99-1520. Continuation Coverage Requirements Applicable to Group Health Plans  

  • [Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
    [Rules and Regulations]
    [Pages 5160-5188]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-1520]
    
    
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    DEPARTMENT OF THE TREASURY
    
    Internal Revenue Service
    
    26 CFR Parts 54 and 602
    
    [TD 8812]
    RIN 1545-AI93
    
    
    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:
         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
    
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    decision in Geissal v. Moore Medical Corp.
         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.
         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.
         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.
         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.
         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
    
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    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 break 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 break 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 make 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
    
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    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 make 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 make 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 make 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 taken 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 taken 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
    
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    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.
    ---------------------------------------------------------------------------
    
    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
    
    [[Page 5165]]
    
    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 make 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 
    takes 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 make 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
    
    [[Page 5166]]
    
    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 make 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 make 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 take 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
    
    [[Page 5167]]
    
    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 
    make 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 make continuation coverage available upon 
    receiving notice of such event.
    ---------------------------------------------------------------------------
    
        The group health plan must make 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 makes 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 make with respect to the rights 
    of a qualified beneficiary during that qualified beneficiary's election 
    period. Specifically, the final regulations require that the plan make 
    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
    
    [[Page 5168]]
    
    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 make 
    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 make 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
    
    [[Page 5169]]
    
    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 make 
    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
    
    [[Page 5170]]
    
    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 make clear that any person may make 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 makes 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 take 
    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 make 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 make 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 mistake. 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.
    
    [[Page 5171]]
    
        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 make 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 make 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 make 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 make 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 make 
    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.
    
    [[Page 5172]]
    
    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 make COBRA continuation coverage available to qualified 
    beneficiaries associated with that employer. (There generally would not 
    be any obligation to make 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 make 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 taking 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 taken 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 
    make 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 make 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 rulemaking 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.
    
    [[Page 5173]]
    
    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 make 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
    
    [[Page 5174]]
    
    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 undertaking 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
    
    [[Page 5175]]
    
    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 make 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 taken 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 taken 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
    
    [[Page 5176]]
    
    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 make COBRA continuation coverage available to E during 
    2003 until the obligation to make 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 make COBRA continuation coverage available 
    to S during those years until the obligation to make 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 
    make COBRA continuation coverage available to C (and would not be 
    obligated to make 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 makes 
    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 administering 
    claims under the plan. In general, such a person will be liable for the 
    excise tax if the person assumes, under a legally enforceable written 
    agreement, the responsibility for performing the act to which the 
    failure to comply with the COBRA continuation coverage requirements 
    relates. Such a person will be liable for the excise tax 
    notwithstanding the absence of a written agreement assuming 
    responsibility for complying with COBRA if the person provides coverage 
    under the plan to a similarly situated nonCOBRA beneficiary (see Q&A-3 
    of Sec. 54.4980B-3 for a definition of similarly situated nonCOBRA 
    beneficiaries) and the employer or plan administrator submits a written 
    request to the person to provide to a qualified beneficiary the same 
    coverage that the person provides to the similarly situated nonCOBRA 
    beneficiary. If the person providing coverage under the plan to a 
    similarly situated nonCOBRA beneficiary is the plan administrator and 
    the qualifying event is a divorce or legal separation or a dependent 
    child's ceasing to be covered under the generally applicable 
    requirements of the plan, the plan administrator will also be liable 
    for the excise tax if the qualified beneficiary submits a written 
    request for coverage.
    
    
    Sec. 54.4980B-3  Qualified beneficiaries.
    
        The determination of who is a qualified beneficiary, an employee, 
    or a covered employee, and of who are the similarly situated nonCOBRA 
    beneficiaries is addressed in the following questions-and-answers:
        Q-1: Who is a qualified beneficiary?
        A-1: (a)(1) Except as set forth in paragraphs (c) through (f) of 
    this Q&A-1, a qualified beneficiary is--
        (i) Any individual who, on the day before a qualifying event, is 
    covered under a group health plan by virtue of being on that day either 
    a covered
    
    [[Page 5177]]
    
