Continuation Coverage Requirements Applicable to
Group Health Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
added health care continuation requirements that apply to group health plans.
Coverage required to be provided under those requirements is referred to as
COBRA continuation coverage. Proposed regulations interpreting the COBRA
continuation coverage requirements were published in the Federal Register of
June 15, 1987 and of January 7, 1998. This document contains final regulations
based on these two sets of proposed regulations. The final regulations also
reflect statutory amendments to the COBRA continuation coverage requirements
since COBRA was enacted. A new set of proposed regulations addressing additional
issues under the COBRA continuation coverage provisions is being published
elsewhere in this issue of the Federal Register. The regulations will generally
affect sponsors of and participants in group health plans, and they provide plan
sponsors and plan administrators with guidance necessary to comply with the law.
DATES: Effective Date: These regulations are effective February 3, 1999.
Applicability Dates: Sections 54.4980B-1 through 54.4980B-8 apply to group
health plans with respect to qualifying events occurring in plan years beginning
on or after January 1, 2000. See the Effective Date portion of this preamble and
Q&A-2 of Sec. 54.4980B-1.
FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis, 202-622-4695. This is not a
toll-free number.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations have been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number
1545-1581. Responses to these collections of information are mandatory in some
cases and required in order to obtain a benefit in other cases. Group health
plans are required to provide certain individuals a notice of their COBRA
continuation coverage rights when certain qualifying events occur and are
required to inform health care providers who contact the plan to confirm the
coverage of certain individuals of the individuals' complete rights to coverage.
To obtain COBRA continuation coverage or extended coverage, certain individuals
are required to notify the plan administrator of certain events or that they are
electing COBRA continuation coverage, and plans are required to notify certain
individuals of insignificant underpayments if the plan wishes to require the
individuals to pay the deficiency. This information will be used to advise
employers and plan administrators of their obligation to offer COBRA
continuation coverage, or an extended period of such coverage; to advise
qualified beneficiaries of their right to elect COBRA continuation coverage and
of insignificant errors in payment; and to inform health care providers of
individuals' rights to COBRA continuation coverage.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a
valid control number.
The estimated average annual burden per respondent varies from 30 seconds to 330
hours, depending on individual circumstances, with an estimated average of 14
minutes.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to these collections of information must be retained
as long as their contents may become material in the administration of any
internal revenue law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C. 6103.
Background
On June 15, 1987, proposed regulations (EE-143-86) relating to continuation
coverage requirements applicable to group health plans were published in the
Federal Register (52 FR 22716). A public hearing was held on November 4, 1987.
Written comments were also received. A supplemental set of proposed regulations
(REG-209485-86) was published in the Federal Register of January 7, 1998 (63 FR
708). No public hearing was requested or held after the publication of the
supplemental proposed regulations; written comments were received. After
consideration of these comments, after review of the reported court decisions
under the parallel COBRA continuation coverage provisions of the Employee
Retirement Income Security Act of 1974 (ERISA) and the Public Health Service
Act, and based on the experience of the IRS in administering the COBRA
continuation coverage requirements, a portion of the regulations proposed by
EE-143-86 and REG-209485-86 is adopted as revised by this Treasury decision. The
revisions are summarized in the explanation below. Also being published
elsewhere in this issue of the Federal Register is a new set of proposed
regulations, which addresses additional issues.
Explanation of Provisions
Overview
The regulations are intended to provide clear, administrable rules regarding
COBRA continuation coverage. The regulations give comprehensive guidance on many
questions under COBRA, with a view to enhancing the certainty and reliance
available to all parties-- including employees, qualified beneficiaries,
employers, employee organizations, and group health plans--in determining their
COBRA rights and obligations. The guidance is designed to further the protective
purposes of COBRA without undue administrative burdens or costs on employers,
employee organizations, or group health plans.
For example, the regulations:
<bullet> Prevent group health plans from terminating COBRA continuation coverage
on the basis of other coverage that a qualified beneficiary had prior to
electing COBRA continuation coverage, in accordance with the Supreme Court's
[[Page 5161]] decision in Geissal v. Moore Medical Corp.
<bullet> Give employers and employee organizations significant flexibility in
determining, for purposes of COBRA, the number of group health plans they
maintain. This will reduce burdens on employers and employee organizations by
permitting them to structure their group health plans in an efficient and
cost-effective manner and to satisfy their COBRA obligations based upon that
structure.
<bullet> Provide baseline rules for determining the COBRA liabilities of buyers
and sellers of corporate stock and corporate assets and permit buyers and
sellers to reallocate and carry out those liabilities by agreement. This will
significantly enhance employers' ability to negotiate and to plan appropriately
for the treatment of qualified beneficiaries in connection with mergers and
acquisitions, while protecting the rights of qualified beneficiaries affected by
the transactions.
<bullet> Limit the application of COBRA for most health flexible spending
arrangements. This will ensure that COBRA continuation coverage under health
flexible spending arrangements is available in appropriate cases without
requiring continuation coverage where that would not serve the statutory
purposes.
<bullet> Eliminate the requirement that group health plans offer qualified
beneficiaries the option to elect only core (health) coverage under a group
health plan that otherwise provides both core and noncore (vision and dental)
coverage.
<bullet> Give employers, in determining whether the small-employer plan
exception applies, the option of counting by pay period rather than by every
business day, and provide, for that exception, for the consistent treatment of
part-time employees through the use of full- time equivalents.
The COBRA continuation coverage requirements enacted on April 7, 1986 have been
amended by the Omnibus Budget Reconciliation Act of 1986 (OBRA 1986), the Tax
Reform Act of 1986 (TRA 1986), the Technical and Miscellaneous Revenue Act of
1988 (TAMRA), the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), the
Omnibus Budget Reconciliation Act of 1990 (OBRA 1990), the Small Business Job
Protection Act of 1996 (SBJPA), and the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).\1\ These amendments made numerous
clarifications and modifications to the COBRA continuation coverage
requirements, moved the requirements from section 162(k) to section 4980B, added
various other features, such as the disability extension to the required period
of coverage, and significantly altered the sanctions imposed on employers and
plans for failing to comply with the requirements. The specific changes made by
these amendments are discussed below in connection with the provisions of the
regulations that relate to them.
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\1\ The COBRA continuation coverage requirements have also been affected by an
amendment made to the definition of group health plan by the Omnibus Budget
Reconciliation Act of 1993 (OBRA 1993). OBRA 1993 amended the definition of
group health plan in section 5000(b)(1), which the COBRA continuation coverage
provisions of the International Revenue Code incorporate by reference.
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The legislative history of COBRA provides that the Department of the Treasury
has the authority to interpret the coverage and tax sanction provisions of COBRA
and that the Department of Labor has the authority to interpret the reporting
and disclosure provisions. Accordingly, these regulations apply in interpreting
the coverage provisions of COBRA in Title I of ERISA, as well as those in the
Internal Revenue Code. With minor exceptions, the final regulations and the new
proposed regulations being published today do not address the notice provisions
of the COBRA continuation coverage requirements.
Organization
The final regulations being published today follow the structure of the 1987
proposed regulations, with related questions-and-answers grouped into topics.
Each topic is now in a separate section, and sections have been added to the new
proposed regulations being published today for (1) business reorganizations and
employer withdrawals from multiemployer plans and (2) the interaction of the
Family and Medical Leave Act of 1993 (FMLA) and COBRA. The substance of the 1998
proposed regulations has been integrated into the questions- and-answers of the
1987 proposed regulations. The ordering of some of the questions-and-answers has
changed, and all of the questions-and- answers relating to the original
statutory effective date have been deleted. In addition, in a few cases, the
content of two separate questions-and-answers in the 1987 proposed regulations
has been combined into a single question-and-answer; in other cases the content
of a single question-and-answer has been expanded to two or more
questions-and-answers. These changes have resulted in the renumbering of the
questions-and-answers. The new proposed regulations being published today are
designed to fill gaps designated in the final regulations as reserved.
Effective Date
The 1987 proposed regulations provide that they will be effective upon
publication as final regulations. Some commenters suggested that the final
regulations should have a delayed effective date. The final regulations follow
this suggestion; they apply with respect to qualifying events occurring in plan
years beginning on or after January 1, 2000. For any period before the effective
date of the final regulations, the plan and the employer must operate in good
faith compliance with a reasonable interpretation of the requirements in section
4980B. For the period before the effective date of the final regulations, the
IRS will consider compliance with the proposed regulations in Sec. 1.162-26 (the
1987 proposed regulations) and Sec. 54.4980B-1 (the 1998 proposed regulations)
to constitute good faith compliance with a reasonable interpretation of the
statutory requirements for the topics that those proposed regulations address,
except to the extent inconsistent with a statutory amendment adopted after the
dates the proposed regulations were issued, during the period the amendment is
effective, or with a decision of the United States Supreme Court released after
the proposed regulations were issued, during the period after the decision is
released. For any period beginning on or after the effective date of the final
regulations with respect to topics not addressed in the final regulations, such
as how to calculate the applicable premium, the plan and the employer must
operate in good faith compliance with a reasonable interpretation of the
requirements in section 4980B.
Compliance with the new proposed regulations will constitute good faith
compliance with a reasonable interpretation of the statutory requirements
addressed in the new proposed regulations until the new proposed regulations are
finalized. In addition, actions inconsistent with the terms of the new proposed
regulations will not necessarily constitute a lack of good faith compliance with
a reasonable interpretation of the statutory requirements addressed in the new
proposed regulations; whether there has been good faith compliance with a
reasonable interpretation of the statutory requirements will depend on all the
facts and circumstances of each case.
The IRS will not assess the excise tax with respect to a plan that operates in
good faith compliance with a reasonable interpretation of the statutory
requirements, as described in the preceding two paragraphs. Note, however, that
in the case of lawsuits brought by qualified beneficiaries to enforce their
COBRA continuation coverage rights under ERISA or the Public Health Service Act,
the courts generally have not applied any good faith compliance standard.
Plans That Must Comply
The final regulations provide rules regarding which group health plans are
subject to COBRA. These rules are generally similar to those set forth in the
1987 proposed regulations. However, the rules for determining, for purposes of
the COBRA continuation coverage requirements, the number of group health plans
maintained by an employer have been deleted, and the new proposed regulations
set forth substantially different rules, which provide that employers and
employee organizations generally have broad discretion to determine the number
of group health plans that they maintain. Other significant changes to the 1987
proposed regulations on this point (some of which are set forth in the 1998
proposed regulations) include exceptions for long-term care services and medical
savings accounts and new rules regarding the small-employer plan exception.
As in the 1987 proposed regulations, the final regulations provide that, in
general, all group health plans are subject to the COBRA continuation coverage
requirements. However, small-employer plans (discussed below), church plans
(within the meaning of section 414(e)), and governmental plans (within the
meaning of section 414(d)) are not subject to COBRA. (The final regulations
refer to these as plans excepted from COBRA.) Plans excepted from COBRA are
generally not subject to the COBRA continuation coverage requirements or the
COBRA excise tax, although group health plans maintained by state or local
governments are subject to parallel continuation coverage requirements in the
Public Health Service Act (which is administered by the Department of Health and
Human Services). Also, the Federal Employees Health Benefit Program is subject
to generally similar, although not parallel, temporary continuation of coverage
provisions under the Federal Employees Health Benefits Amendments Act of 1988.
The final regulations define group health plan in a manner generally similar to
that in the 1987 proposed regulations. However, certain changes in terminology
have been made to reflect the statutory cross-reference to section 5000(b)(1)
set forth in section 4980B(g)(2) (such as the use of the term health care and
the definition of employee). Additionally, the final regulations, in accordance
with section 4980B(g)(2), provide that a plan is not a group health plan if
substantially all the coverage provided under the plan is for qualified
long-term care services (as defined in section 7702B(c)). The final regulations
allow plans to use any reasonable method in determining whether a plan satisfies
this exception. The final regulations also provide, in accordance with section
106(b)(5), that amounts contributed by an employer to a medical savings account
(as defined in section 220(d)) are not considered part of a group health plan
for purposes of COBRA (although a high-deductible health plan will not fail to
be a group health plan simply because it covers a holder of a medical savings
account).
