefits under Social Security. However, if Medicare is obtained prior to COBRA election, COBRA coverage may not be discontinued, even if the other coverage continues after the COBRA election.

If the period of COBRA coverage continues for the maximum 18, 29 or 36-month period, an employee may apply for conversion coverage at the end of their period of COBRA coverage, but only if the option to apply for conversion coverage is then available under the plan. The completed application and first premium payment for conversion coverage must be received within 31 days after COBRA coverage ends. If conversion coverage is the available under the plan, be aware that conversion coverage provides different benefits and costs than does COBRA coverage.

Special rules for disabled individuals and certain family members may extend the maximum periods of coverage. If a qualified beneficiary is determined under Title II or XVI of the Social Security Act to have been disabled within the first 60 days of COBRA coverage, then that qualified beneficiary and all of the qualified beneficiaries in his or her family may be able to extend COBRA continuation coverage for up to an additional 11 months. However, qualified beneficiaries should be aware that they may lose all rights to the additional 11 months of coverage if notice of the determination is not provided within 60 days of the date of the determination and before the expiration of the 18-month COBRA continuation period. The qualified beneficiary who is disabled or any qualified beneficiaries in his or her family may notify the plan administrator of the determination.

Paying for COBRA Coverage

Payments are the employees' responsibility. The premium cannot exceed 102 percent of the cost to the plan for similarly situated individuals who have not incurred a qualifying event, including both the portion paid by employees and any portion paid by the employer before the qualifying event, plus 2 percent for administrative costs.

For qualified beneficiaries receiving the 11-month disability extension of coverage, the premium for those additional months may be increased to 150 percent of the applicable premium.

COBRA premiums may be increased if the costs to the group health plan increases but generally must be fixed in advance of each 12-month premium cycle. The plan must allow the employee to pay premiums on a monthly basis if they ask to do so, and the plan may allow them to make payments at other intervals (for example, weekly or quarterly).

The initial premium payment must be made within 45 days after the date of the COBRA election by the qualified beneficiary. Payment must cover the period of coverage from the date of COBRA election retroactive to the date of the loss of coverage due to the qualifying event. Premiums for successive periods of coverage are due on the date stated in the plan with a minimum 30-day grace period for payments.

COBRA beneficiaries remain subject to the rules of the plan and therefore must satisfy all costs related to copayments and deductibles, and are subject to catastrophic and other benefit limits.

Coordination with Other Benefits

The Family and Medical Leave Act (FMLA), effective August 5, 1993, requires an employer to maintain coverage under any "group health plan" for an employee on FMLA leave under the same conditions coverage would have been provided if the employee had continued working. Coverage provided under the FMLA is not COBRA coverage, and FMLA leave is not a qualifying event under COBRA. A COBRA qualifying event may occur, however, when an employer's obligation to maintain health benefits under FMLA ceases, such as when an employee notifies an employer of his or her intent not to return to work.

Keeping COBRA Papers in Order

COBRA does not specify record-keeping requirements, but employers should keep documents which can help defend against COBRA non-compliance claims. Consider keeping the following documents / records for one year after the election period ends or the continuation coverage ends:

• COBRA election forms, claim forms, letters rejecting COBRA coverage.
• Any notification documents sent to employees and beneficiaries.
• The Medicare eligibility of covered employees.
• Any COBRA-related correspondence sent by employees and beneficiaries.
• Current addresses of employees.
• Records of terminations, reductions in hours, leaves of absence, and/or deaths of employees covered by the group health plan.
• Disability status of covered employees.
• List of retirees covered by group health plan.
• List of employees covered by your group health plan.
• Current addresses of anyone receiving COBRA benefits.
• Written acknowledgements from employees and qualified beneficiaries that they received notice of their COBRA rights.
• Records of COBRA premium payments made by employees.
• Records of any changes made to your group health plan.
• Method used to calculate COBRA premiums.
• List of employees denied COBRA coverage, along with reasons why they were denied coverage.

Important COBRA dates

The following are important COBRA dates, which should be found within the above COBRA records you keep on file. Use this list to do a quick audit of your files:

• Date a qualifying event occurred, and what it was.
• Date election period ends.
• Date of election.
• Date coverage terminates if COBRA continuation coverage is not elected.
• Date maximum coverage period ends.
• Dates of payments due, and amounts due.
• Dates grace periods end.
• Date COBRA coverage ends.