    employee, the spouse of a covered employee, or a dependent child of the 
    covered employee; or
        (ii) Any child who is born to or placed for adoption with a covered 
    employee during a period of COBRA continuation coverage.
        (2) In the case of a qualifying event that is the bankruptcy of the 
    employer, a covered employee who had retired on or before the date of 
    substantial elimination of group health plan coverage is also a 
    qualified beneficiary, as is any spouse, surviving spouse, or dependent 
    child of such a covered employee if, on the day before the bankruptcy 
    qualifying event, the spouse, surviving spouse, or dependent child is a 
    beneficiary under the plan.
        (3) In general, an individual (other than a child who is born to or 
    placed for adoption with a covered employee during a period of COBRA 
    continuation coverage) who is not covered under a plan on the day 
    before the qualifying event cannot be a qualified beneficiary with 
    respect to that qualifying event, and the reason for the individual's 
    lack of actual coverage (such as the individual's having declined 
    participation in the plan or failed to satisfy the plan's conditions 
    for participation) is not relevant for this purpose. However, if the 
    individual is denied or not offered coverage under a plan under 
    circumstances in which the denial or failure to offer constitutes a 
    violation of applicable law (such as the Americans with Disabilities 
    Act, 42 U.S.C. 12101-12213, the special enrollment rules of section 
    9801, or the requirements of section 9802 prohibiting discrimination in 
    eligibility to enroll in a group health plan based on health status), 
    then, for purposes of Secs. 54.4980B-1 through 54.4980B-8, the 
    individual will be considered to have had the coverage that was 
    wrongfully denied or not offered.
        (4) Paragraph (b) of this Q&A-1 describes how certain family 
    members are not qualified beneficiaries even if they become covered 
    under the plan; paragraphs (c), (d), and (e) of this Q&A-1 place limits 
    on the general rules of this paragraph (a) concerning who is a 
    qualified beneficiary; paragraph (f) of this Q&A-1 provides when an 
    individual who has been a qualified beneficiary ceases to be a 
    qualified beneficiary; paragraph (g) of this Q&A-1 defines placed for 
    adoption; and paragraph (h) of this Q&A-1 contains examples.
        (b) In contrast to a child who is born to or placed for adoption 
    with a covered employee during a period of COBRA continuation coverage, 
    an individual who marries any qualified beneficiary on or after the 
    date of the qualifying event and a newborn or adopted child (other than 
    one born to or placed for adoption with a covered employee) are not 
    qualified beneficiaries by virtue of the marriage, birth, or placement 
    for adoption or by virtue of the individual's status as the spouse or 
    the child's status as a dependent of the qualified beneficiary. These 
    new family members do not themselves become qualified beneficiaries 
    even if they become covered under the plan. (For situations in which a 
    plan is required to make coverage available to new family members of a 
    qualified beneficiary who is receiving COBRA continuation coverage, see 
    Q&A-5 of Sec. 54.4980B-5, paragraph (c) in Q&A-4 of Sec. 54.4980B-5, 
    section 9801(f)(2), and Sec. 54.9801-6T(b).)
        (c) An individual is not a qualified beneficiary if, on the day 
    before the qualifying event referred to in paragraph (a) of this Q&A-1, 
    the individual is covered under the group health plan by reason of 
    another individual's election of COBRA continuation coverage and is not 
    already a qualified beneficiary by reason of a prior qualifying event.
        (d) 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 that is 
    the bankruptcy of the employer.
        (e) An individual is not a qualified beneficiary if the 
    individual's status as a covered employee is attributable to a period 
    in which the individual was a nonresident alien who received from the 
    individual's employer no earned income (within the meaning of section 
    911(d)(2)) that constituted income from sources within the United 
    States (within the meaning of section 861(a)(3)). If, pursuant to the 
    preceding sentence, an individual is not a qualified beneficiary, then 
    a spouse or dependent child of the individual is not considered a 
    qualified beneficiary by virtue of the relationship to the individual.
        (f) A qualified beneficiary who does not elect COBRA continuation 
    coverage in connection with a qualifying event ceases to be a qualified 
    beneficiary at the end of the election period (see Q&A-1 of 
    Sec. 54.4980B-6). Thus, for example, if such a former qualified 
    beneficiary is later added to a covered employee's coverage (e.g., 
    during an open enrollment period) and then another qualifying event 
    occurs with respect to the covered employee, the former qualified 
    beneficiary does not become a qualified beneficiary by reason of the 
    second qualifying event. If a covered employee who is a qualified 
    beneficiary does not elect COBRA continuation coverage during the 
    election period, then any child born to or placed for adoption with the 
    covered employee on or after the date of the qualifying event is not a 
    qualified beneficiary. Once a plan's obligation to make COBRA 
    continuation coverage available to an individual who has been a 
    qualified beneficiary ceases under the rules of Sec. 54.4980B-7, the 
    individual ceases to be a qualified beneficiary.
        (g) For purposes of Secs. 54.4980B-1 through 54.4980B-8, placement 
    for adoption or being placed for adoption means the assumption and 
    retention by the covered employee of a legal obligation for total or 
    partial support of a child in anticipation of the adoption of the 
    child. The child's placement for adoption with the covered employee 
    terminates upon the termination of the legal obligation for total or 
    partial support. A child who is immediately adopted by the covered 
    employee without a preceding placement for adoption is considered to be 
    placed for adoption on the date of the adoption.
        (h) The rules of this Q&A-1 are illustrated by the following 
    examples:
    
        Example 1. (i) B is a single employee who voluntarily terminates 
    employment and elects COBRA continuation coverage under a group 
    health plan. To comply with the requirements of section 9801(f) and 
    Sec. 54.9801-6T(b), the plan permits a covered employee who marries 
    to have her or his spouse covered under the plan. One month after 
    electing COBRA continuation coverage, B marries and chooses to have 
    B's spouse covered under the plan.
        (ii) B's spouse is not a qualified beneficiary. Thus, if B dies 
    during the period of COBRA continuation coverage, the plan does not 
    have to offer B's surviving spouse an opportunity to elect COBRA 
    continuation coverage.
        Example 2. (i) C is a married employee who terminates 
    employment. C elects COBRA continuation coverage for C but not C's 
    spouse, and C's spouse declines to elect such coverage. C's spouse 
    thus ceases to be a qualified beneficiary. At the next open 
    enrollment period, C adds the spouse as a beneficiary under the 
    plan.
        (ii) The addition of the spouse during the open enrollment 
    period does not make the spouse a qualified beneficiary. The plan 
    thus will not have to offer the spouse an opportunity to elect COBRA 
    continuation coverage upon a later divorce from or death of C.
        Example 3. (i) Under the terms of a group health plan, a covered 
    employee's child, upon attaining age 19, ceases to be a dependent 
    eligible for coverage.
        (ii) At that time, the child must be offered an opportunity to 
    elect COBRA continuation coverage. If the child elects COBRA 
    continuation coverage, the child marries during the period of the 
    COBRA continuation coverage, and the child's spouse becomes covered 
    under the group health plan, the child's spouse is not a qualified 
    beneficiary.
    