Under the final regulations, a group health plan is a plan maintained by an
employer or employee organization to provide health care to individuals who have
an employment-related connection to the employer or employee organization or to
the families of such individuals. In accordance with section 5000(b)(1), these
individuals include employees, former employees, the employer, and others
associated or formerly associated with the employer or employee organization in
a business relationship. The final regulations generally refer to all
individuals covered under a plan by virtue of the performance of services or by
virtue of membership in an employee organization as employees. (As discussed
below, the term employee has a narrower meaning for purposes of the
small-employer plan exception.) The final regulations use the term employer to
refer to a person for whom an individual performs services. Pursuant to section
414(t), the term employer also includes, with respect to such a person, any
member of a group described in section 414(b), (c), (m), or (o) that includes
the person (a controlled group) as well as any successor of the person or of a
member of the controlled group.
Under the final regulations, as under the 1987 proposed regulations, a plan
generally is considered to provide health care whether it does so directly or
through insurance, reimbursement, or other means and whether it does so through
an on-site facility or a cafeteria or other flexible benefit arrangement.
Insurance includes group insurance policies and one or more individual policies
under an arrangement maintained by the employer or employee organization to
provide health care to two or more employees. Under the final regulations, as
under the 1987 proposed regulations, in the case of a cafeteria plan or other
flexible benefit arrangement, the COBRA continuation coverage requirements apply
only to the health care benefits under the cafeteria plan or other flexible
benefit arrangement that an employee has actually chosen to receive.
Many commenters on the 1987 proposed regulations requested clarification of the
application of COBRA to health care benefits provided under flexible spending
arrangements (health FSAs). Some commentators argued that health FSAs should not
be subject to COBRA. Health FSAs satisfy the definition of group health plan in
section 5000(b)(1) and, accordingly, are generally subject to the COBRA
continuation coverage requirements. However, COBRA is intended to ensure that a
qualified beneficiary has guaranteed access to coverage under a group health
plan and that the cost of that coverage is no greater than 102 percent of the
applicable premium. The IRS and Treasury believe that the purposes of COBRA are
not furthered by requiring an employer to offer COBRA for a plan year if the
amount that the employer could require to be paid for the COBRA coverage for the
plan year would exceed the maximum benefit that the qualified beneficiary could
receive under the FSA for that plan year and if the qualified beneficiary could
not avoid a breCOBRA_Insurance in coverage, for purposes of the HIPAA portability
provisions,\2\ by electing COBRA coverage under the FSA. Accordingly, the new
proposed regulations contain a rule limiting the application of the COBRA
continuation coverage requirements in the case of health FSAs.
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\2\ Under HIPAA, a qualified beneficiary who maintains coverage after
termination of employment under a group health plan that is subject to HIPAA can
avoid a breCOBRA_Insurance in coverage and thereby avoid becoming subject to a preexisting
condition exclusion upon later becoming covered by another group health plan.
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Under this rule, if the health FSA satisfies two conditions, the health FSA need
not mCOBRA_Insurancee COBRA continuation coverage available to a qualified beneficiary for
any plan year after the plan year in which the qualifying event occurs. The
first condition that the health FSA must satisfy for this exception to apply is
that the health FSA is not subject to the HIPAA portability provisions in
sections 9801 though 9833 because the benefits provided under the health FSA are
excepted benefits. (See sections 9831 and 9832.) \3\ The second condition is
that, in the plan year in which the qualifying event of a qualified beneficiary
occurs, the maximum amount that the health FSA could require to be paid for a
full plan year of COBRA continuation coverage equals or exceeds the maximum
benefit available under the health FSA for the year. It is contemplated that
this second condition will be satisfied in most cases.
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\3\ The IRS and Treasury, together with the U.S. Department of Labor and the
U.S. Department of Health and Human Services, have issued a notice (62 FR 67688)
holding that a health FSA is exempt from HIPAA because the benefits provided
under it are excepted benefits under sections 9831 and 9832 if the employer also
provides another group health plan, the benefits under the other plan are not
limited to excepted benefits, and the maximum reimbursement under the health FSA
is not greater than two times the employee's salary reduction election (or if
greater, the employee's salary reduction election plus five hundred dollars.)
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Moreover, if a third condition is satisfied, the health FSA need not mCOBRA_Insurancee COBRA
continuation coverage available with respect to a qualified beneficiary at all.
This third condition is satisfied if, as of the date of the qualifying event,
the maximum benefit available to the qualified beneficiary under the health FSA
for the remainder of the plan year is not more than the maximum amount that the
plan could require as payment for the remainder of that year to maintain
coverage under the health FSA.
A plan is maintained by an employer or employee organization even if the
employer or employee organization does not directly or indirectly contribute to
it if coverage under the plan would not be available to an individual at the
same cost if the individual did not have an employment-related connection to the
employer or employee organization. The final regulations, for purposes of the
definition of a group health plan, use the term health care instead of the term
medical care (which was used in the 1987 proposed regulations). This change
reflects the change in the definition of group health plan made by OBRA 1989.
However, the final regulations provide that health care has the same meaning as
the term medical care under section 213(d). Like the 1987 proposed regulations,
the final regulations set forth a summary of items that do and do not constitute
health care.
The final regulations, generally following the 1987 proposed regulations, set
forth rules for determining whether a group health plan is a small-employer
plan. In general, a group health plan other than a multiemployer plan is a
small-employer plan if it is maintained for a calendar year by an employer that
normally employed fewer than 20 employees during the preceding calendar year,
and a group health plan that is a multiemployer plan is a small-employer plan if
each of the employers contributing to the plan for a calendar year normally
employed fewer than 20 employees during the preceding calendar year. Whether the
plan is a multiemployer plan or not, the term employer includes all members of a
controlled group. An example in the final regulations clarifies that the
controlled group includes foreign members, and thus a U.S. subsidiary with fewer
than 20 employees is subject to COBRA if the controlled group has 20 or more
employees world-wide. The final regulations set forth additional rules for the
application of the small-employer plan exception to multiemployer plans, and the
new proposed regulations contain the same definition of multiemployer plan that
is in section 414(f).
Under the final regulations, an employer is considered to have normally employed
fewer than 20 employees during a particular calendar year if it had fewer than
20 employees on at least 50 percent of its typical business days during that
year. This rule differs from the rule in the 1987 proposed regulations in two
ways. First, the 1987 proposed regulations use the term working days, whereas
the final regulations use the statutory term typical business days.
The second difference relates to the term employee. Under the 1987 proposed
regulations, self-employed individuals and independent contractors are counted
as employees for purposes of the small-employer plan exception if they are
covered under a plan of the employer. Commenters argued that only common law
employees should be counted for this purpose. Unlike the definition of covered
employee (amended by OBRA 1989 to mCOBRA_Insurancee clear that individuals who are not common
law employees but who are covered under the group health plan of an employer or
employee organization by virtue of the performance of services are still
considered covered employees) and the definition of group health plan (amended
by OBRA 1993 to mCOBRA_Insurancee clear that a health plan covering individuals who are not
common law employees of the employer or employee organization, and who are not
family members of common law employees, is still a group health plan) the
reference to employees for purposes of the small-employer plan exception have
not been amended to include individuals who are not common law employees.
Consequently, under the final regulations, only common law employees are tCOBRA_Insuranceen
into account for purposes of the small-employer plan exception; self-employed
individuals, independent contractors, and directors are not counted.
Although a small-employer plan is generally excepted from COBRA, a plan that is
not a small-employer plan for a period remains subject to COBRA for qualifying
events that occurred during that period, even if it subsequently becomes a
small-employer plan.
In determining whether a plan is eligible for the small-employer plan exception,
part-time employees, as well as full-time employees, must be tCOBRA_Insuranceen into account.
Several commenters on the 1987 proposed regulations requested clarification of
how to count part-time employees for the small-employer plan exception, and the
new proposed regulations provide guidance on this issue. Under the new proposed
regulations, instead of each part-time employee counting as a full employee,
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 works for the employer
divided by the number of hours that an employee must work in order to be
considered a full-time employee. The number of hours that must be worked to be
considered a full-time employee is determined in a manner consistent with the
employer's general employment practices, although for this purpose not more than
eight hours a day or 40 hours a week may be used. An employer may count
employees for each typical business day or may count employees for a pay period
and attribute the total number of employees for that pay period to each typical
business day that falls within the pay period. The employer must use the same
method for all employees and for the entire year for which the small-employer
plan determination is made.
In determining whether a multiemployer plan satisfies the requirements for the
small-employer plan exception, the 1987 proposed regulations provide a special
rule permitting the multiemployer plan to be considered a small-employer plan
for a year if any contributing employer that grew to be too large to qualify for
the exception during the preceding year ceases to contribute to the plan by
February 1 of the current year. Questions have been raised about the need for
and the authority for this special rule, and one commenter pointed out the
uncertainty of how to deal with a qualified beneficiary experiencing a
qualifying event under such a plan in January of the current year if the
qualified beneficiary needed confirmation of coverage for urgent services before
it was clear that the too-large employer would cease contributing to the
multiemployer plan by February 1. Based on these concerns, the final regulations
eliminate this special rule for multiemployer plans.
The new proposed regulations provide guidance, for purposes of the COBRA
continuation coverage requirements, on how to determine the number of group
health plans that an employer or employee organization maintains. Under these
rules, the employer or employee organization is generally permitted to establish
the separate identity and number of group health plans under which it provides
health care benefits to employees. Thus, if an employer or employee organization
provides a variety of health care benefits to employees, it generally may
aggregate the benefits into a single group health plan or disaggregate benefits
into separate group health plans. The status of health care benefits as part of
a single group health plan or as separate plans is determined by reference to
the instruments governing those arrangements. If it is not clear from the
instruments governing an arrangement or arrangements to provide health care
benefits whether the benefits are provided under one plan or more than one plan,
or if there are no instruments governing the arrangement or arrangements, all
such health care benefits (other than those for qualified long-term care
services) provided by a single entity (determined without regard to the
controlled group) constitute a single group health plan.
Under the new proposed regulations, a multiemployer plan and a plan other than a
multiemployer plan are always separate plans. In addition, any treatment of
health care benefits as constituting separate group health plans will be
disregarded if a principal purpose of the treatment is to evade any requirement
of law. Of course, an employer's flexibility to treat benefits as part of
separate plans may be limited by the operation of other laws, such as the
prohibition in section 9802 on conditioning eligibility to enroll in a group
health plan on the basis of any health factor of an individual.
The final regulations modify the rules set forth in the 1987 proposed
regulations for determining the plan year of a group health plan under COBRA.
These modifications are made to be consistent with the rules in the temporary
regulations under HIPAA. The definition of plan year is important in applying,
for example, the effective date provisions under the final regulations and the
rules for health FSAs under the new proposed regulations. Under the final
regulations, the plan year is the year designated as such in the plan documents.
If the plan documents do not designate a plan year (or if there are no plan
documents), the plan year is the deductible/limit year used by the plan. If the
plan does not impose deductibles or limits on an annual basis, the plan year is
the policy year. If the plan does not impose deductibles or limits on an annual
basis and the plan is not insured (or the insurance policy is not renewed
annually), the plan year is the taxable year of the employer. In any other case,
the plan year is the calendar year.
The final regulations reflect the statutory provisions 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 of section 4980B(f). In
the case of a multiemployer plan, the excise tax is imposed on the plan; \4\ in
the case of any other plan, the excise tax is imposed on the employer
maintaining the plan. In certain circumstances, the excise tax can be imposed on
other persons involved with the provision of benefits under the plan, such as an
insurer providing benefits under the plan or a third party administrator
administering claims under the plan. Separate, non-tax remedies may be available
in the case of a plan that fails to comply with the COBRA continuation coverage
requirements in ERISA.
