In early 1999, the IRS issued both proposed and final regulations regarding continuation of group health coverage under COBRA. On January 10^th, 2001, the IRS issued another new set of final COBRA regulations that finalized (with a few modifications) the 1999 proposed regulations and revised the 1999 final COBRA regulations. The regulations generally become effective for qualifying events occurring on or after January 1, 2002. Below is a summary of the changes to the COBRA regulations.

The final regulations reflect the statutory provision that provide for the imposition of an excise tax in the event of a failure by a group health plan to comply with the COBRA continuation coverage requirements.

Under the new proposed regulations, group health plans are no longer required to allow participants to elect only core coverage in plans where both core and non-core coverage are provided. This is a significant change from the proposed 1987 regulations. Qualified beneficiaries may now be required to elect all coverage under the plan if they want to elect COBRA coverage.

A qualified beneficiary may have his or her COBRA continuation coverage terminated early in certain cases, such as failure to pay the premium timely, for cause, after becoming covered under another group health plan or Medicare, or termination of all of an employer's group health plans. The regulations provide a number of new rules on the timely payment issue. Payment is considered made on the date it is sent, a qualified beneficiary must be given a reasonable period of time (30 days is deemed reasonable) to correct insignificant payment shortfalls after being notified by the employer, and payments must be accepted from persons other than the qualified beneficiary. To terminate coverage early based on cause, the same rules must also apply to similarly situated active employees. For coverage under another group health plan or Medicare, there must be actual coverage beginning after the date of COBRA coverage. Merely being eligible for other coverage but not enrolling is insufficient to terminate COBRA coverage early. Similarly, the existence of other coverage at the time of a qualifying event, as opposed to becoming entitled to such coverage after that time, is not grounds for denial of COBRA coverage.

The final regulations require group health plans to respond to a health care provider's inquiries into the status of a qualified beneficiary during the COBRA election period. This means that the plan must make a full response to all inquiries regarding the qualified beneficiary's right to coverage under the plan during the election period. If the qualified beneficiary has not elected coverage under the plan, the provider must be informed that the qualified beneficiary is eligible to make a COBRA election and is covered by the plan once the election is made. The provider may be informed that, if the election is not made timely, any coverage remaining in effect during the election period is subject to retroactive cancellation.

COBRA does not apply to a plan sponsored by an employer with fewer than 20 employees on at least 50% of its typical business days during the prior year. The total number of employees is determined on a common control basis and includes full-time and part-time employees and employees not covered under the plan. However, each part-time employee only has to be counted as a fraction of a full-time employee. Although self-employed persons, directors, and independent contractors are not included for purposes of this rule, they are entitled to COBRA coverage if the employer otherwise employs more than 20 employees. Employers with fewer than 20 employees can still be subject to COBRA if they participate in a multiple-employer plan under which another employer has more than 20 employees. Also, an employer cannot terminate COBRA coverage for existing qualified beneficiaries if the employer subsequently has fewer than 20 employees.

The first option is to terminate a qualified beneficiary's health insurance coverage immediately upon the termination of employment. The health coverage is then subject to retroactive reinstatement back to the date coverage was canceled, only when the qualified beneficiary makes a timely election and timely payment. Any claims that are submitted are held, pending the COBRA election and applicable payment. If the qualified beneficiary makes a timely election and timely payment, the coverage is reinstated retroactively for the applicable payment period, and any claims for that period are paid. If coverage is not elected it will permanently lapse and claims are denied. The final COBRA regulations clearly allow for immediate termination of coverage subject to retroactive reinstatement upon receipt of valid premium payment.

The second option is to maintain the employee's health insurance coverage for the 60- day election period. The coverage is subject to retroactive termination if the employee does not pay for the coverage. Under this option, the employer will pay premiums to keep the qualified beneficiary's health insurance coverage in force. If the qualified beneficiary makes a timely election and timely payment the employer is reimbursed with the qualified beneficiary's premium payment. If the qualified beneficiary does not elect to continue coverage the employer can cancel the coverage retroactively and get a credit for premiums paid. The obvious problem with the second option is claims being paid and the qualified beneficiary failing to pay the applicable premium. The employer could attempt to recoup the premiums from the qualified beneficiary, however, given the amount it is usually not worth pursuing. A plan using this option is more likely to increase its exposure to claims that could otherwise be denied. Due to the increased claims exposure,

Significant changes were made by the final regulations to the rules set forth in the proposed regulations on determining the number of health plans that an employer/employee organization maintains for COBRA purposes. The final regulations state that all health care benefits provided by one entity, trade or business are to be considered one group health plan, unless the plan documents clearly indicate that the benefits are separate plans.