    [[Page 5178]]
    
        Example 4. (i) D is a single employee who, upon retirement, is 
    given the opportunity to elect COBRA continuation coverage but 
    declines it in favor of an alternative offer of 12 months of 
    employer-paid retiree health benefits. At the end of the election 
    period, D ceases to be a qualified beneficiary and will not have to 
    be given another opportunity to elect COBRA continuation coverage 
    (at the end of those 12 months or at any other time). D marries E 
    during the period of retiree health coverage and, under the terms of 
    that coverage, E becomes covered under the plan.
        (ii) If a divorce from or death of D will result in E's losing 
    coverage, E will be a qualified beneficiary because E's coverage 
    under the plan on the day before the qualifying event (that is, the 
    divorce or death) will have been by reason of D's acceptance of 12 
    months of employer-paid coverage after the prior qualifying event 
    (D's retirement) rather than by reason of an election of COBRA 
    continuation coverage.
        Example 5. (i) The facts are the same as in Example 4, except 
    that, under the terms of the plan, the divorce or death does not 
    cause E to lose coverage so that E continues to be covered for the 
    balance of the original 12-month period.
        (ii) E does not have to be allowed to elect COBRA continuation 
    coverage because the loss of coverage at the end of the 12-month 
    period is not caused by the divorce or death, and thus the divorce 
    or death does not constitute a qualifying event. See Q&A-1 of 
    Sec. 54.4980B-4.
    
        Q-2: Who is an employee and who is a covered employee?
        A-2: (a)(1) For purposes of Secs. 54.4980B-1 through 54.4980B-8 
    (except for purposes of Q&A-5 in Sec. 54.4980B-2, relating to the 
    exception from COBRA for plans maintained by an employer with fewer 
    than 20 employees), an employee is any individual who is eligible to be 
    covered under a group health plan by virtue of the performance of 
    services for the employer maintaining the plan or by virtue of 
    membership in the employee organization maintaining the plan. Thus, for 
    purposes of Secs. 54.4980B-1 through 54.4980B-8 (except for purposes of 
    Q&A-5 in Sec. 54.4980B-2), the following individuals are employees if 
    their relationship to the employer maintaining the plan makes them 
    eligible to be covered under the plan--
        (i) Self-employed individuals (within the meaning of section 
    401(c)(1));
        (ii) Independent contractors (and their employees and independent 
    contractors); and
        (iii) Directors (in the case of a corporation).
        (2) Similarly, whenever reference is made in Secs. 54.4980B-1 
    through 54.4980B-8 (except in Q&A-5 of Sec. 54.4980B-2) to an 
    employment relationship (such as by referring to the termination of 
    employment of an employee or to an employee's being employed by an 
    employer), the reference includes the relationship of those individuals 
    who are employees within the meaning of this paragraph (a). See 
    paragraph (c) in Q&A-5 of Sec. 54.4980B-2 for a narrower meaning of 
    employee solely for purposes of Q&A-5 of Sec. 54.4980B-2.
        (b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, a covered 
    employee is any individual who is (or was) provided coverage under a 
    group health plan (other than a plan that is excepted from COBRA on the 
    date of the qualifying event; see Q&A-4 of Sec. 54.4980B-2) by virtue 
    of being or having been an employee. For example, a retiree or former 
    employee who is covered by a group health plan is a covered employee if 
    the coverage results in whole or in part from her or his previous 
    employment. An employee (or former employee) who is merely eligible for 
    coverage under a group health plan is generally not a covered employee 
    if the employee (or former employee) is not actually covered under the 
    plan. In general, the reason for the employee's (or former employee's) 
    lack of actual coverage (such as having declined participation in the 
    plan or having failed to satisfy the plan's conditions for 
    participation) is not relevant for this purpose. However, if the 
    employee (or former employee) is denied or not offered coverage under 
    circumstances in which the denial or failure to offer constitutes a 
    violation of applicable law (such as the Americans with Disabilities 
    Act, 42 U.S.C. 12101 through 12213, the special enrollment rules of 
    section 9801, or the requirements of section 9802 prohibiting 
    discrimination in eligibility to enroll in a group health plan based on 
    health status), then, for purposes of Secs. 54.4980B-1 through 
    54.4980B-8, the employee (or former employee) will be considered to 
    have had the coverage that was wrongfully denied or not offered.
        Q-3: Who are the similarly situated non-COBRA beneficiaries?
        A-3: For purposes of Secs. 54.4980B-1 through 54.4980B-8, similarly 
    situated non-COBRA beneficiaries means the group of covered employees, 
    spouses of covered employees, or dependent children of covered 
    employees receiving coverage under a group health plan maintained by 
    the employer or employee organization who are receiving that coverage 
    for a reason other than the rights provided under the COBRA 
    continuation coverage requirements and who, based on all of the facts 
    and circumstances, are most similarly situated to the situation of the 
    qualified beneficiary immediately before the qualifying event.
    
    
    Sec. 54.4980B-4  Qualifying events.
    