COBRA Questions and Answers

Welcome to the Consolidated Omnibus Budget Reconciliation Act (COBRA) Questions and Answers (Q&A) review. Below is a listing of pertinent questions that help provide guidance on several issues dealing with the COBRA rights and obligations on health care continuation for employees and their beneficiaries.

(Answers are provided as general guidance on the subjects covered in the question and are not provided as specific legal advice. Each individual case should be reviewed by your legal counsel to apply the law to the particular facts of your situation.)

Q. What rights to health care continuation coverage does COBRA provide?

A. If you are covered by an employer’s group health plan, COBRA may give you the right to stay covered even if something happens, like losing your job, that would otherwise cause you to lose coverage. This continuation coverage under an employer’s plan is called "COBRA coverage." COBRA coverage usually lasts only for a limited time, and you usually have to pay for it.

If you are covered by an employer’s group health plan, and an event occurs that would otherwise cause you to lose that group health coverage, you need to understand whether COBRA applies to your specific situation and, if so, what your rights are under COBRA.

Q. Which employer plans are subject to COBRA?

A. COBRA applies to most employer group health plans but not to all of them. For example, it does not apply to plans of employers with fewer than 20 employees or to church plans. Many plans of small employers, though, are subject to State laws similar to COBRA. If you are covered under a plan of an employer with fewer than 20 employees, you can contact the department or commission of insurance in your State to find out if you have rights to continuation coverage under your State’s insurance laws. (Federal employees, while not protected by COBRA, have similar continuation coverage rights under-another-federal law.)

Q. What events result in COBRA rights and for how long is COBRA coverage available?

A. Even if COBRA applies to your group health plan, it gives rights only to certain people who would be losing health coverage for certain specific reasons. Some of the most common situations that give people COBRA rights are:

• Loss of job – If you are covered by your employer’s group health plan and you lose or leave your job, COBRA generally gives you the right to stay in the employer’s plan for up to 18 months. The same rights apply if you are the spouse or dependent child of an employee who loses his or her job. (The 18-motnh period can be increased to 29 months if someone in the family is disabled.)
• Reduced hours – If you are covered by your employer’s group health plan and your hours are reduced, the employer’s plan may provide that you lose coverage unless you elect COBRA. In this case, COBRA generally gives you the right to stay in the employer’s plan for up to 18 months. The same rights apply if you are the spouse or dependent child of an employee whose hours are reduced. (The 18-month period can be increased to 29 months if someone in the family is disabled.)
• Death or divorce of a spouse – You have the right to COBRA coverage if you are covered by a group health plan of your spouse’s employer and you would lose coverage because your spouse dies or you and your spouse divorce or legally separate. In these cases, COBRA gives you the right to stay in the plan for up to 36 months.
• Death or divorce of parent – You have the right to COBRA coverage if you are a dependent child covered by a group health plan of your parent’s employer and you would lose coverage because your parent dies or your parents divorce or legally separate. In these cases, COBRA gives you the right to stay in the plan for up to 36 months.
• Change of status as dependent – COBRA also gives you rights if you are a dependent child covered by a group health plan of your parent’s employer and you would lose coverage because you reach an age or condition that causes you to no longer be covered as a dependent under the plan. In these cases, COBRA gives you the right to stay in the plan for up to 36 months.

Q. What are the rules for the 60-day election period?

A. Following a qualifying event, the plan administrator must inform the qualified beneficiaries of their rights to purchase continuation coverage within 14 days after the administrator is informed of the event. Then, each qualified beneficiary has the later of 60 days after coverage would end, or the day he/she received notice, to decide on his/her election to continue coverage. If the employee waives coverage, he/she has 60 days to change his/her mind, revoke the waiver, and elect COBRA. An employee may elect alternative COBRA coverage and the same 60-day rules apply.