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\4\ In this regard, the U.S. Department of labor has advised the IRS and
Treasury that to the extent a plan fiduciary subjects a plan to liability for
the COBRA excise tax on account of her or his imprudent actions, the plan
fiduciary may be held personally liable under Title I of ERISA for the amount of
the tax.
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Qualified Beneficiaries
The rules in the final regulations for determining who is a qualified
beneficiary generally follow those set forth in the 1987 proposed regulations,
as well as those set forth in the 1998 proposed regulations regarding the status
of newborn and adopted children as qualified beneficiaries. However, certain
provisions have been added to the final regulations to reflect the special
statutory rules that apply in the case of bankruptcy of the employer as a
qualifying event. Modifications have also been made to reflect the decision of
the Supreme Court in Geissal v. Moore Medical Corp., 118 S. Ct. 1869 (1998),
which held that an individual covered under another group health plan at the
time she or he elects COBRA continuation coverage cannot be denied COBRA
continuation coverage on the basis of that other coverage.
Under the final regulations, a qualified beneficiary is, in general: (1) any
individual who, on the day before a qualifying event, is covered under a group
health plan either as a covered employee, the spouse of a covered employee, or
the dependent child of a covered employee; or (2) any child born to or placed
for adoption with a covered employee during a period of COBRA continuation
coverage. (The final regulations retain the definitions of the terms placement
for adoption and being placed for adoption that were in the 1998 proposed
regulations.) For a qualifying event that is the bankruptcy of the employer, any
covered employee who retired on or before the date of any substantial
elimination of group health plan coverage is a qualified beneficiary; the
spouse, surviving spouse, or dependent child of the retired covered employee is
also a qualified beneficiary if the spouse, surviving spouse, or dependent child
was a beneficiary under the plan on the day before the bankruptcy qualifying
event. The final regulations add a provision clarifying that if an individual is
denied coverage under a group health plan in violation of applicable law
(including HIPAA) and experiences an event that would be a qualifying event if
the coverage had not been wrongfully denied, the individual is considered a
qualified beneficiary.
A covered employee can be a qualified beneficiary only in connection with a
qualifying event that is the termination (or reduction of hours) of the covered
employee's employment or the employer's bankruptcy. As under the 1987 proposed
regulations, the final regulations provide that a covered employee is not a
qualified beneficiary if her or his status as a covered employee is attributable
to certain periods in which she or he was a nonresident alien (in which case the
covered employee's spouse and dependent children are also not qualified
beneficiaries). Although a child born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage is a qualified
beneficiary, a child born to or placed for adoption with a qualified beneficiary
other than the covered employee after a qualifying event, or a person who
becomes the spouse of a qualified beneficiary (regardless of whether the
qualified beneficiary is the covered employee) after a qualifying event is not a
qualified beneficiary. The final regulations retain the rule of the 1987
proposed regulations under which an individual is not a qualified beneficiary
if, on the day before the qualifying event, the individual is covered under the
group health plan solely because of another individual's election of COBRA
continuation coverage. However, consistent with Geissal, the final regulations
eliminate the rule in the 1987 proposed regulations that an individual is not a
qualified beneficiary if, on the day before the qualifying event, the individual
was entitled to Medicare benefits.
An individual ceases to be a qualified beneficiary if she or he does not elect
COBRA continuation coverage by the end of the election period (discussed below).
The final regulations clarify that an individual who elects COBRA continuation
coverage ceases to be a qualified beneficiary once the plan's obligation to
provide COBRA continuation coverage has ended.
The term covered employee is defined in the final regulations in a manner
substantially the same as in the 1987 proposed regulations. Although some
commenters on the 1987 proposed regulations objected to the inclusion in this
definition of individuals other than common law employees, the statutory
definition was amended by OBRA 1989 to include such individuals.
Under the final regulations, a covered employee generally includes any
individual who is or has been provided coverage under a group health plan (other
than one excepted from COBRA as of the date of what would otherwise be a
qualifying event) because of her or his present or past performance of services
for the employer maintaining the group health plan (or by reason of membership
in the employee organization maintaining the plan). Thus, retirees and former
employees covered by a group health plan are covered employees if the coverage
is provided in whole or in part because of the previous employment. Any
individual who performs services for the employer maintaining the plan or who is
a member of the employee organization maintaining the plan may be a covered
employee. Thus, common law employees, self-employed individuals, independent
contractors, and corporate directors can be covered employees. Generally, mere
eligibility for coverage--as opposed to actual coverage--does not mCOBRA_Insurancee an
individual a covered employee. However, if an individual who otherwise would be
a covered employee is denied coverage under a group health plan in violation of
applicable law (including HIPAA), the individual is considered a covered
employee.
Qualifying Events
The rules regarding qualifying events under the final regulations generally are
the same as those in the 1987 proposed regulations. Under the final regulations,
a qualifying event is any of a set of specified events that occurs while a group
health plan is subject to COBRA and that causes a covered employee (or the
spouse or dependent child of the covered employee) to lose coverage under the
plan. These specified events are: the death of a covered employee; the
termination (other than by reason of gross misconduct), or reduction of hours,
of a covered employee's employment; the divorce or legal separation of a covered
employee from the covered employee's spouse; a covered employee's becoming
entitled to Medicare benefits under Title XVIII of the Social Security Act; a
dependent child's ceasing to be a dependent child of the covered employee under
the plan; and a proceeding in bankruptcy under Title 11 of the United States
Code with respect to an employer from whose employment a covered employee
retired at any time. The addition of employer bankruptcy as a qualifying event
reflects the amendments made to COBRA by OBRA 1986.
The reasons for which an employee has a termination of employment or a reduction
of hours of employment generally are not relevant in determining whether the
termination or reduction of hours is a qualifying event. Thus, a voluntary
termination, a strike, a lockout, a layoff, or an involuntary discharge each may
constitute a qualifying event. However, if an employee is discharged for gross
misconduct, the termination of employment does not constitute a qualifying
event. The final regulations clarify that a reduction of hours of a covered
employee's employment includes any decrease in the number of hours that a
covered employee works or is required to work that does not constitute a
termination of employment. Thus, if a covered employee tCOBRA_Insurancees a leave of absence,
is laid off, or otherwise performs no hours of work during a period, the covered
employee has experienced a reduction in hours that, if the other applicable
requirements are satisfied, constitutes a qualifying event. (But see Notice
94-103 (1994-2 C.B. 569) and the new proposed regulations, described below, for
special rules regarding FMLA leave.) A covered employee's loss of coverage by
reason of a failure to work the minimum number of hours required for coverage
constitutes a reduction of hours of employment. Under the final regulations, to
lose coverage means to cease to be covered under the same terms and conditions
as in effect immediately before the event. The final regulations clarify that a
loss of coverage includes an increase in an employee premium or contribution
resulting from one of the events described above. The loss of coverage need not
be concurrent with the event; it is enough that the loss of coverage occur at
any time before the end of the maximum coverage period (described below). For
employer bankruptcies, the term to lose coverage also includes a substantial
elimination of coverage that occurs within 12 months before or after the date on
which the bankruptcy proceeding begins.
Under the final regulations, as under the 1987 proposed regulations, reductions
or eliminations in coverage in anticipation of an event are disregarded in
determining whether the event results in a loss of coverage. Although several
commenters objected to this rule, the final regulations retain the provision in
order to protect qualified beneficiaries from being deprived of their COBRA
rights because an employer or employee organization transposes a loss or
reduction of coverage to a time before the qualifying event. This rule also
applies in cases where a covered employee discontinues the coverage of a spouse
in anticipation of a divorce or legal separation. In such a case, upon receiving
notice of the divorce or legal separation, a plan is required to mCOBRA_Insurancee COBRA
continuation coverage available, effective on the date of the divorce or legal
separation (but not for any period before the date of the divorce or legal
separation).
Under the final regulations, as under the 1987 proposed regulations, an event
must occur while the group health plan is subject to COBRA in order to
constitute a qualifying event. A plan that is excepted from COBRA (for example,
by reason of the small-employer plan exception) and that later becomes subject
to COBRA is not required to provide COBRA continuation coverage to individuals
who experienced what would otherwise be a qualifying event during the period
when the plan was not subject to COBRA.
Finally, in the case of a child born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage, the qualifying event
that gives rise to that period of COBRA continuation coverage is the qualifying
event applicable to that child. Thus, if a second qualifying event has occurred
before such a child is born (for example, if the covered employee dies), the
second qualifying event also applies to the newborn child.
COBRA Continuation Coverage
The 1987 proposed regulations generally refer to the coverage that a qualified
beneficiary is entitled to as the coverage that was in effect on the day before
the qualifying event. While that is generally true, the final regulations have
been revised to incorporate the statutory standard that a qualified beneficiary
is entitled to the coverage made available to similarly situated beneficiaries
with respect to whom a qualifying event has not occurred. The final regulations
generally use as a shorthand for this statutory language the phrase ``similarly
situated nonCOBRA beneficiaries'' instead of the phrase ``similarly situated
active employees'' used in the 1987 proposed regulations. In certain contexts in
the final regulations, though, the phrase ``similarly situated active
employees'' is still used because in those contexts--such as the right to mCOBRA_Insurancee
an independent election for COBRA continuation coverage--qualified beneficiaries
who are spouses and dependent children of covered employees are entitled to the
rights that employees have (and in those contexts, spouses and dependent
children who are not qualified beneficiaries typically do not have the rights
that employees have).
The 1987 proposed regulations address in a separate question-and- answer the
type of coverage that must be made available to qualified beneficiaries if a
change is made in the coverage provided to similarly situated nonCOBRA
beneficiaries. The final regulations include this rule in the
question-and-answer that defines COBRA continuation coverage. In doing so, the
final regulations delete several specific requirements in the 1987 proposed
regulations. For example, if coverage for the similarly situated nonCOBRA
beneficiaries is changed or eliminated, the 1987 proposed regulations require
that qualified beneficiaries be permitted to elect coverage under any remaining
plan made available to the similarly situated active employees. Many commenters
objected that in the case of a mere change in benefits, the requirement to give
qualified beneficiaries an election among other plans would give them greater
rights than those active employees might have. The final regulations follow the
suggestion of the commenters in providing that the general principle--that
qualified beneficiaries have the same rights as similarly situated nonCOBRA
beneficiaries--applies in this situation. The same principle also applies in
determining whether credit for deductibles must be carried over from a
discontinued plan to a new plan. Nevertheless, if an employer or employee
organization providing more than one plan to a group of similarly situated
nonCOBRA beneficiaries eliminates benefits under one plan without giving the
similarly situated nonCOBRA beneficiaries the right to enroll in another plan,
that option would still have to be made available to qualified beneficiaries if
the employer continued to maintain a group health plan because of the employer's
obligation to continue to mCOBRA_Insurancee COBRA continuation coverage available.
The 1987 proposed regulations include detailed rules requiring that qualified
beneficiaries generally be offered the option of electing only core coverage or
both core and noncore coverage. These rules were based on a reference in the
conference report to the Tax Reform Act of 1986. Many commenters expressed the
opinion that the reference in the conference report is an insufficient basis for
including this concept in the regulations when nothing in the statute itself
suggests a distinction between core and noncore coverage. Commenters also
contended that the core/noncore distinction would create undue administrative
complexity and promote adverse selection. After careful consideration, the IRS
and Treasury have decided not to include in either the final or the new proposed
regulations any such requirement to offer for core coverage separately. However,
comments are invited on whether such a requirement should be adopted.
The 1987 proposed regulations establish standards for determining the
deductibles and limits that apply to COBRA continuation coverage in a period in
which an individual or a group of family members has coverage that is not COBRA
continuation coverage and then elects COBRA continuation coverage. (Of course,
during a period in which an individual or group of family members had only COBRA
continuation coverage, the rules for deductibles and limits would apply to them
in the same manner as they would to similarly situated nonCOBRA beneficiaries.)