        The determination of what constitutes a qualifying event is 
    addressed in the following questions and answers:
        Q-1: What is a qualifying event?
        A-1: (a) A qualifying event is an event that satisfies paragraphs 
    (b), (c), and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further 
    explains a reduction of hours of employment, paragraph (f) of this Q&A-
    1 describes the treatment of children born to or placed for adoption 
    with a covered employee during a period of COBRA continuation coverage, 
    and paragraph (g) of this Q&A-1 contains examples.
        (b) An event satisfies this paragraph (b) if the event is any of 
    the following--
        (1) The death of a covered employee;
        (2) The termination (other than by reason of the employee's gross 
    misconduct), or reduction of hours, of a covered employee's employment;
        (3) The divorce or legal separation of a covered employee from the 
    employee's spouse;
        (4) A covered employee's becoming entitled to Medicare benefits 
    under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);
        (5) A dependent child's ceasing to be a dependent child of a 
    covered employee under the generally applicable requirements of the 
    plan; or
        (6) 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.
        (c) An event satisfies this paragraph (c) if, under the terms of 
    the group health plan, the event causes the covered employee, or the 
    spouse or a dependent child of the covered employee, to lose coverage 
    under the plan. For this purpose, to lose coverage means to cease to be 
    covered under the same terms and conditions as in effect immediately 
    before the qualifying event. Any increase in the premium or 
    contribution that must be paid by a covered employee (or the spouse or 
    dependent child of a covered employee) for coverage under a group 
    health plan that results from the occurrence of one of the events 
    listed in paragraph (b) of this Q&A-1 is a loss of coverage. In the 
    case of an event that is the bankruptcy of the employer, lose coverage 
    also means any substantial elimination of coverage under the plan, 
    occurring within 12 months before or after the date the bankruptcy 
    proceeding commences, for a covered employee who had retired on or 
    before the date of the substantial elimination of group health plan 
    coverage or for any spouse, surviving spouse, or dependent child of 
    such a covered employee if, on the day
    
    [[Page 5179]]
    
    before the bankruptcy qualifying event, the spouse, surviving spouse, 
    or dependent child is a beneficiary under the plan. For purposes of 
    this paragraph (c), a loss of coverage need not occur immediately after 
    the event, so long as the loss of coverage occurs before the end of the 
    maximum coverage period (see Q&A-1 and Q&A-6 of Sec. 54.4980B-7). 
    However, if neither the covered employee nor the spouse or a dependent 
    child of the covered employee loses coverage before the end of what 
    would be the maximum coverage period, the event does not satisfy this 
    paragraph (c). If coverage is reduced or eliminated in anticipation of 
    an event (for example, an employer's eliminating an employee's coverage 
    in anticipation of the termination of the employee's employment, or an 
    employee's eliminating the coverage of the employee's spouse in 
    anticipation of a divorce or legal separation), the reduction or 
    elimination is disregarded in determining whether the event causes a 
    loss of coverage.
        (d) An event satisfies this paragraph (d) if it occurs while the 
    plan is subject to COBRA. Thus, an event will not satisfy this 
    paragraph (d) if it occurs while the plan is excepted from COBRA (see 
    Q&A-4 of Sec. 54.4980B-2). Even if the plan later becomes subject to 
    COBRA, it is not required to make COBRA continuation coverage available 
    to anyone whose coverage ends as a result of an event during a year in 
    which the plan is excepted from COBRA. For example, if a group health 
    plan is excepted from COBRA as a small-employer plan during the year 
    2001 (see Q&A-5 of Sec. 54.4980B-2) and an employee terminates 
    employment on December 31, 2001, the termination is not a qualifying 
    event and the plan is not required to permit the employee to elect 
    COBRA continuation coverage. This is the case even if the plan ceases 
    to be a small-employer plan as of January 1, 2002. Also, the same 
    result will follow even if the employee is given three months of 
    coverage beyond December 31 (that is, through March of 2002), because 
    there will be no qualifying event as of the termination of coverage in 
    March. However, if the employee's spouse is initially provided with the 
    three-month coverage through March 2002, but the spouse divorces the 
    employee before the end of the three months and loses coverage as a 
    result of the divorce, the divorce will constitute a qualifying event 
    during 2002 and so entitle the spouse to elect COBRA continuation 
    coverage. See Q&A-7 of Sec. 54.4980B-7 regarding the maximum coverage 
    period in such a case.
        (e) A reduction of hours of a covered employee's employment occurs 
    whenever there is a decrease in the hours that a covered employee is 
    required to work or actually works, but only if the decrease is not 
    accompanied by an immediate termination of employment. This is true 
    regardless of whether the covered employee continues to perform 
    services following the reduction of hours of employment. For example, 
    an absence from work due to disability, a temporary layoff, or any 
    other reason is a reduction of hours of a covered employee's employment 
    if there is not an immediate termination of employment. If a group 
    health plan measures eligibility for the coverage of employees by the 
    number of hours worked in a given time period, such as the preceding 
    month or quarter, and an employee covered under the plan fails to work 
    the minimum number of hours during that time period, the failure to 
    work the minimum number of required hours is a reduction of hours of 
    that covered employee's employment.
        (f) The qualifying event of a qualified beneficiary who is a child 
    born to or placed for adoption with a covered employee during a period 
    of COBRA continuation coverage is the qualifying event giving rise to 
    the period of COBRA continuation coverage during which the child is 
    born or placed for adoption. If a second qualifying event has occurred 
    before the child is born or placed for adoption (such as the death of 
    the covered employee), then the second qualifying event also applies to 
    the newborn or adopted child. See Q&A-6 of Sec. 54.4980B-7.
        (g) The rules of this Q&A-1 are illustrated by the following 
    examples, in each of which the group health plan is subject to COBRA:
    