The proposed regulations issued in 1999 provided assistance on determining when health Flexible Spending Accounts (or Health Care Spending Accounts) are required to offer continuation coverage under COBRA. Consequently, many health Flexible Spending Accounts do not have to offer COBRA coverage. The final regulations assume the earlier guidance with one amendment, clarifying that if a health Flexible Spending Account must offer COBRA coverage, all the general COBRA rules apply exactly as they do to coverage under other group health plans.

Under the 2001 final regulations, the COBRA and FMLA rules that were presented in the 1999 proposed regulations remain the same, with one new provision, that the end of an FMLA leave must be determined under the Department of Labor's FMLA regulations and not under the COBRA regulations.

The 2001 final regulations reiterate that the determination of whether a reduction or elimination of coverage is in anticipation of a qualifying event is based on all pertinent facts and circumstances. There is no specific limitation on the period during which an anticipatory reduction or elimination can be considered to have occurred.

Any increase in premium or contribution payable as a result of a qualifying event is a loss of coverage that triggers the availability of COBRA coverage under the proposed and final regulations. For example, an employee transfers from full-time to part-time employment, and for group health coverage the employer requires part-time employees to pay higher premiums. The qualifying event is the reduction in hours, the higher premium is a loss of coverage, and under the regulations, the employee is entitled to a notice of his COBRA rights.

The 1999 final regulations established that premium payments for COBRA continuation coverage would be considered timely if made within 30 days after the date due, or longer if provided by the plan. In addition, those final regulations provide guidance on how premium payments that are short by an insignificant amount are treated. Under those rules, insignificant underpayments are to be considered as payment in full, unless the plan notifies the qualified beneficiary of the amount of the underpayment and allows them a 30-day period to correct the payment. Due to the lack of guidance in the 1999 regulations on what would constitute an "insignificant" underpayment, the 2001 final regulations set forth the following definition that plan sponsors may use to determine if a premium payment is short by an insignificant amount: the underpayment does not exceed the lesser of $50 or 10 percent of the required premium amount.

The final regulations by and large follow the proposed regulations as they relate to business reorganizations with two clarifications. First, the successor employer rules (for determining when a buyer is a successor employer in an asset sale) apply in bankruptcy the same manner as they do outside of bankruptcy. Second, the 2001 final regulations make clear that an asset sale includes not only sales, but other transfers as well. Under the 1999 proposed regulations, an asset sale generates a qualifying event for the seller's employees. Regarding asset sales where employees terminate employment and no longer receive health coverage from the seller, but are employed in the same jobs and have the same health coverage through the buyer, the employees are treated as experiencing a qualifying event with respect to the seller's plan.

The 1999 regulations provide that claims under indemnity or reimbursement arrangements do not have to be paid before the election (and, if applicable, payment for the coverage) is made if they are incurred during the election period.

The 2001 final regulations state clearly that the requirement for employers and/or employee organizations to offer alternative coverage (in certain circumstances) to qualified beneficiaries that move outside of the service area of a region-specific plan must be made available by the date the qualified beneficiary relocates, or if later, the first day of the month following the month in which the qualified beneficiary requests the alternative coverage. Furthermore, the 2001 final regulations state that it is not a requirement for employers and/or employee organizations to incur extraordinary costs in an effort to extend coverage to qualified beneficiaries in areas with no active employees.

Under the 2001 final regulations, employers that withdraw from multi-employer plans will be responsible for providing COBRA continuation coverage if they cover active employees previously covered under the multi-employer plan in any of the following situations: in a new plan; in an existing plan; in another multi-employer plan. .

The final regulations are effective for qualifying events that occur on or after January 1, 2000. Prior to that date, a good-faith compliance standard applies. For matters covered by the new proposed regulations, a good-faith standard also applies. Although complying with the proposed regulations will constitute good-faith compliance for IRS purposes, the proposed regulations are not binding in ERISA litigation with qualified beneficiaries.

To ensure compliance with the new regulations, employers should review their COBRA procedures, COBRA notices, and group health plans and summary plan descriptions, including health FLEXIBLE SPENDING ACCOUNT plan documents and Summary Plan Descriptions. Employers should also consider implementing new options permitted under the new rules that could help alleviate some of the complexities in COBRA administration. In addition to streamlining the COBRA notice and election process, this could also help to ensure that the plan document complies with ERISA requirements and contains eligibility requirements that are consistent with the employer's intent.

Lee Sachs, "Departmental Offices; Management Advisory Committee Meeting," Volume 66, Number 7, January 10, 2001, <http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register&docid=01-647-filed> (October 3, 2002).