Some commenters objected to the provisions of the 1987 proposed regulations for
computing deductibles or limits on a family basis in the case of a qualifying
event (such as divorce) that splits a family into two (or more) units. The 1987
proposed regulations would require that each resulting family unit be credited
with all the expenses incurred by the entire family before the qualifying event.
The final regulations revise this rule. Under the final regulations, in
computing deductibles and limits for the family unit receiving COBRA coverage,
the plan is required to tCOBRA_Insurancee into account only those expenses incurred before
the qualifying event by family members who are part of the resulting family unit
after the qualifying event.
The 1987 proposed regulations provide that qualified beneficiaries moving
outside the area served by a region-specific plan must be given the right to
obtain other coverage from the employer maintaining the region-specific plan.
The rule conditions the right to other coverage on the employer having employees
in the area to which the qualified beneficiary is moving. This proposed rule
unduly limits the application of the rule in the case of an employer or employee
organization that could provide other coverage to the qualified beneficiary
without having to establish a new plan or enter into a new group insurance
contract even though the employer did not have employees or the employee
organization did not have members in the area that the qualified beneficiary was
moving to. This might be the case, for example, if the employer or employee
organization maintained a self- insured plan or maintained an insured plan
through an insurance company licensed to provide that same product in the area
that the qualified beneficiary was moving to. The final regulations eliminate
the condition that an employer have employees in the area to which the qualified
beneficiary is moving and instead require that coverage be made available to the
qualified beneficiary if the employer or employee organization would be able to
provide coverage to the qualified beneficiary under one of its existing plans.
Generally the coverage that must be made available is that made available to the
similarly situated nonCOBRA beneficiaries. If, however, the coverage made
available to the similarly situated nonCOBRA beneficiaries cannot be made
available in the area that the qualified beneficiary is moving to, then the
coverage that must be made available is coverage provided to other employees.
The 1987 proposed regulations require, in the case of a plan providing open
enrollment rights, that open enrollment rights be extended to qualified
beneficiaries if an employer maintains two or more plans. Thus, that rule, by
its terms, does not require that open enrollment rights be given if an employer
maintains a single plan and allows active employees during open enrollment to
switch between categories of coverage such as single and family or among
categories such as employee-only, employee-plus- one-dependent, or
employee-plus-two-or-more-dependents. The final regulations eliminate the
condition that an employer or employee organization maintain two or more plans
for a qualified beneficiary to have open enrollment rights. Thus, open
enrollment rights must be extended to qualified beneficiaries in any case in
which they are extended to similarly situated active employees. (Note that the
open enrollment right of employees to enroll when not previously enrolled would
not have to be extended to individuals who previously did not elect to receive
COBRA continuation coverage because an individual ceases to be a qualified
beneficiary if COBRA continuation coverage is not elected.)
The 1987 proposed regulations require that qualified beneficiaries be given the
same right to add new family members that similarly situated active employees
have. Many commenters objected to this rule, arguing that it requires more than
a mere continuation of coverage. However, COBRA continuation coverage is more
than just a continuation of the coverage a qualified beneficiary had before the
qualifying event; it includes the same procedural rights to expand or change
coverage that similarly situated active employees have. Moreover, the policy
behind the 1987 proposed regulations is reflected in the HIPAA amendment to
COBRA creating special qualified beneficiary status for certain newborn and
adopted children as well as in the HIPAA special enrollment rights in section
9801(f) for new spouses and for newborn and adopted children. Accordingly, the
final regulations provide guidance on the application of the HIPAA special
enrollment rights to qualified beneficiaries and retain the rule in the 1987
proposed regulations regarding the right of qualified beneficiaries to add new
family members (even though not eligible for the HIPAA special enrollment
rights) to the same extent that active employees are permitted to add new family
members.
Electing COBRA Continuation Coverage
The final regulations set forth rules regarding elections of COBRA continuation
coverage by qualified beneficiaries. In general, a group health plan is required
to offer a qualified beneficiary the opportunity to elect COBRA continuation
coverage at any time during the election period. The election period begins not
later than the date the qualified beneficiary would lose coverage by reason of a
qualifying event and ends not earlier than 60 days after the later of that date
or 60 days after the date on which the qualified beneficiary is provided notice
of her or his right to elect COBRA continuation coverage. For purposes of
determining whether a qualified beneficiary's election of COBRA continuation
coverage is timely, the election is deemed to be made on the date it is sent to
the employer or plan administrator. The final regulations clarify that a
qualified beneficiary need not herself or himself elect COBRA continuation
coverage; that election can be made on behalf of the qualified beneficiary by a
third party (including a third party that is not a qualified beneficiary).
Generally, the employer or plan administrator must determine when a qualifying
event has occurred, and a qualified beneficiary is not required to give notice
of the event. However, a covered employee or qualified beneficiary is required
to notify the plan administrator of a qualifying event that is a divorce or
legal separation of the covered employee or a dependent child's ceasing to be a
dependent child under the plan terms. The 1987 proposed regulations prescribe
that the notification should be given to the employer or other plan
administrator. The final regulations simply require that the notice be provided
to the plan administrator.
The notice must be provided within 60 days after the date of the qualifying
event or the date on which the qualified beneficiary would lose coverage because
of the qualifying event, whichever is later. If the notice is not provided, the
group health plan is not required to mCOBRA_Insurancee COBRA continuation coverage available
to the qualified beneficiary.\5\ In the case of the covered employee's divorce
or legal separation, a single notice sent by or on behalf of the covered
employee or any one of the qualified beneficiaries (that is, the spouse or a
dependent child) satisfies the notice requirement for all those who become
qualified beneficiaries as a result of the divorce or legal separation.
---------------------------------------------------------------------------
\5\ The U.S. Department of Labor has advised the IRS and Treasury that, if a
covered employee or qualified beneficiary has not been adequately informed of
the obligation to provide notice in the case of a qualifying event that is the
divorce or legal separation of the covered employee or that is a dependent
child's ceasing to be covered under the generally applicable requirements of the
plan, the covered employee's or qualified beneficiary's failure to provide
timely notice to the plan administrator will not affect the plan's obligation to
mCOBRA_Insurancee continuation coverage available upon receiving notice of such event.
---------------------------------------------------------------------------
The group health plan must mCOBRA_Insurancee COBRA continuation coverage available for the
entire election period if the qualified beneficiary elects coverage prior to the
end of the period (except in the case of a revoked waiver, as discussed below).
An employer or employee organization maintaining a group health plan using an
indemnity or reimbursement arrangement can satisfy this requirement by
continuing the qualified beneficiary's coverage during the election period or by
discontinuing the coverage until the qualified beneficiary elects COBRA and then
retroactively reinstating the qualified beneficiary's coverage. Under the final
regulations, as under the 1987 proposed regulations, the date of the qualifying
event (and thus, the beginning of the maximum coverage period) is not delayed
merely because a plan provides coverage during the election period. Claims
incurred by the qualified beneficiary during the election period do not have to
be paid until COBRA continuation coverage is elected and any payment required
for coverage is made.
For a group health plan providing health services--including a health
maintenance organization or a walk-in clinic--a qualified beneficiary who has
not elected and paid for COBRA continuation coverage can be required to choose
either to elect and to pay for coverage or to pay a reasonable and customary
charge for plan services (but only if the qualified beneficiary will be
reimbursed for that charge within 30 days after she or he elects COBRA
continuation coverage and mCOBRA_Insurancees any payment for coverage). Alternatively, the
plan can treat the qualified beneficiary's use of the plan's health services as
a constructive election of COBRA continuation coverage and, if it so notifies
the qualified beneficiary prior to the use of services, can require payment for
COBRA continuation coverage.
The final regulations adopt the position in Communications Workers of America v.
NYNEX Corp., 898 F.2d 887 (2d Cir. 1989), regarding the responses that a group
health plan must mCOBRA_Insurancee with respect to the rights of a qualified beneficiary
during that qualified beneficiary's election period. Specifically, the final
regulations require that the plan mCOBRA_Insurancee a complete response to any inquiry from a
health care provider regarding the qualified beneficiary's right to coverage
under the plan during the election period. Thus, if the qualified beneficiary
has not yet elected COBRA continuation coverage but remains covered under the
plan during the election period (subject to retroactive cancellation if no
election is made), the plan must so inform the health care provider. Conversely,
if the qualified beneficiary is not covered during the election period prior to
her or his election, the plan must inform the health care provider that the
qualified beneficiary does not have current coverage but will have retroactive
coverage if COBRA continuation coverage is elected. (The final regulations also
include similar requirements with respect to inquiries made by health care
providers during the 30- and 45-day grace periods for paying for COBRA
continuation coverage.)
A qualified beneficiary who waives COBRA continuation coverage during the
election period can revoke the waiver before the end of the election period, but
the group health plan is not then required to provide coverage as of any date
prior to the revocation. Although several commenters objected to the rule in the
1987 proposed regulations allowing the revocation during the election period of
any previous waiver, the final regulations retain this rule. If the rule
permitted irrevocable waivers, plans might induce qualified beneficiaries to
execute waivers hastily before becoming fully informed of their rights and
having the opportunity to carefully consider whether to elect COBRA. As with the
election of COBRA continuation coverage, a waiver or a revocation of a waiver is
deemed to be made on the date sent. The employer or employee organization
maintaining the group health plan is not permitted to withhold money, benefits,
or anything else to which the qualified beneficiary is entitled under any law or
agreement in order to induce a qualified beneficiary to mCOBRA_Insurancee payment for COBRA
continuation coverage or to surrender any rights under COBRA. Any waiver of
COBRA continuation coverage rights obtained through such means will be invalid.
However, the general rules for coverage during the election period apply in the
case of waivers and revocations of waivers. Thus, in the case of an indemnity
arrangement, the plan can deny coverage for claims until payment for the
coverage has been made (as can also be done with those health maintenance
organizations or walk-in clinics that adopt this method for complying with the
COBRA continuation coverage requirements during the election period).
A group health plan must offer each qualified beneficiary the opportunity to
mCOBRA_Insurancee an independent election to receive COBRA continuation coverage and, during
an open enrollment period, to choose among any options available to similarly
situated active employees. This requirement also applies to any child born to or
placed for adoption with a covered employee during a period of COBRA
continuation coverage. (An election for a minor child may be made by the child's
parent or legal guardian.) If a covered employee or the spouse of a covered
employee elects COBRA continuation coverage and the election does not specify
whether the election is for self-only coverage, the election is deemed to
include an election of COBRA continuation coverage on behalf of other qualified
beneficiaries with respect to that qualifying event.
Duration of COBRA Continuation Coverage
The 1987 proposed regulations incorporate the statutory bases for terminating
COBRA continuation coverage except the rule (added by OBRA 1989 and amended by
HIPAA) that COBRA coverage can be terminated in the month that is more than 30
days after a final determination that a qualified beneficiary is no longer
disabled. The new proposed regulations add this statutory basis for terminating
COBRA coverage, with two clarifications. First, the new proposed regulations
clarify that a determination that a qualified beneficiary is no longer disabled
allows termination of COBRA continuation coverage for all qualified
beneficiaries who were entitled to the disability extension by reason of the
disability of the qualified beneficiary who has been determined to no longer be
disabled. Second, the new proposed regulations clarify that such a determination
does not allow termination of the COBRA continuation coverage of a qualified
beneficiary before the end of the maximum coverage period that would apply
without regard to the disability extension.
Section 4980B(f)(2)(B)(iv) provides that a qualified beneficiary's right to
COBRA continuation coverage may be terminated when the qualified beneficiary
``first becomes,'' after the date of the COBRA election, covered under another
group health plan (subject to certain additional conditions) or entitled to
Medicare benefits. The final regulations add two new questions-and-answers that
provide guidance on this provision.