        Example 1. (i) An employee who is covered by a group health plan 
    terminates employment (other than by reason of the employee's gross 
    misconduct) and, beginning with the day after the last day of 
    employment, is given 3 months of employer-paid coverage under the 
    same terms and conditions as before that date. At the end of the 
    three months, the coverage terminates.
        (ii) The loss of coverage at the end of the three months results 
    from the termination of employment and, thus, the termination of 
    employment is a qualifying event.
        Example 2. (i) An employee who is covered by a group health plan 
    retires (which is a termination of employment other than by reason 
    of the employee's gross misconduct) and, upon retirement, is 
    required to pay an increased amount for the same group health 
    coverage that the employee had before retirement.
        (ii) The increase in the premium or contribution required for 
    coverage is a loss of coverage under paragraph (c) of this Q&A-1 
    and, thus, the retirement is a qualifying event.
        Example 3. (i) An employee and the employee's spouse are covered 
    under an employer's group health plan. The employee retires and is 
    given identical coverage for life. However, the plan provides that 
    the spousal coverage will not be continued beyond six months unless 
    a higher premium for the spouse is paid to the plan.
        (ii) The requirement for the spouse to pay a higher premium at 
    the end of the six months is a loss of coverage under paragraph (c) 
    of this Q&A-1. Thus, the retirement is a qualifying event and the 
    spouse must be given an opportunity to elect COBRA continuation 
    coverage.
        Example 4. (i) F is a covered employee who is married to G, and 
    both are covered under a group health plan maintained by F's 
    employer. F and G are divorced. Under the terms of the plan, the 
    divorce causes G to lose coverage. The divorce is a qualifying 
    event, and G elects COBRA continuation coverage, remarries during 
    the period of COBRA continuation coverage, and G's new spouse 
    becomes covered under the plan. (See Q&A-5 in Sec. 54.4980B-5, 
    paragraph (c) in Q&A-4 of Sec. 54.4980B-5, section 9801(f)(2), and 
    Sec. 54.9801-6T(b).) G dies. Under the terms of the plan, the death 
    causes G's new spouse to lose coverage under the plan.
        (ii) G's death is not a qualifying event because G is not a 
    covered employee.
        Example 5. (i) An employer maintains a group health plan for 
    both active employees and retired employees (and their families). 
    The coverage for active employees and retired employees is 
    identical, and the employer does not require retirees to pay more 
    for coverage than active employees. The plan does not make COBRA 
    continuation coverage available when an employee retires (and is not 
    required to because the retired employee has not lost coverage under 
    the plan). The employer amends the plan to eliminate coverage for 
    retired employees effective January 1, 2002. On that date, several 
    retired employees (and their spouses and dependent children) have 
    been covered under the plan since their retirement for less than the 
    maximum coverage period that would apply to them in connection with 
    their retirement.
        (ii) The elimination of retiree coverage under these 
    circumstances is a deferred loss of coverage for those retirees (and 
    their spouses and dependent children) under paragraph (c) of this 
    Q&A-1 and, thus, the retirement is a qualifying event. The plan must 
    make COBRA continuation coverage available to them for the balance 
    of the maximum coverage period that applies to them in connection 
    with the retirement.
    
        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?
        A-2: Apart from facts constituting gross misconduct, the facts 
    surrounding the termination or reduction of hours are irrelevant in 
    determining whether a qualifying event has occurred. Thus, it
    
    [[Page 5180]]
    
    does not matter whether the employee voluntarily terminated or was 
    discharged. For example, a strike or a lockout is a termination or 
    reduction of hours that constitutes a qualifying event if the strike or 
    lockout results in a loss of coverage as described in paragraph (c) of 
    Q&A-1 of this section. Similarly, a layoff that results in such a loss 
    of coverage is a qualifying event.
    
    
    Sec. 54.4980B-5  COBRA continuation coverage.
    