Q. What is the 45-day payment period?

A. The qualified beneficiary must pay the premium due within 45 days following his/her date of election for coverage. This gives the employee sufficient time to think about purchasing COBRA. The 60-day election plus the 45-day premium due date is 105 days. In the case of divorce, legal separation, or child’s loss of dependent status, the qualified beneficiary has 60 days to notify the plan administrator. The plan administrator then has 14 days to give proper notice before the 60-day election period begins. This totals 179 days for the employee to decide to purchase COBRA coverage (60 + 14 + 60 + 45). If an individual underpays his/her premium, the employer must give him/her 30 days’ notice to pay the difference. If an individual is unable to pay, any third party can pay the premium, including a health care provider such as a hospital.

Q. Can An Employee Deduct COBRA Premiums on a Pre-Tax Basis?

A. As a general rule, no prohibition exists on a qualified beneficiary making a pre-tax payment of COBRA premiums out of the last paycheck immediately before a qualifying event.

Of course, any pre-tax deduction should conform to the cafeteria plan requirements under Internal Revenue Code Section 125.

Also, COBRA requires that qualified beneficiaries be allowed to pay their COBRA premiums on a monthly basis. Therefore, an employer could not restrict a qualified beneficiary’s payment options and require that all COBRA premium payments for more than a one-month period be made out of the qualified beneficiary’s last paycheck. On a voluntary basis, however, nothing prevents a qualified beneficiary’s pre-tax payment.

Q. When must employees be informed of their COBRA rights?

A. Information must be provided to all plan participants at the outset — when an employee is first covered by a plan subject to COBRA. At the same time, potential qualified beneficiaries must also be notified, such as an employee’s spouse. In addition, each time a qualifying event occurs, a plan participant and his/her qualified beneficiaries must be notified of their COBRA rights. When events occur that involve a change in family status, the plan participant or qualified beneficiary has 60 days to notify the plan administrator or their rights under COBRA will end.

Q. What should an employer do when multiple events occur?

A. First, look at the time frame for the first qualifying event. Example: An employee is terminated on 10/1/97. He is properly notified of his COBRA rights and he and his family elect continuation coverage. This gives them up to 18 months of coverage. If he and his wife divorce on January 1, 1998, a 36-month coverage period kicks in, retroactive to 10/1/97.

Q: What is a multi-employer plan?

A. A multi-employer plan is a plan to which more than one employer is required to contribute, that is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer. Plus, it satisfies such other requirements as the Secretary of Labor may prescribe by regulation.

Q. How long does the continuation coverage last?

A. In general, if a beneficiary would lose group health coverage because of a covered employee’s reduction in work hours or termination of employment for any reason other than gross misconduct, the maximum coverage period is 18 months.

In addition, there is an extension of 11 months for disability, only if the qualified beneficiary notifies the plan administrator of the Social Security disability determination within 60 days of the determination and BEFORE the 18-month maximum coverage period expires (a total of 29 months).

If the qualifying event is any one of the following, the maximum coverage is 36 months:

• Divorce or legal separation from the spouse
• Covered employee’s death
• Covered employee’s entitlement to Medicare — Part A or Part B, assuming that the entitlement arises after COBRA was elected
• Loss of dependent child status under the plan.

If the employee fails to make timely premium payments, a qualified beneficiary becomes covered under another employer’s health plan which covers pre-existing conditions, or Medicare begins, the coverage ends. New note: The final regulations state that a termination of employment following a reduction of hours does not constitute a secondary qualifying event that would expand the maximum coverage period.

Q. What coverage must be offered and to whom?

A. The employer must offer continued coverage with the same group health benefits. The group health plan is defined as an employee benefit plan providing medical care to the employers’ employees, former employees, or families of such employees. The final regulations require both core and non-core coverage to be offered. (But the IRS is still looking for input on this aspect.) The persons referenced are known as "qualified beneficiaries." All qualified beneficiaries can make their own separate COBRA election. The final regulations eliminate the rule from the 1987 proposed regulations that an individual is not a qualified beneficiary if he/she was entitled to Medicare benefits on the date before the qualifying event. The regulations add a rule that the plan must consider an individual as a qualified beneficiary if he/she was wrongfully denied coverage under a group health plan and experiences an event that would otherwise be a qualifying event. In addition, employers need not provide COBRA to qualified beneficiaries who move away from the region the plan covers if the employer would be able to provide coverage under one of its existing plans.

