EMPLOYEE BENEFITS

Think You Know COBRA?
Think Again.

July 2004

By Dana R. Scott, Human Capital and Benefits Consultant

On May 26, 2004, the Department of Labor published final regulations for COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985) which will become effective for all plan years beginning on or after November 26, 2004. Thus, these changes will be come effective for calendar year plans on January 1, 2005.

The majority of these changes relate to notice obligations of the employer, the covered employee and the plan administrator. However, these updates also provide us with a good opportunity to review the basic tenets of COBRA as outlined below:

Employers with 20 or more employees are subject COBRA. The law generally applies to group health plans maintained by employers in the private sector, and those of state and local governments, but does not apply to plans maintained by the federal government or certain church-related organizations. (However, state continuation, similar to COBRA, may apply to church-related organizations and those employers with fewer than 20 employees.)

COBRA allows certain covered employees, spouses and dependent children – normally referred to as qualified beneficiaries - the right to continue coverage under the employer’s group health plan when coverage would otherwise end due to a specific or “qualifying” event.

Qualifying events under COBRA include the employee’s separation from employment (for reasons other than gross misconduct), reduction in hours or entitlement to Medicare; the covered employee’s legal separation or divorce; the covered employee’s dependent child losing dependent status as defined by the plan; or the death of the covered employee. The length of COBRA entitlement (18 or 36 months) is determined by the specific type of qualified event.

Some of the questions which frequently trouble employers are discussed below:

1. What plans are covered under COBRA?

• Group health plans, e.g., medical and dental
• Flexible Spending Plans
• Vision Plans
• Prescription Drug Plans
• Employee Assistance Plans (EAPs) that provide medical care such as counseling or psychological treatment

Plans that are not covered under COBRA include:

• Wellness Plans
• Life Insurance
• Disability Plans
• Health Savings Accounts
• Medical Savings Accounts
• Long Term Care Plans
• EAPs that don’t provide medical care

2. When must I notify employees of their COBRA rights?

Employers must provide an employee with the initial notification of their COBRA rights within 90 days of the employee becoming covered under the employer’s group health plan. In the case of a covered spouse, s/he must also receive this notification. The purpose of this notice is to provide a general overview of COBRA rights and responsibilities.

While a single notice may be sent to the employee and spouse if they live at the same address, the new regulations provide that the notice must identify the spouse either by name or by relationship. As an example, the notice would be addressed to “Jane and William Jones” or “Jane Jones and Spouse.”

3. Who can elect COBRA?

If the employee’s spouse, and/or child(ren) are covered under the employee’s plan, each has the right to elect COBRA coverage independent of the employee’s election. For instance, should the employee elect COBRA continuation under the medical plan, but decline dental coverage, the spouse may independently elect COBRA dental coverage if s/he chooses to do so. This example also assumes that these coverages are “unbundled” and not contained in one plan. As a result, COBRA election forms should contain appropriate language and separate election areas for all qualified beneficiaries.

New under the final regulations is the requirement that the employee and the other qualified beneficiaries such as the covered spouse and/or child(ren) must each be given notification of their right to elect COBRA coverage. Previously, employers could simply address the COBRA notification to the employee, “and qualified beneficiaries” when sending notification to one address. Under the new regulations, the notification must state either the name(s) or the relationship(s) of the qualified beneficiaries. For example, the letter would be addressed to “John Smith and child” or “John Smith and John Smith, Jr.”

4. When must qualified beneficiaries make their COBRA election?

Qualified beneficiaries have 60 days from the date coverage ends or the date the COBRA notification is sent, whichever is later, to elect coverage. For example, let’s assume a qualified beneficiary’s coverage ends on March 31, the Plan sends the COBRA notification on April 10. Under this scenario, the qualified beneficiary has 60 days from April 10 to elect COBRA coverage. Some employers prefer to send the notice via Certified Mail to be sure the notice was received. As long as the employer can prove the notice was sent to the employee’s last known address, this step is not necessary.

A qualified beneficiary may initially decline or waive coverage, and later revoke the waiver and elect COBRA coverage if s/he is still within the 60-day election period.

5. Is there a grace period for COBRA premium payments?

Most employers are aware of the first COBRA payment grace period; qualified beneficiaries may take up to 45 days after their initial election to make their first payment, which generally must cover the period from the election retroactive to the date coverage initially ended.