        The following questions-and-answers address the requirements for 
    coverage to constitute COBRA continuation coverage:
        Q-1: What is COBRA continuation coverage?
        A-1: (a) If a qualifying event occurs, each qualified beneficiary 
    (other than a qualified beneficiary for whom the qualifying event will 
    not result in any immediate or deferred loss of coverage) must be 
    offered an opportunity to elect to receive the group health plan 
    coverage that is provided to similarly situated nonCOBRA beneficiaries 
    (ordinarily, the same coverage that the qualified beneficiary had on 
    the day before the qualifying event). See Q&A-3 of Sec. 54.4980B-3 for 
    the definition of similarly situated nonCOBRA beneficiaries. This 
    coverage is COBRA continuation coverage. If coverage under the plan is 
    modified for similarly situated nonCOBRA beneficiaries, then the 
    coverage made available to qualified beneficiaries is modified in the 
    same way. If the continuation coverage offered differs in any way from 
    the coverage made available to similarly situated nonCOBRA 
    beneficiaries, the coverage offered does not constitute COBRA 
    continuation coverage and the group health plan is not in compliance 
    with COBRA unless other coverage that does constitute COBRA 
    continuation coverage is also offered. Any elimination or reduction of 
    coverage in anticipation of an event described in paragraph (b) of Q&A-
    1 of Sec. 54.4980B-4 is disregarded for purposes of this Q&A-1 and for 
    purposes of any other reference in Secs. 54.4980B-1 through 54.4980B-8 
    to coverage in effect immediately before (or on the day before) a 
    qualifying event. COBRA continuation coverage must not be conditioned 
    upon, or discriminate on the basis of lack of, evidence of 
    insurability.
        (b) In the case of a qualified beneficiary who is a child born to 
    or placed for adoption with a covered employee during a period of COBRA 
    continuation coverage, the child is generally entitled to elect 
    immediately to have the same coverage that dependent children of active 
    employees receive under the benefit packages under which the covered 
    employee has coverage at the time of the birth or placement for 
    adoption. Such a child would be entitled to elect coverage different 
    from that elected by the covered employee during the next available 
    open enrollment period under the plan. See Q&A-4 of this section.
        Q-2: What deductibles apply if COBRA continuation coverage is 
    elected?
        A-2: (a) Qualified beneficiaries electing COBRA continuation 
    coverage generally are subject to the same deductibles as similarly 
    situated nonCOBRA beneficiaries. If a qualified beneficiary's COBRA 
    continuation coverage begins before the end of a period prescribed for 
    accumulating amounts toward deductibles, the qualified beneficiary must 
    retain credit for expenses incurred toward those deductibles before the 
    beginning of COBRA continuation coverage as though the qualifying event 
    had not occurred. The specific application of this rule depends on the 
    type of deductible, as set forth in paragraphs (b) through (d) of this 
    Q&A-2. Special rules are set forth in paragraph (e) of this Q&A-2, and 
    examples appear in paragraph (f) of this Q&A-2.
        (b) If a deductible is computed separately for each individual 
    receiving coverage under the plan, each individual's remaining 
    deductible amount (if any) on the date COBRA continuation coverage 
    begins is equal to that individual's remaining deductible amount 
    immediately before that date.
        (c) If a deductible is computed on a family basis, the remaining 
    deductible for the family on the date that COBRA continuation coverage 
    begins depends on the members of the family electing COBRA continuation 
    coverage. In computing the family deductible that remains on the date 
    COBRA continuation coverage begins, only the expenses of those family 
    members receiving COBRA continuation coverage need be taken into 
    account. If the qualifying event results in there being more than one 
    family unit (for example, because of a divorce), the family deductible 
    may be computed separately for each resulting family unit based on the 
    members in each unit. These rules apply regardless of whether the plan 
    provides that the family deductible is an alternative to individual 
    deductibles or an additional requirement.
        (d) Deductibles that are not described in paragraph (b) or (c) of 
    this Q&A-2 must be treated in a manner consistent with the principles 
    set forth in those paragraphs.
        (e) If a deductible is computed on the basis of a covered 
    employee's compensation instead of being a fixed dollar amount and the 
    employee remains employed during the period of COBRA continuation 
    coverage, the plan is permitted to choose whether to apply the 
    deductible by treating the employee's compensation as continuing 
    without change for the duration of the COBRA continuation coverage at 
    the level that was used to compute the deductible in effect immediately 
    before the COBRA continuation coverage began, or to apply the 
    deductible by taking the employee's actual compensation into account. 
    In applying a deductible that is computed on the basis of the covered 
    employee's compensation instead of being a fixed dollar amount, for 
    periods of COBRA continuation coverage in which the employee is not 
    employed by the employer, the plan is required to compute the 
    deductible by treating the employee's compensation as continuing 
    without change for the duration of the COBRA continuation coverage 
    either at the level that was used to compute the deductible in effect 
    immediately before the COBRA continuation coverage began or at the 
    level that was used to compute the deductible in effect immediately 
    before the employee's employment was terminated.
        (f) The rules of this Q&A-2 are illustrated by the following 
    examples; in each example, deductibles under the plan are determined on 
    a calendar year basis:
    
        Example 1. (i) A group health plan applies a separate $100 
    annual deductible to each individual it covers. The plan provides 
    that the spouse and dependent children of a covered employee will 
    lose coverage on the last day of the month after the month of the 
    covered employee's death. A covered employee dies on June 11, 2001. 
    The spouse and the two dependent children elect COBRA continuation 
    coverage, which will begin on August 1, 2001. As of July 31, 2001, 
    the spouse has incurred $80 of covered expenses, the older child has 
    incurred no covered expenses, and the younger one has incurred $120 
    of covered expenses (and therefore has already satisfied the 
    deductible).
        (ii) At the beginning of COBRA continuation coverage on August 
    1, the spouse has a remaining deductible of $20, the older child 
    still has the full $100 deductible, and the younger one has no 
    further deductible.
        Example 2. (i) A group health plan applies a separate $200 
    annual deductible to each individual it covers, except that each 
    family member is treated as having satisfied the individual 
    deductible once the family has incurred $500 of covered expenses 
    during the year. The plan provides that upon the divorce of a 
    covered employee, coverage will
    