Q. Which employees must be covered?

A. Under final regulations, only common-law employees are taken into account for purposes of a new "small-employer plan exception" — self-employed individuals, independent contractors, and directors do not count as employees. The coverage is for individuals who have an employment-related connection to the employer or employee organization, or the families of such individuals. The final regulations generally refer to all individuals covered under a plan due to their performance of services, or due to their membership in an employee organization, as employees. The final regulations provide that an increase in an employee premium or contribution due to a qualifying event constitutes a "loss of coverage" which triggers the right to COBRA. New note: In response to a Supreme Court decision, the IRS has decreed that individuals may be eligible for coverage under COBRA, even if health insurance coverage is available to them under their spouse’s plan.

Q. Which employers must comply with COBRA?

A. An employer who offers a health plan (except church- and government-sponsored plans) with 20 or more full- or part-time employees on 50% of its typical business days during the calendar year. The final regulations substitute "working days" with "business days" to allow the employer the option to count by pay period rather than every day. The newly proposed regulations allow employers to count each part-time employee as a fraction of a full-time employee by hours to be considered full-time.

Q. What coverage must be maintained for Flexible Spending Accounts (FSA)?

A. An FSA is a flexible spending arrangement under an employer-sponsored Section 125 (Cafeteria) Plan. Generally, the FSA provisions apply if previously offered to such individuals. COBRA need not be offered if the employer could be required to pay an amount which would exceed the maximum benefit the qualified beneficiary could receive under the FSA for that plan year, and if the qualified beneficiary could not avoid a break in coverage for purposes of the Health Insurance Portability and Accountability Act (HIPAA) portability provisions by electing COBRA coverage under the FSA.

Q. Can the premiums be increased after COBRA is elected?

A. Final regulations revise the rules so that a plan is permitted to increase the amount it requires to be paid for COBRA coverage to take into account these conditions:

• Permitted increases during the disability extension,
• Allowable increases in premiums to the maximum allowable amount, and
• Permitted increases when a qualified beneficiary changes to more expensive coverage.

For non-disabled qualified beneficiaries who are entitled to the disability extension, employers may charge 150% of the COBRA premium if the disabled individual is part of the coverage group, but only 102% if only the non-disabled qualified beneficiary is in the coverage group.

Q. What is the "small-employer plan exception"?

A. The issue arises when an employer who was previously covered by COBRA then becomes a "small-employer" (under 20 employees) for a period. In determining whether a plan is eligible for the small-employer plan exception, part-time, as well as full-time, employees must be taken into account. Under the new proposed regulations, part-time employees can be counted as a fraction of an employee. This fraction equals the number of hours that a part-time employee works for the employer, divided by the number of hours that an employee must work to be considered full-time. Consistent employment practices must be followed. However, no more than eight hours per day or 40 hours per week may be used. And employers may count employees by each typical business day, or per pay period, and attribute the total number of employees for that pay period to each typical business day that falls within the pay period.

Q. What is the plan year?

A. The plan year is the year that is designated as such in the plan documents. If the plan documents do not designate a plan year (or if there are no plan documents), then the plan year is determined in accordance with the following:

• The plan year is the deductible/limit year used under the plan.
• If the plan does not impose deductibles or limits on an annual basis, then the plan year is the policy year.
• If the plan does not impose deductibles or limits on an annual basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer's taxable year.
• In any other case, the plan year is the calendar year.

Q. What other regulations benefit employers?

A. New regulations allow employers to determine the number of group health plans they maintain. This allows employers to structure their health plans in an efficient and cost- effective way that will still satisfy COBRA. The regulations also offer baseline rules for determining the COBRA liability to buyers and sellers in mergers and acquisitions; and to agree on which liabilities for which each will be responsible. This should facilitate negotiations while still protecting the rights of the qualified beneficiaries affected by such transactions. The responsibility for coverage oversight rests with the employer. It is important to pay attention to the rules for offering, notifying, and maintaining health coverage for qualified employees and their beneficiaries. While the new final and proposed regulations are designed to give guidance to further protect COBRA without undue administrative burdens or costs to employers, employee organizations, or group health care plans, non-compliance may result in serious penalties.