However, there is also a minimum 30-day grace period for each successive payment due date. Payment is considered made on the date it is postmarked (if it is mailed), not the date of the check or the date the payment is physically received by the Plan.

Under the new regulations, qualified beneficiaries must receive what is called an “Early Termination Notice” if they lose coverage due to failure to make payment by the due date or within the grace period.

6. What is the Short Payment Rule?

While COBRA coverage may be terminated if the qualified beneficiary fails to make payment within the required timeframe, including the applicable grace period, when a payment is received with an “insignificant” shortfall, coverage can not be automatically terminated.

The IRS defines “insignificant” as a shortfall of $50, or 10% of the premium, whichever is less. When such a payment is received, the Plan may either accept it as payment in full, or notify the participant of the shortfall and allow him/her 30 days from the date of notification to correct the deficiency.

Employers are encouraged to administer short payment situations and/or missed payments with care to avoid potential liability. Resist the temptation to immediately terminate benefits. Generally, a documented opportunity for the qualified beneficiary to “cure” by making payment in full, and another notice of the consequences for failure to do so is advisable.

7. How do the rules differ for disabled qualified beneficiaries?

Disabled COBRA qualified beneficiaries may extend the 18-month period of coverage for termination of employment or reduction of hours an additional 11 months for a total of 29 months for the entire family.

In order for this to occur, the qualified beneficiary must have a ruling from the Social Security Administration indicating that s/he was disabled at the time of or within the first 60 days of COBRA coverage, and a copy of that ruling must be received by the Plan within 60 days of the qualified beneficiary’s receipt, and prior to the expiration of the 18 months.

The Plan may charge 150% of the premium (rather than 102%) during this 11-month extension. Once the qualified beneficiary’s disability is determined to have ended, the extension will end as well.

8. What notices are required under the new regulations?

General Notice
Employers must provide this notice upon the employee’s initial participation in the group health plan. The notice must include:

• Name of the Plan
• Individual from whom additional information may be obtained
• Description of the employee/qualified beneficiary obligations under COBRA including notice obligations to the employer
• General description of COBRA events, rights and obligations
• Explanation of the importance of keeping the employer advised of any address changes for current or possible qualified beneficiaries
• Statement that the notice is a summary and that more complete information may be obtained from the Plan Administrator or the SPD

Notice of Unavailability of COBRA
New under the final regulations is a requirement that the employer, when determining that an individual is not entitled to continuation under COBRA, must provide that individual with written notification of that determination.

Notice of Right to Elect COBRA
When the Plan Administrator receives notification of a qualifying event, and determines that the individual is entitled to continuation under COBRA, this notice will be sent to the qualified beneficiary and must contain the following:

• Name of the Plan
• Individual from whom additional information may be obtained
• Qualifying event and identification of the qualified beneficiaries eligible to elect COBRA
• Statement that each qualified beneficiary has an independent COBRA election right
• How and when to elect coverage, including relevant time frames and consequences of not electing coverage
• What benefits are available through COBRA and when they begin
• When COBRA coverage ends, and circumstances which may extend coverage
• Notice requirements for second qualifying event
• Amount of premiums, when they are due and relevant grace periods
• Explanation of the importance of keeping the employer advised of any address changes for current or possible qualified beneficiaries
• Statement that the notice is a summary and that more complete information may be obtained from the Plan Administrator or the SPD

In addition, the COBRA Election Form is generally part of this notice.

Early Termination Notice
This notice is sent to a covered COBRA participant in those instances when coverage will end prior to the maximum period generally applicable to that individual’s qualifying event, such as for non-payment of premium. This notice need not be provided in advance of the Early Termination date, but must be provided as soon as is practicable. This notice must include:

• Date coverage terminated or will terminate
• Reason coverage terminated or is terminating
• The individual’s rights to alternative or individual coverage, if any

Other Notices
The final regulations expressly permit employers to establish specific procedures under which employees must notify the employer of qualifying events. As a reminder, the employee has either 30 or 60 days to notify the employer of a qualifying event, depending upon the event. In turn, if the employer is not also the Plan Administrator, the employer has 14 days in which to notify the Plan Administrator.

While the Department of Labor has provided model notices for the General Notice and the Notice of Right to elect on their website, most employers will also need to develop new notices for the other notification requirement referenced above. Employers are encouraged to review their current notices to ensure they comply with the new requirements and to seek professional guidance where appropriate.

 

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