    [[Page 5181]]
    
    end immediately for the employee's spouse and any children who do 
    not remain in the employee's custody. A covered employee with four 
    dependent children is divorced, the spouse obtains custody of the 
    two oldest children, and the spouse and those children all elect 
    COBRA continuation coverage to begin immediately. The family had 
    accumulated $420 of covered expenses before the divorce, as follows: 
    $70 by each parent, $200 by the oldest child, $80 by the youngest 
    child, and none by the other two children.
        (ii) The resulting family consisting of the spouse and the two 
    oldest children accumulated a total of $270 of covered expenses, and 
    thus the remaining deductible for that family could be as high as 
    $230 (because the plan would not have to count the incurred expenses 
    of the covered employee and the youngest child). The remaining 
    deductible for the resulting family consisting of the covered 
    employee and the two youngest children is not subject to the rules 
    of this Q&A-2 because their coverage is not COBRA continuation 
    coverage.
        Example 3. Each year a group health plan pays 70 percent of the 
    cost of an individual's psychotherapy after that individual's first 
    three visits during the year. A qualified beneficiary whose election 
    of COBRA continuation coverage takes effect beginning August 1, 2001 
    and who has already made two visits as of that date need only pay 
    for one more visit before the plan must begin to pay 70 percent of 
    the cost of the remaining visits during 2001.
        Example 4. (i) A group health plan has a $250 annual deductible 
    per covered individual. The plan provides that if the deductible is 
    not satisfied in a particular year, expenses incurred during October 
    through December of that year are credited toward satisfaction of 
    the deductible in the next year. A qualified beneficiary who has 
    incurred covered expenses of $150 from January through September of 
    2001 and $40 during October elects COBRA continuation coverage 
    beginning November 1, 2001.
        (ii) The remaining deductible amount for this qualified 
    beneficiary is $60 at the beginning of the COBRA continuation 
    coverage. If this individual incurs covered expenses of $50 in 
    November and December of 2001 combined (so that the $250 deductible 
    for 2001 is not satisfied), the $90 incurred from October through 
    December of 2001 are credited toward satisfaction of the deductible 
    amount for 2002.
    
        Q-3: How do a plan's limits apply to COBRA continuation coverage?
        A-3: (a) Limits are treated in the same way as deductibles (see 
    Q&A-2 of this section).
        This rule applies both to limits on plan benefits (such as a 
    maximum number of hospital days or dollar amount of reimbursable 
    expenses) and limits on out-of-pocket expenses (such as a limit on 
    copayments, a limit on deductibles plus copayments, or a catastrophic 
    limit). This rule applies equally to annual and lifetime limits and 
    applies equally to limits on specific benefits and limits on benefits 
    in the aggregate under the plan.
        (b) The rule of this Q&A-3 is illustrated by the following 
    examples; in each example limits are determined on a calendar year 
    basis:
    
        Example 1. (i) A group health plan pays for a maximum of 150 
    days of hospital confinement per individual per year. A covered 
    employee who has had 20 days of hospital confinement as of May 1, 
    2001 terminates employment and elects COBRA continuation coverage as 
    of that date.
        (ii) During the remainder of the year 2001 the plan need only 
    pay for a maximum of 130 days of hospital confinement for this 
    individual.
        Example 2. (i) A group health plan reimburses a maximum of 
    $20,000 of covered expenses per family per year, and the same 
    $20,000 limit applies to unmarried covered employees. A covered 
    employee and spouse who have no children divorce on May 1, 2001, and 
    the spouse elects COBRA continuation coverage as of that date. In 
    2001, the employee had incurred $5,000 of expenses and the spouse 
    had incurred $8,000 before May 1.
        (ii) The plan can limit its reimbursement of the amount of 
    expenses incurred by the spouse on and after May 1 for the remainder 
    of the year to $12,000 ($20,000-$8,000 = $12,000). The remaining 
    limit for the employee is not subject to the rules of this Q&A-3 
    because the employee's coverage is not COBRA continuation coverage.
        Example 3. (i) A group health plan pays for 80 percent of 
    covered expenses after satisfaction of a $100-per-individual 
    deductible, and the plan pays for 100 percent of covered expenses 
    after a family has incurred out-of-pocket costs of $2,000. The plan 
    provides that upon the divorce of a covered employee, coverage will 
    end immediately for the employee's spouse and any children who do 
    not remain in the employee's custody. An employee and spouse with 
    three dependent children divorce on June 1, 2001, and one of the 
    children remains with the employee. The spouse elects COBRA 
    continuation coverage as of that date for the spouse and the other 
    two children. During January through May of 2001, the spouse 
    incurred $600 of covered expenses and each of the two children in 
    the spouse's custody after the divorce incurred covered expenses of 
    $1,100. This resulted in total out-of-pocket costs for these three 
    individuals of $800 ($300 total for the three deductibles, plus $500 
    for 20 percent of the other $2,500 in incurred expenses [$600 + 
    $1,100 + $1,100 = $2,800; $2,800-$300 = $2,500]).
        (ii) For the remainder of 2001, the resulting family consisting 
    of the spouse and two children has an out-of-pocket limit of $1,200 
    ($2,000-$800 = $1,200) . The remaining out-of-pocket limit for the 
    resulting family consisting of the employee and one child is not 
    subject to the rules of this Q&A-3 because their coverage is not 
    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?
        A-4: (a) In general, a qualified beneficiary need only be given an 
    opportunity to continue the coverage that she or he was receiving 
    immediately before the qualifying event. This is true regardless of 
    whether the coverage received by the qualified beneficiary before the 
    qualifying event ceases to be of value to the qualified beneficiary, 
    such as in the case of a qualified beneficiary covered under a region-
    specific health maintenance organization (HMO) who leaves the HMO's 
    service region. The only situations in which a qualified beneficiary 
    must be allowed to change from the coverage received immediately before 
    the qualifying event are as set forth in paragraphs (b) and (c) of this 
    Q&A-4 and in Q&A-1 of this section (regarding changes to or elimination 
    of the coverage provided to similarly situated nonCOBRA beneficiaries).
        (b) If a qualified beneficiary participates in a region-specific 
    benefit package (such as an HMO or an on-site clinic) that will not 
    service her or his health needs in the area to which she or he is 
    relocating (regardless of the reason for the relocation), the qualified 
    beneficiary must be given an opportunity to elect alternative coverage 
    that the employer or employee organization makes available to active 
    employees. If the employer or employee organization makes group health 
    plan coverage available to similarly situated nonCOBRA beneficiaries 
    that can be extended in the area to which the qualified beneficiary is 
    relocating, then that coverage is the alternative coverage that must be 
    made available to the relocating qualified beneficiary. If the employer 
    or employee organization does not make group health plan coverage 
    available to similarly situated nonCOBRA beneficiaries that can be 
    extended in the area to which the qualified beneficiary is relocating 
    but makes coverage available to other employees that can be extended in 
    that area, then the coverage made available to those other employees 
    must be made available to the relocating qualified beneficiary. 
    However, the employer or employee organization is not required to make 
    any other coverage available to the relocating qualified beneficiary if 
    the only coverage the employer or employee organization makes available 
    to active employees is not available in the area to which the qualified 
    beneficiary relocates (because all such coverage is region-specific and 
    does not service individuals in that area).
        (c) If an employer or employee organization makes an open 
    enrollment period available to similarly situated active employees with 
    respect to whom a qualifying event has not occurred, the same open 
    enrollment period rights
    