The 1987 proposed regulations substitute ``is'' for the statutory phrase ``first
becomes.'' The effect of this substitution was to permit an employer to cut off
a qualified beneficiary's right to COBRA continuation coverage based upon other
group health plan coverage that the qualified beneficiary first became covered
under before she or he elected COBRA coverage. In the case of entitlement to
Medicare benefits, the 1987 proposed regulations not only shift the statutory
``becomes'' to ``is,'' they also exclude from the definition of qualified
beneficiary anyone who is entitled to Medicare benefits on the day before the
qualifying event. After careful consideration, the IRS and Treasury concluded
that the better interpretation of the statute is that other group health plan
coverage that a qualified beneficiary has before the COBRA election is not a
basis for cutting off the qualified beneficiary's right to COBRA continuation
coverage. (The same rule applies for entitlement to Medicare benefits.)
Based upon the recommendation of the IRS, the Solicitor General filed
an amicus brief before the Supreme Court urging this position, which was
unanimously adopted by the Supreme Court in Geissal v. Moore Medical Corp., 118
S. Ct. 1869 (1998). The final regulations adopt the position urged by the IRS
and Treasury and adopted by the Court in Geissal. They provide that an employer
may cut off the right to COBRA continuation coverage based upon other group
health plan coverage or entitlement to Medicare benefits only if the qualified
beneficiary first becomes covered under the other group health plan coverage or
entitled to the Medicare benefits after the date of the COBRA election.
The statutory rule allowing a plan to discontinue COBRA continuation coverage on
account of coverage under another group health plan was amended by OBRA 1989 to
prohibit the discontinuance if the qualified beneficiary's other coverage was
subject to a preexisting condition exclusion. This amendment was further
modified by HIPAA to allow discontinuance of COBRA continuation coverage if the
preexisting condition exclusion does not apply or is satisfied by reason of the
limitations on preexisting condition exclusions in section 9801. The final
regulations reflect this amendment and clarify that coverage under another group
health plan includes coverage under a governmental plan.
Many commenters asked whether mere eligibility for Medicare justifies a
discontinuance of COBRA continuation coverage. In addition, many inquiries have
been received that ask whether the qualified beneficiary must be entitled to
both Part A and B of Medicare. The final regulations clarify that entitlement to
Medicare benefits means being enrolled in Medicare and does not mean merely
being eligible to enroll in Medicare. The final regulations also clarify that
being entitled to either Part A or B is sufficient for the plan to discontinue
COBRA continuation coverage (assuming that the entitlement to Medicare benefits
first arises after COBRA continuation coverage has been elected).
The 1987 proposed regulations allow a plan to discontinue providing COBRA
continuation coverage to a qualified beneficiary for cause on the same basis
that the plan could terminate for cause the coverage of a similarly situated
active employee (except for payments that would be untimely if made by a
nonCOBRA beneficiary but that are made within the grace periods provided by
COBRA). The final regulations provide that, for example, if a plan terminates
the coverage of similarly situated active employees for the submission of a
fraudulent claim, then the COBRA continuation coverage of a qualified
beneficiary can also be terminated for the submission of a fraudulent claim.
The 1987 proposed regulations reflect the statutory rules that were then in
effect for the maximum period that a plan is required to mCOBRA_Insurancee COBRA continuation
coverage available. Since then the statute has been amended to add the
disability extension, to permit plans to extend the notice period if the maximum
coverage period is also extended (referred to as the optional extension of the
required periods), and to add a special rule in the case of Medicare entitlement
preceding a qualifying event that is the termination or reduction of hours of
employment. The new proposed regulations reflect these statutory changes. The
maximum coverage period for a qualifying event that is the bankruptcy of the
employer has also been added to the new proposed regulations.
The 1998 proposed regulations set forth the requirements for a disability
extension to apply to a qualified beneficiary. Those requirements have been
incorporated into the final regulations, with one clarification. One of the
conditions for a disability extension to apply is that the qualified beneficiary
be disabled during the first 60 days of COBRA continuation coverage. In the case
of a qualified beneficiary who is born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage, the final regulations
clarify that the 60-day period is measured from the date of the child's birth or
placement for adoption.
The 1987 proposed regulations set forth standards for expanding the maximum
coverage period in the case of multiple qualifying events. Since 1987, the
statutory rules for multiple qualifying events have been affected by the
addition of the disability extension and the optional extension of required
periods. The final regulations reflect the statutory changes.
In addition, the final regulations clarify that a termination of employment
following a qualifying event that is a reduction of hours of employment does not
expand the maximum coverage period. Accord, Burgess v. Adams Tool & Engineering,
Inc., 908 F. Supp. 473 (W.D. Mich. 1995); contra, Gibbs v. Anchorage School
District, 1995 U.S. LEXIS 6290 (D. Ark. 1995). The underlying pattern in the
statute is generally to require 18 months (or 29 months, in the case of a
disability extension) of coverage for qualifying events that are the termination
or reduction of hours of a covered employee's employment and 36 months for other
qualifying events. The statutory provision for expansion of the 18- month period
to 36 months upon the occurrence of a second qualifying event generally follows
this pattern by allowing a qualified beneficiary who would have been entitled to
36 months of coverage if the second qualifying event had occurred first to get a
total of 36 months of COBRA continuation coverage. The statute lists six
categories of qualifying events, and termination of employment and reduction of
hours of employment are in the same category (just as divorce and legal
separation are in the same category of qualifying event). Treating a reduction
of hours of employment and a termination of employment as variations of a single
qualifying event rather than as two distinct qualifying events is consistent
with the overall design of the statute.
The 1987 proposed regulations address situations in which, following a
qualifying event, an employer provides alternative coverage, rather than COBRA
continuation coverage, to a former employee and her or his spouse and dependent
children. The 1987 proposed regulations provide that if the alternative coverage
does not satisfy the requirements for COBRA continuation coverage, each
qualified beneficiary must be given the opportunity to elect COBRA continuation
coverage instead of the alternative coverage. If, however, the alternative
coverage would satisfy the requirements for COBRA continuation coverage, the
1987 proposed regulations provide that, at the time of the original qualifying
event, the employee, spouse, and dependent children need not be provided with
the opportunity to elect COBRA continuation coverage. The final regulations
generally retain these rules but also clarify that if the employer increases the
employee share of premiums upon the occurrence of a qualifying event, the
qualified beneficiaries must be offered the opportunity to elect COBRA
continuation coverage.
The 1987 proposed regulations further provide that, if the alternative coverage
does not satisfy the requirements for COBRA continuation coverage and if, after
the original qualifying event, a qualifying event occurs that would cause a
spouse or dependent child to lose the alternative coverage, the spouse or child
must be offered COBRA continuation coverage. However, if the alternative
coverage satisfies the requirements for COBRA continuation coverage, and if
another qualifying event that causes the spouse or dependent child to lose the
alternative coverage occurs more than 18 months after the original qualifying
event, the 1987 proposed regulations provide that the spouse or dependent child
need not be offered COBRA continuation coverage. The final regulations modify
the 1987 proposed regulations and provide that if an event such as the death of
or divorce from the covered employee would end the right of a spouse or
dependent child to receive the alternative coverage (whether during or after the
first 18 months of COBRA continuation coverage), then that event is a qualifying
event, regardless of whether the alternative coverage would satisfy the
requirements for COBRA continuation coverage.
The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)
gives certain members of the military reserves the right to up to 18 months of
continuation coverage when they are called to active duty. Many people have
asked if the USERRA and COBRA periods of continuation coverage run concurrently
or consecutively. The final regulations clarify that USERRA coverage is
alternative coverage. Thus, the periods run concurrently.
The 1987 proposed regulations include the statutory rule requiring that a
conversion option otherwise made available under the plan be made available
within 180 days before the end of the maximum coverage period. The final
regulations adopt this rule without change.
Paying for COBRA Continuation Coverage
The 1987 proposed regulations identify the qualified beneficiary as the person
that can be required to pay the applicable premium. Many plans and employers
have asked whether they must accept payment on behalf of a qualified beneficiary
from third parties, such as a hospital or a new employer. Nothing in the statute
requires the qualified beneficiary to pay the amount required by the plan; the
statute merely permits the plan to require that payment be made. In order to
mCOBRA_Insurancee clear that any person may mCOBRA_Insurancee the required payment on behalf of a
qualified beneficiary, the final regulations modify the rule in the 1987
proposed regulations to refer to the payment requirement without identifying the
person who mCOBRA_Insurancees the payment.
The 1998 proposed regulations address the amount that a plan can require to be
paid for COBRA continuation coverage during the disability extension. This
amount is 150 percent of the applicable premium instead of the limit of 102
percent of the applicable premium that applies for coverage outside the
disability extension. The 1998 proposed regulations specifically reserve the
issue of the amount a plan could require to be paid in a case where only
nondisabled family members of the disabled individual receive COBRA continuation
coverage during the disability extension. The preamble to the 1998 proposed
regulations solicited comments on this issue. Commenters suggested that the 150
percent rate could be required if the disabled individual was part of the
coverage group but that the limit could be the 102 percent rate if only
nondisabled qualified beneficiaries were in the coverage group. The final
regulations adopt this suggestion.
The 1987 proposed regulations provide that the amount required to be paid for a
qualified beneficiary's COBRA continuation coverage must be fixed in advance for
each 12-month determination period. Many commenters suggested exceptions that
could be made to this general rule. Section 4980B(f)(4)(C) explicitly requires
that the determination of the applicable premium be made for a period of 12
months and that the determination be made before the beginning. Therefore, the
final regulations do not permit an increase in the applicable premium during the
12-month determination period. However, the final regulations do revise the
general rule from the 1987 proposed regulations to recognize the difference
between the applicable premium (which may not be increased during a 12-month
determination period and which is the basis for calculating the maximum amount
that the plan can require to be paid for COBRA continuation coverage) and the
maximum amount that the plan can require to be paid for COBRA continuation
coverage. Thus, the final regulations permit a plan to increase the amount it
requires to be paid for COBRA continuation coverage during a determination
period to tCOBRA_Insurancee into account the permitted increases during the disability
extension, to explicitly permit a plan that is requiring payment of less than
the maximum permissible amount to increase the amount required to be paid during
the 12-month determination period, and to permit an increase if a qualified
beneficiary changes to more expensive coverage (but also to require a reduction
if the qualified beneficiary changes to less expensive coverage).
The 1987 proposed regulations set forth the statutory requirement that qualified
beneficiaries be allowed to pay for COBRA coverage in monthly installments. The
1987 proposed regulations add that plans may allow payment to be made at other
intervals, and specifically mention quarterly or semiannual payment as examples.
The final regulations adopt the rule in the 1987 proposed regulations, but the
final regulations add weekly payment as an example to mCOBRA_Insurancee clear that shorter
than monthly installments are also permitted.
The 1987 proposed regulations provide that the first payment for COBRA
continuation coverage does not apply prospectively only. In order to mCOBRA_Insurancee clear
that a plan is not precluded from allowing a qualified beneficiary to apply the
first payment prospectively only, the final regulations provide that qualified
beneficiaries need not be given the option of having the first payment for COBRA
continuation coverage apply prospectively only.
The 1987 proposed regulations address the issue of timely payment for COBRA
continuation coverage, including an interpretation of the statutory grace
periods of 45 days for the initial payment and 30 days for all other payments.
Commenters pointed out that the application of the statutory grace period rules
could produce an anomalous result in some situations, such as allowing a plan to
require payment for the third month of COBRA continuation coverage earlier than
the plan could require payment for the first two months. OBRA 1989 amended the
45-day grace period rule to prevent this, and the final regulations conform to
the OBRA 1989 change. The final regulations also clarify that payment is
considered made on the date it is sent.
The final regulations also add a requirement (similar to the one described above
for the election period) relating to the response that a plan must give when a
health care provider, such as a physician, a hospital, or a pharmacy, contacts
the plan to confirm coverage of a qualified beneficiary with respect to whom the
required payment has not been made for the current period (but for whom any
applicable grace period has not expired). In such a case, the plan is required
to inform the health care provider of all of the details of the qualified
beneficiary's right to coverage during the applicable grace periods.
Many individuals have inquired about a plan's right to discontinue their COBRA
continuation coverage because the amount of the payment made was short by an
amount that is not significant. Sometimes the error has been clearly one of
transposed digits on a check tendered for payment; in other instances, payment
has been short by such a small amount that it would be unreasonable to attribute
the shortfall to anything other than mistCOBRA_Insurancee. The final regulations establish a
mechanism for the treatment of payments that are short by an insignificant
amount. Either the plan must treat the payment as satisfying the plan's payment
requirement or it must notify the qualified beneficiary of the amount of the
deficiency and grant the qualified beneficiary a reasonable period of time for
the deficiency to be paid. The final regulations provide that, as a safe harbor,
a period of 30 days is deemed to be a reasonable period for this purpose.
Business Reorganizations
The 1987 proposed regulations provide little direct guidance on the allocation
of responsibility for COBRA continuation coverage in the event of corporate
transactions, such as a sale of stock of a subsidiary or a sale of substantial
assets. Commenters on the 1987 proposed regulations requested further guidance
on corporate transactions, pointing out that the existing degree of uncertainty
tends to drive up the costs and risks of a transaction to both buyers and
sellers. The IRS and Treasury share this view and believe also that greater
certainty helps to protect the rights of qualified beneficiaries in these
transactions. The IRS has been contacted by many qualified beneficiaries whose
COBRA continuation coverage has been dropped or denied in the context of a
corporate transaction. In many cases, these qualified beneficiaries have been
told by each of the buyer and the seller that the other party is the one
responsible for providing them with COBRA continuation coverage. The preamble to
the 1998 proposed regulations requested comments on a possible approach to
allocating responsibility for COBRA continuation coverage in corporate
transactions. Commenters suggested that, in a stock sale, as in an asset sale,
it would be consistent with standard commercial practice to provide that the
seller retains liability for all existing qualified beneficiaries, including
those formerly associated with the subsidiary being sold. The IRS and Treasury
have studied the comments and given consideration to several alternatives with a
view to establishing rules that will minimize the administrative burden and
transaction costs for the parties to transactions while protecting the rights of
qualified beneficiaries and maintaining consistency with the statute.
Accordingly, the new proposed regulations mCOBRA_Insurancee clear that the parties to a
transaction are free to allocate the responsibility for providing COBRA
continuation coverage by contract, even if the contract imposes responsibility
on a different party than would the new proposed regulations. So long as the
party to whom the contract allocates responsibility performs its obligations,
the other party will have no responsibility for providing COBRA continuation
coverage. If, however, the party allocated responsibility under the contract
defaults on its obligation, and if, under the new proposed regulations, the
other party would have the obligation to provide COBRA continuation coverage in
the absence of a contractual provision, then the other party would retain that
obligation. This approach would avoid prejudicing the rights of qualified
beneficiaries to COBRA continuation coverage based upon the provisions of a
contract to which they were not a party and under which the employer with the
underlying obligation under the regulations to provide COBRA continuation
coverage could otherwise contract away that obligation to a party that fails to
perform. Moreover, the party with the underlying responsibility under the
regulations can insist on appropriate security and, of course, could pursue
contractual remedies against the defaulting party.
The new proposed regulations provide, for both sales of stock and sales of
substantial assets, such as a division or plant or substantially all the assets
of a trade or business, that the seller retains the obligation to mCOBRA_Insurancee COBRA
continuation coverage available to existing qualified beneficiaries. In
addition, in situations in which the seller ceases to provide any group health
plan to any employee in connection with the sale whether such a cessation is in
connection with the sale is determined on the basis of the facts and
circumstances of each case and thus is not responsible for providing COBRA
continuation coverage, the new proposed regulations provide that the buyer is
responsible for providing COBRA continuation coverage to existing qualified
beneficiaries. This secondary liability for the buyer applies in all stock sales
and in all sales of substantial assets in which the buyer continues the business
operations associated with the assets without interruption or substantial
change.
A particular type of asset sale raises issues for which the new proposed
regulations do not provide any special rules. (Thus, the general rules in the
new proposed regulations for business reorganizations would apply to this type
of transaction.) This type of asset sale is one in which, after purchasing a
business as a going concern, the buyer continues to employ the employees of that
business and continues to provide those employees exactly the same health
coverage that they had before the sale (either by providing coverage through the
same insurance contract or by establishing a plan that mirrors the one that
provided benefits before the sale). The application of the rules in the new
proposed regulations to this type of asset sale would require the seller to mCOBRA_Insurancee
COBRA continuation coverage available to the employees continuing in employment
with the buyer (and to other family members who are qualified beneficiaries).
Ordinarily, the continuing employees (or their family members) would be very
unlikely to elect COBRA continuation coverage from the seller when they can
receive the same coverage (usually at much lower cost) as active employees of
the buyer.
Consideration is being given to whether, under appropriate circumstances, such
an asset sale would be considered not to result in a loss of coverage for those
employees who continue in employment with the buyer after the sale. A
countervailing concern, however, relates to those qualified beneficiaries who
might have a reason to elect COBRA continuation coverage from the seller. An
example of such a qualified beneficiary would be an employee who continues in
employment with the buyer, whose family is likely to have medical expenses that
exceed the cost of COBRA coverage, and who has significant questions about the
solvency of the buyer or other concerns about how long the buyer might continue
to provide the same health coverage.
Under one possible approach, a loss of coverage would be considered not to have
occurred so long as the purchasing employer in an asset sale continued to
maintain the same group health plan coverage that the seller maintained before
the sale without charging the employees any greater percentage of the total cost
of coverage than the seller had charged before the sale. For this purpose, the
coverage would be considered unchanged if there was no obligation to provide a
summary of material modifications within 60 days after the change due to a
material reduction in covered services or benefits under the rules that apply
under Title I of ERISA. If these conditions were satisfied for the maximum
coverage period that would otherwise apply to the seller's termination of
employment of the continuing employees (generally 18 months from the date of the
sale), then those terminations of employment would never be considered
qualifying events. If the conditions were not satisfied for the full maximum
coverage period, then on the date when they ceased to be satisfied the seller
would be obligated to mCOBRA_Insurancee COBRA continuation coverage available for the balance
of the maximum coverage period.
Comments are invited on the utility of such a rule, either in situations in
which the seller retains an ownership interest in the buyer after the sale (for
example, a sale of assets from a 100-percent owned subsidiary to a 75-percent
owned subsidiary) or, more generally, in situations in which the seller and the
buyer are unrelated. Suggestions are also solicited for other rules that would
protect qualified beneficiaries while providing relief to employers in these
situations.
Although the new proposed regulations address how COBRA obligations are affected
by a sale of stock (and a sale of substantial assets), the new proposed
regulations do not address how the obligation to mCOBRA_Insurancee COBRA continuation
coverage available is affected by the transfer of an ownership interest in a
noncorporate entity that causes the noncorporate entity to cease to be a member
of a group of trades or businesses under common control (whether or not it
becomes a member of a different group of trades or business under common
control). Comments are invited on this issue.
Employer Withdrawals From Multiemployer Plans
The new proposed regulations also address COBRA obligations in connection with
an employer's cessation of contributions to a multiemployer group health plan.
The new proposed regulations provide that the multiemployer plan generally
continues to have the obligation to mCOBRA_Insurancee COBRA continuation coverage available
to qualified beneficiaries associated with that employer. (There generally would
not be any obligation to mCOBRA_Insurancee COBRA continuation coverage available to
continuing employees in this situation because a cessation of contributions is
not a qualifying event.) However, once the employer provides group health
coverage to a significant number of employees who were formerly covered under
the multiemployer plan, or starts contributing to another multiemployer plan on
their behalf, the employer's plan (or the new multiemployer plan) would have the
obligation to mCOBRA_Insurancee COBRA continuation coverage available to the existing
qualified beneficiaries. This rule is contrary to the holding in In re Appletree
Markets, Inc., 19 F.3d 969 (5th Cir. 1994), which held that the multiemployer
plan continued to have the COBRA obligations with respect to existing qualified
beneficiaries after the withdrawing employer established a plan for the same
class of employees previously covered under the multiemployer plan.
Interaction of FMLA and COBRA
The new proposed regulations set forth rules regarding the interaction of the
COBRA continuation coverage requirements with the provisions of the Family and
Medical Leave Act of 1993 (FMLA). The rules under the new proposed regulations
are substantially the same as those set forth in Notice 94-103. The last two
questions-and-answers in that notice have not been included in the new proposed
regulations because they relate to general subject matter that is addressed
elsewhere in the regulations.
Under the new proposed regulations, the tCOBRA_Insuranceing of FMLA leave by a covered
employee is not itself a qualifying event. Instead, a qualifying event occurs
when an employee who is covered under a group health plan immediately prior to
FMLA leave (or who becomes covered under a group health plan during FMLA leave)
does not return to work with the employer at the end of FMLA leave and would,
but for COBRA continuation coverage, lose coverage under the group health plan.
(As under the general rules of COBRA, this would also constitute a qualifying
event with respect to the spouse or any dependent child of the employee.) The
qualifying event is deemed to occur on the last day of the employee's FMLA
leave, and the maximum coverage period generally begins on that day. (The new
proposed regulations provide a special rule for cases where coverage is not lost
until a later date and the plan provides for the optional extension of the
required periods.) In the case of such a qualifying event, the employer cannot
condition the employee's rights to COBRA continuation coverage on the employee's
reimbursement of any premiums paid by the employer to maintain the employee's
group health plan coverage during the period of FMLA leave.
Any lapse of coverage under the group health plan during the period of FMLA
leave and any state or local law requiring that group health plan coverage be
provided for a period longer than that required by the FMLA are disregarded in
determining whether the employee has a qualifying event on the last day of that
leave. However, the employee's loss of coverage at the end of FMLA leave will
not constitute a qualifying event if, prior to the employee's return from FMLA
leave, the employer has eliminated group health plan coverage for the class of
employees to which the employee would have belonged if she or he had not tCOBRA_Insuranceen
FMLA leave.
Special Analyses.
It has been determined that this Treasury decision is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that the collections of
information in these regulations will not have a significant economic impact on
a substantial number of small entities. This certification is based upon the
fact that employers with fewer than 20 employees are not subject to the
requirements set forth in the final regulations and, thus, the very smallest
employers are not affected by the collection of information requirements.
Moreover, even for small entities with 20 or more employees who maintain group
health plans and who, thus, are subject to the requirements of COBRA, the
collections of information will not impose a substantial economic impact. The
only collections of information imposed on small entities by the regulations are
(1) to notify qualified beneficiaries of their right to elect COBRA continuation
coverage upon the occurrence of a qualifying event and (2) to notify certain
qualified beneficiaries that mCOBRA_Insurancee insignificant payment errors of those errors.
With respect to this first notice requirement, it is estimated that, on average,
in a given year, qualifying events will occur with respect to approximately 10
percent of all covered employees. Thus, an employer with 100 employees would be
required to send 10 notices to qualified beneficiaries each year. The average
cost of sending such a notice is estimated to be $.50. Thus, the total estimated
cost for 10 notices is $5.00, which is the estimated annual average burden on an
employer with 100 employees. With respect to the second notice requirement, it
is estimated that, on average, at any time, the number of qualified
beneficiaries is approximately equal to two percent of an employer's workforce.
Of that number, approximately 1 in 10 will mCOBRA_Insurancee an insignificant error in
payment each year that requires the employer to send such a notice. For example,
an employer with 100 employees will have an average of two qualified
beneficiaries at any time. Thus, the employer will receive an insignificant
underpayment about once every five years. Even if the employer chose to send out
a notice each time such an insignificant underpayment occurred, this would
amount to only one notice every five years. The average cost of sending such a
notice is estimated to be $5.00, resulting in an average annual burden of $1.00
for an employer with 100 employees. Thus, the total annual cost of these two
notice requirements for an employer with 100 employees is $6.00, which is not a
significant economic impact. Therefore, a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations. Pursuant to section 7805(f) of
the Internal Revenue Code, the 1998 notice of proposed rulemCOBRA_Insuranceing preceding
these final regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small business.
Drafting information. The principal author of these regulations is Russ
Weinheimer, Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects
26 CFR Part 54
Excise taxes, Health care, Health insurance, Pensions, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 54 and 602 are amended as follows:
PART 54--PENSION EXCISE TAXES
Paragraph 1. The authority citation for part 54 is amended by adding the
following entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B-1 also issued under 26 U.S.C. 4980B.
Section 54.4980B-2 also issued under 26 U.S.C. 4980B.
Section 54.4980B-3 also issued under 26 U.S.C. 4980B.
Section 54.4980B-4 also issued under 26 U.S.C. 4980B.
Section 54.4980B-5 also issued under 26 U.S.C. 4980B.
Section 54.4980B-6 also issued under 26 U.S.C. 4980B.
Section 54.4980B-7 also issued under 26 U.S.C. 4980B.
Section 54.4980B-8 also issued under 26 U.S.C. 4980B. * * *
Par. 2. Sections 54.4980B-0, 54.4980B-1, 54.4980B-2, 54.4980B-3, 54.4980B-4,
54.4980B-5, 54.4980B-6, 54.4980B-7, and 54.4980B-8 are added to read as follows:
Sec. 54.4980B-0 Table of contents.
This section contains first a list of the section headings and then a list of
the questions in each section in Secs. 54.4980B-1 through 54.4980B-8.
List of Sections
Sec. 54.4980B-1 COBRA in general.
Sec. 54.4980B-2 Plans that must comply.
Sec. 54.4980B-3 Qualified beneficiaries.
Sec. 54.4980B-4 Qualifying events.
Sec. 54.4980B-5 COBRA continuation coverage.
Sec. 54.4980B-6 Electing COBRA continuation coverage.
Sec. 54.4980B-7 Duration of COBRA continuation coverage.
Sec. 54.4980B-8 Paying for COBRA continuation coverage.
List of Questions
Sec. 54.4980B-1 COBRA in general.
Q-1: What are the health care continuation coverage requirements contained in
section 4980B of the Internal Revenue Code and in ERISA?
Q-2: What is the effective date of Secs. 54.4980B-1 through 54.4980B-8?
Sec. 54.4980B-2 Plans that must comply.
Q-1: For purposes of section 4980B, what is a group health plan?
Q-2: For purposes of section 4980B, what is the employer?
Q-3: [Reserved]
Q-4: What group health plans are subject to COBRA?
Q-5: What is a small-employer plan?
Q-6: [Reserved]
Q-7: What is the plan year?
Q-8: How do the COBRA continuation coverage requirements apply to cafeteria
plans and other flexible benefit arrangements?
Q-9: What is the effect of a group health plan's failure to comply with the
requirements of section 4980B(f)?
Q-10: Who is liable for the excise tax if a group health plan fails to comply
with the requirements of section 4980B(f)?
Sec. 54.4980B-3 Qualified beneficiaries.
Q-1: Who is a qualified beneficiary?
Q-2: Who is an employee and who is a covered employee?
Q-3: Who are the similarly situated nonCOBRA beneficiaries?
Sec. 54.4980B-4 Qualifying events.
Q-1: What is a qualifying event?
Q-2: Are the facts surrounding a termination of employment (such as whether it
was voluntary or involuntary) relevant in determining whether the termination of
employment is a qualifying event?
Sec. 54.4980B-5 COBRA continuation coverage.
Q-1: What is COBRA continuation coverage?
Q-2: What deductibles apply if COBRA continuation coverage is elected?
Q-3: How do a plan's limits apply to COBRA continuation coverage?
Q-4: Can a qualified beneficiary who elects COBRA continuation coverage ever
change from the coverage received by that individual immediately before the
qualifying event?
Q-5: Aside from open enrollment periods, can a qualified beneficiary who has
elected COBRA continuation coverage choose to cover individuals (such as newborn
children, adopted children, or new spouses) who join the qualified beneficiary's
family on or after the date of the qualifying event?
4.4980B-6 Electing COBRA continuation coverage.
Q-1: What is the election period and how long must it last?
Q-2: Is a covered employee or qualified beneficiary responsible for informing
the plan administrator of the occurrence of a qualifying event?
Q-3: During the election period and before the qualified beneficiary has made an
election, must coverage be provided?
Q-4: Is a waiver before the end of the election period effective to end a
qualified beneficiary's election rights?
Q-5: Can an employer or employee organization withhold money or other benefits
owed to a qualified beneficiary until the qualified beneficiary either waives
COBRA continuation coverage, elects and pays for such coverage, or allows the
election period to expire?
Q-6: Can each qualified beneficiary mCOBRA_Insurancee an independent election under COBRA?
54.4980B-7 Duration of COBRA continuation coverage.
Q-1: How long must COBRA continuation coverage be made available to a qualified
beneficiary?
Q-2: When may a plan terminate a qualified beneficiary's COBRA continuation
coverage due to coverage under another group health plan?
Q-3: When may a plan terminate a qualified beneficiary's COBRA continuation
coverage due to the qualified beneficiary's entitlement to Medicare benefits?
Q-4: [Reserved]
Q-5: How does a qualified beneficiary become entitled to a disability extension?
Q-6: Under what circumstances can the maximum coverage period be expanded?
Q-7: If health coverage is provided to a qualified beneficiary after a
qualifying event without regard to COBRA continuation coverage (for example, as
a result of state or local law, the Uniformed Services Employment and
Reemployment Rights Act of 1994 (38 U.S.C. 4315), industry practice, a
collective bargaining agreement, severance agreement, or plan procedure), will
such alternative coverage extend the maximum coverage period?
Q-8: Must a qualified beneficiary be given the right to enroll in a conversion
health plan at the end of the maximum coverage period for COBRA continuation
coverage?
54.4980B-8 Paying for COBRA continuation coverage.
Q-1: Can a group health plan require payment for COBRA continuation coverage?
Q-2: When is the applicable premium determined and when can a group health plan
increase the amount it requires to be paid for COBRA continuation coverage?
Q-3: Must a plan allow payment for COBRA continuation coverage to be made in
monthly installments?
Q-4: Is a plan required to allow a qualified beneficiary to choose to have the
first payment for COBRA continuation coverage applied prospectively only?
Q-5: What is timely payment for COBRA continuation coverage?
Sec. 54.4980B-1 COBRA in general.
The COBRA continuation coverage requirements are described in general in the
following questions-and-answers:
Q-1: What are the health care continuation coverage requirements contained in
section 4980B of the Internal Revenue Code and in ERISA?
A-1: (a) Section 4980B provides generally that a group health plan must offer
each qualified beneficiary who would otherwise lose coverage under the plan as a
result of a qualifying event an opportunity to elect, within the election
period, continuation coverage under the plan. The continuation coverage
requirements were added to section 162 by the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), Public Law 99-272 (100
Stat. 222), and moved to section 4980B by the Technical and Miscellaneous
Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342). Continuation coverage
required under section 4980B is referred to in Secs. 54.4980B-1 through
54.4980B-8 as COBRA continuation coverage.
(b) COBRA also added parallel continuation coverage requirements to Part 6 of
Subtitle B of Title I of the Employee Retirement Income Security Act of 1974 (ERISA)
(29 U.S.C. 1161-1168), which is administered by the U.S. Department of Labor. If
a plan does not comply with the COBRA continuation coverage requirements, the
Internal Revenue Code imposes an excise tax on the employer maintaining the plan
(or on the plan itself), whereas ERISA gives certain parties--including
qualified beneficiaries who are participants or beneficiaries within the meaning
of Title I of ERISA, as well as the Department of Labor-- the right to file a
lawsuit to redress the noncompliance. The rules in Secs. 54.4980B-1 through
54.4980B-8 apply for purposes of section 4980B and generally also for purposes
of the COBRA continuation coverage requirements in Title I of ERISA. However,
certain provisions of the COBRA continuation coverage requirements (such as the
definitions of group health plan, employee, and employer) are not identical in
the Internal Revenue Code and Title I of ERISA. In those cases in which the
statutory language is not identical, the rules in Secs. 54.4980B-1 though
54.4980B-8 nonetheless apply to the COBRA continuation coverage requirements of
Title I of ERISA, except to the extent those rules are inconsistent with the
statutory language of Title I of ERISA.
(c) A group health plan that is subject to section 4980B (or the parallel
provisions under ERISA) is referred to as being subject to COBRA. (See Q&A-4 of
Sec. 54.4980B-2). A qualified beneficiary can be required to pay for COBRA
continuation coverage. The term qualified beneficiary is defined in Q&A-1 of
Sec. 54.4980B-3. The term qualifying event is defined in Q&A-1 of Sec.
54.4980B-4. COBRA continuation coverage is described in Sec. 54.4980B-5. The
election procedures are described in Sec. 54.4980B-6. Duration of COBRA
continuation coverage is addressed in Sec. 54.4980B-7, and payment for COBRA
continuation coverage is addressed in Sec. 54.4980B-8. Unless the context
indicates otherwise, any reference in Secs. 54.4980B-1 through 54.4980B-8 to
COBRA refers to section 4980B (as amended) and to the parallel provisions of
ERISA.
Q-2: What is the effective date of Secs. 54.4980B-1 through 54.4980B-8?
A-2: Sections 54.4980B-1 through 54.4980B-8 apply with respect to qualifying
events occurring in plan years beginning on or after January 1, 2000. For
purposes of section 4980B, with respect to qualifying events that occur in plan
years beginning before that date, and with respect to qualifying events that
occur in plan years beginning on or after that date for topics relating to the
COBRA continuation coverage requirements of section 4980B that are not addressed
in Secs. 54.4980B- 1 through 54.4980B-8 (such as methods for calculating the
applicable premium), plans and employers must operate in good faith compliance
with a reasonable interpretation of the statutory requirements in section 4980B.
Sec. 54.4980B-2 Plans that must comply.
The following questions-and-answers apply in determining which plans must comply
with the COBRA continuation coverage requirements:
Q-1: For purposes of section 4980B, what is a group health plan?
A-1: (a) For purposes of section 4980B, a group health plan is a plan maintained
by an employer or employee organization to provide health care to individuals
who have an employment-related connection to the employer or employee
organization or to their families. Individuals who have an employment-related
connection to the employer or employee organization consist of employees, former
employees, the employer, and others associated or formerly associated with the
employer or employee organization in a business relationship (including members
of a union who are not currently employees). Health care is provided under a
plan whether provided directly or through insurance, reimbursement, or
otherwise, and whether or not provided through an on-site facility (except as
set forth in paragraph (d) of this Q&A-1), or through a cafeteria plan (as
defined in section 125) or other flexible benefit arrangement. For purposes of
this Q&A-1, insurance includes not only group insurance policies but also one or
more individual insurance policies in any arrangement that involves the
provision of health care to two or more employees. A plan maintained by an
employer or employee organization is any plan of, or contributed to (directly or
indirectly) by, an employer or employee organization. Thus, a group health plan
is maintained by an employer or employee organization even if the employer or
employee organization does not contribute to it if coverage under the plan would
not be available at the same cost to an individual but for the individual's
employment-related connection to the employer or employee organization. These
rules are further explained in paragraphs (b) through (d) of this Q&A-1. An
exception for qualified long-term care services is set forth in paragraph (e) of
this Q&A-1, and for medical savings accounts in paragraph (f) of this Q&A-1.
(b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, health care has the
same meaning as medical care under section 213(d). Thus, health care generally
includes the diagnosis, cure, mitigation, treatment, or prevention of disease,
and any other undertCOBRA_Insuranceing for the purpose of affecting any structure or function
of the body. Health care also includes transportation primarily for and
essential to health care as described in the preceding sentence. However, health
care does not include anything that is merely beneficial to the general health
of an individual, such as a vacation. Thus, if an employer or employee
organization maintains a program that furthers general good health, but the
program does not relate to the relief or alleviation of health or medical
problems and is generally accessible to and used by employees without regard to
their physical condition or state of health, that program is not considered a
program that provides health care and so is not a group health plan. For
example, if an employer maintains a spa, swimming pool, gymnasium, or other
exercise/fitness program or facility that is normally accessible to and used by
employees for reasons other than relief of health or medical problems, such a
facility does not constitute a program that provides health care and thus is not
a group health plan. In contrast, if an employer maintains a drug or alcohol
treatment program or a health clinic, or any other facility or program that is
intended to relieve or alleviate a physical condition or health problem, the
facility or program is considered to be the provision of health care and so is
considered a group health plan.
(c) Whether a benefit provided to employees constitutes health care is not
affected by whether the benefit is excludable from income under section 132
(relating to certain fringe benefits). For example, if a department store
provides its employees discounted prices on all merchandise, including health
care items such as drugs or eyeglasses, the mere fact that the discounted prices
also apply to health care items will not cause the program to be a plan
providing health care, so long as the discount program would normally be
accessible to and used by employees without regard to health needs or physical
condition. If, however, the employer maintaining the discount program is a
health clinic, so that the program is used exclusively by employees with health
or medical needs, the program is considered to be a plan providing health care
and so is considered to be a group health plan.
(d) The provision of health care at a facility that is located on the premises
of an employer or employee organization does not constitute a group health plan
if--
(1) The health care consists primarily of first aid that is provided during the
employer's working hours for treatment of a health condition, illness, or injury
that occurs during those working hours;
(2) The health care is available only to current employees; and
(3) Employees are not charged for the use of the facility.
(e) A plan does not constitute a group health plan subject to COBRA if
substantially all of the coverage provided under the plan is for qualified
long-term care services (as defined in section 7702B(c)). For this purpose, a
plan is permitted to use any reasonable method in determining whether
substantially all of the coverage provided under the plan is for qualified
long-term care services.
(f) Under section 106(b)(5), amounts contributed by an employer to a medical
savings account (as defined in section 220(d)) are not considered part of a
group health plan subject to COBRA. Thus, a plan is not required to mCOBRA_Insurancee COBRA
continuation coverage available with respect to amounts contributed by an
employer to a medical savings account. A high deductible health plan does not
fail to be a group health plan subject to COBRA merely because it covers a
medical savings account holder.
Q-2: For purposes of section 4980B, what is the employer?
A-2: For purposes of section 4980B, employer refers to--
(a) A person for whom services are performed;
(b) Any other person that is a member of a group described in section 414(b),
(c), (m), or (o) that includes a person described in paragraph (a) of this
Q&A-2; and
(c) Any successor of a person described in paragraph (a) or (b) of this Q&A-2.
Q-3: [Reserved]
A-3: [Reserved]
Q-4: What group health plans are subject to COBRA?
A-4: (a) All group health plans are subject to COBRA except group health plans
described in paragraph (b) of this Q&A-4. Group health plans described in
paragraph (b) of this Q&A-4 are referred to in Secs. 54.4980B-1 through
54.4980B-8 as excepted from COBRA.
(b) The following group health plans are excepted from COBRA--
(1) Small-employer plans (see Q&A-5 of this section);
(2) Church plans (within the meaning of section 414(e)); and
(3) Governmental plans (within the meaning of section 414(d)).
(c) The COBRA continuation coverage requirements generally do not apply to group
health plans that are excepted from COBRA. However, a small-employer plan
otherwise excepted from COBRA is nonetheless subject to COBRA with respect to
qualified beneficiaries who experience a qualifying event during a period when
the plan is not a small- employer plan (see paragraph (g) of Q&A-5 of this
section).
(d) Although governmental plans are not subject to the COBRA continuation
coverage requirements, group health plans maintained by state or local
governments are generally subject to parallel continuation coverage requirements
that were added by section 10003 of COBRA to the Public Health Service Act (42
U.S.C. 300bb-1 through 300bb-8), which is administered by the U.S. Department of
Health and Human Services. Federal employees and their family members covered
under the Federal Employees Health Benefit Program are covered by generally
similar, but not parallel, temporary continuation of coverage provisions enacted
by the Federal Employees Health Benefits Amendments Act of 1988. See 5 U.S.C.
8905a.
Q-5: What is a small-employer plan?
A-5: (a) Except in the case of a multiemployer plan, a small- employer plan is a
group health plan maintained by an employer (within the meaning of Q&A-2 of this
section) that normally employed fewer than 20 employees (within the meaning of
paragraph (c) of this Q&A-5) during the preceding calendar year. In the case of
a multiemployer plan, a small-employer plan is a group health plan under which
each of the employers contributing to the plan for a calendar year normally
employed fewer than 20 employees during the preceding calendar year. The rules
of this paragraph (a) are illustrated in the following example:
Example. (i) Corporation S employs 12 employees, all of whom work and reside in
the United States. S maintains a group health plan for its employees and their
families. S is a wholly-owned subsidiary of P. In the previous calendar year,
the controlled group of corporations including P and S employed more than 19
employees, although the only employees in the United States of the controlled
group that includes P and S are the 12 employees of S.
(ii) Under Sec. 1.414(b)-1 of this chapter, foreign corporations are not
excluded from membership in a controlled group of corporations. Consequently,
the group health plan maintained by S is not a small-employer plan during the
current calendar year because the controlled group including S normally employed
at least 20 employees in the preceding calendar year.
(b) An employer is considered to have normally employed fewer than 20 employees
during a particular calendar year if, and only if, it had fewer than 20
employees on at least 50 percent of its typical business days during that year.
(c) All full-time and part-time common law employees of an employer are tCOBRA_Insuranceen
into account in determining whether an employer had fewer than 20 employees;
however, an individual who is not a common law employee of the employer is not
tCOBRA_Insuranceen into account. Thus, the following individuals are not counted as employees
for purposes of this Q&A-5 even though they are referred to as employees for all
other purposes of Secs. 54.4980B-1 through 54.4980B-8--
(1) Self-employed individuals (within the meaning of section 401(c)(1));
(2) Independent contractors (and their employees and independent contractors);
and
(3) Directors (in the case of a corporation).
(d) [Reserved]
(e) [Reserved]
(f) [Reserved]
(g) A small-employer plan is generally excepted from COBRA. If, however, a plan
that has been subject to COBRA (that is, was not a small-employer plan) becomes
a small-employer plan, the plan remains subject to COBRA for qualifying events
that occurred during the period when the plan was subject to COBRA. The rules of
this paragraph (g) are illustrated by the following examples:
Example 1. An employer maintains a group health plan. The employer employed 20
employees on more than 50 percent of its working days during 2001, and
consequently the plan is not excepted from COBRA during 2002. Employee E resigns
and does not work for the employer after January 31, 2002. Under the terms of
the plan, E is no longer eligible for coverage upon the effective date of the
resignation, that is, February 1, 2002. The employer does not hire a replacement
for E. E timely elects and pays for COBRA continuation coverage. The employer
employs 19 employees for the remainder of 2002, and consequently the plan is not
subject to COBRA in 2003. The plan must nevertheless continue to mCOBRA_Insurancee COBRA
continuation coverage available to E during 2003 until the obligation to mCOBRA_Insurancee
COBRA continuation coverage available ceases under the rules of Sec. 54.4980B-7.
The obligation could continue until August 1, 2003, the date that is 18 months
after the date of E's qualifying event, or longer if E is eligible for a
disability extension.
Example 2. The facts are the same as in Example 1. The employer continues to
employ 19 employees throughout 2003 and 2004 and consequently the plan continues
to be excepted from COBRA during 2004 and 2005. Spouse S is covered under the
plan because S is married to one of the employer's employees. On April 1, 2002,
S is divorced from that employee and ceases to be eligible for coverage under
the plan. The plan is subject to COBRA during 2002 because X normally employed
20 employees during 2001. S timely notifies the plan administrator of the
divorce and timely elects and pays for COBRA continuation coverage. Even though
the plan is generally excepted from COBRA during 2003, 2004, and 2005, it must
nevertheless continue to mCOBRA_Insurancee COBRA continuation coverage available to S during
those years until the obligation to mCOBRA_Insurancee COBRA continuation coverage available
ceases under the rules of Sec. 54.4980B-7. The obligation could continue until
April 1, 2005, the date that is 36 months after the date of S's qualifying
event.
Example 3. The facts are the same as in Example 2. C is a dependent child of one
of the employer's employees and is covered under the plan. A dependent child is
no longer eligible for coverage under the plan upon the attainment of age 23. C
attains age 23 on November 16, 2005. The plan is excepted from COBRA with
respect to C during 2005 because the employer normally employed fewer than 20
employees during 2004. Consequently, the plan is not obligated to mCOBRA_Insurancee COBRA
continuation coverage available to C (and would not be obligated to mCOBRA_Insurancee COBRA
continuation coverage available to C even if the plan later became subject to
COBRA again).
Q-6: [Reserved]
A-6: [Reserved]
Q-7: What is the plan year?
A-7: (a) The plan year is the year that is designated as the plan year in the
plan documents.
(b) 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 this paragraph
(b).
(1) The plan year is the deductible/limit year used under the plan.
(2) If the plan does not impose deductibles or limits on an annual basis, then
the plan year is the policy year.
(3) 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.
(4) In any other case, the plan year is the calendar year.
Q-8: How do the COBRA continuation coverage requirements apply to cafeteria
plans and other flexible benefit arrangements?
A-8: The provision of health care benefits does not fail to be a group health
plan merely because those benefits are offered under a cafeteria plan (as
defined in section 125) or under any other arrangement under which an employee
is offered a choice between health care benefits and other taxable or nontaxable
benefits. However, the COBRA continuation coverage requirements apply only to
the type and level of coverage under the cafeteria plan or other flexible
benefit arrangement that a qualified beneficiary is actually receiving on the
day before the qualifying event. The rules of this Q&A-8 are illustrated by the
following example:
Example: (i) Under the terms of a cafeteria plan, employees can choose among
life insurance coverage, membership in a health maintenance organization (HMO),
coverage for medical expenses under an indemnity arrangement, and cash
compensation. Of these available choices, the HMO and the indemnity arrangement
are the arrangements providing health care. The instruments governing the HMO
and indemnity arrangements indicate that they are separate group health plans.
These group health plans are subject to COBRA. The employer does not provide any
group health plan outside of the cafeteria plan. B and C are unmarried
employees. B has chosen the life insurance coverage, and C has chosen the
indemnity arrangement.
(ii) B does not have to be offered COBRA continuation coverage upon terminating
employment, nor is a subsequent open enrollment period for active employees
required to be made available to B. However, if C terminates employment and the
termination constitutes a qualifying event, C must be offered an opportunity to
elect COBRA continuation coverage under the indemnity arrangement. If C mCOBRA_Insurancees
such an election and an open enrollment period for active employees occurs while
C is still receiving the COBRA continuation coverage, C must be offered the
opportunity to switch from the indemnity arrangement to the HMO (but not to the
life insurance coverage because that does not constitute coverage provided under
a group health plan).
Q-9: What is the effect of a group health plan's failure to comply with the
requirements of section 4980B(f)?
A-9: Under section 4980B(a), if a group health plan subject to COBRA fails to
comply with section 4980B(f), an excise tax is imposed. Moreover, non-tax
remedies may be available if the plan fails to comply with the parallel
requirements in ERISA, which are administered by the Department of Labor.
Q-10: Who is liable for the excise tax if a group health plan fails to comply
with the requirements of section 4980B(f)?
A-10: (a) In general, the excise tax is imposed on the employer maintaining the
plan, except that in the case of a multiemployer plan the excise tax is imposed
on the plan.
(b) In certain circumstances, the excise tax is also imposed on a person
involved with the provision of benefits under the plan (other than in the
capacity of an employee), such as an insurer providing benefits under the plan
or a third party administrator admin