    [[Page 5182]]
    
    must be made available to each qualified beneficiary receiving COBRA 
    continuation coverage. An open enrollment period means a period during 
    which an employee covered under a plan can choose to be covered under 
    another group health plan or under another benefit package within the 
    same plan, or to add or eliminate coverage of family members.
        (d) The rules of this Q&A-4 are illustrated by the following 
    examples:
    
        Example 1. (i) E is an employee who works for an employer that 
    maintains several group health plans. Under the terms of the plans, 
    if an employee chooses to cover any family members under a plan, all 
    family members must be covered by the same plan and that plan must 
    be the same as the plan covering the employee. Immediately before 
    E's termination of employment (for reasons other than gross 
    misconduct), E is covered along with E's spouse and children by a 
    plan. The coverage under that plan will end as a result of the 
    termination of employment.
        (ii) Upon E's termination of employment, each of the four family 
    members is a qualified beneficiary. Even though the employer 
    maintains various other plans and options, it is not necessary for 
    the qualified beneficiaries to be allowed to switch to a new plan 
    when E terminates employment.
        (iii) COBRA continuation coverage is elected for each of the 
    four family members. Three months after E's termination of 
    employment there is an open enrollment period during which similarly 
    situated active employees are offered an opportunity to choose to be 
    covered under a new plan or to add or eliminate family coverage.
        (iv) During the open enrollment period, each of the four 
    qualified beneficiaries must be offered the opportunity to switch to 
    another plan (as though each qualified beneficiary were an 
    individual employee). For example, each member of E's family could 
    choose coverage under a separate plan, even though the family 
    members of employed individuals could not choose coverage under 
    separate plans. Of course, if each family member chooses COBRA 
    continuation coverage under a separate plan, the plan can require 
    payment for each family member that is based on the applicable 
    premium for individual coverage under that separate plan. See Q&A-1 
    of Sec. 54.4980B-8.
        Example 2. (i) The facts are the same as in Example 1, except 
    that E's family members are not covered under E's group health plan 
    when E terminates employment.
        (ii) Although the family members do not have to be given an 
    opportunity to elect COBRA continuation coverage, E must be allowed 
    to add them to E's COBRA continuation coverage during the open 
    enrollment period. This is true even though the family members are 
    not, and cannot become, qualified beneficiaries (see Q&A-1 of 
    Sec. 54.4980B-3).
    
        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?
        A-5: (a) Yes. Under section 9801 and Sec. 54.9801-6T, employees 
    eligible to participate in a group health plan (whether or not 
    participating), as well as former employees participating in a plan 
    (referred to in those rules as participants), are entitled to special 
    enrollment rights for certain family members upon the loss of other 
    group health plan coverage or upon the acquisition by the employee or 
    participant of a new spouse or of a new dependent through birth, 
    adoption, or placement for adoption, if certain requirements are 
    satisfied. Employees not participating in the plan also can obtain 
    rights for self-enrollment under those rules. Once a qualified 
    beneficiary is receiving COBRA continuation coverage (that is, has 
    timely elected and made timely payment for COBRA continuation 
    coverage), the qualified beneficiary has the same right to enroll 
    family members under those special enrollment rules as if the qualified 
    beneficiary were an employee or participant within the meaning of those 
    rules. However, neither a qualified beneficiary who is not receiving 
    COBRA continuation coverage nor a former qualified beneficiary has any 
    special enrollment rights under those rules.
        (b) In addition to the special enrollment rights described in 
    paragraph (a) of this Q&A-5, if the plan covering the qualified 
    beneficiary provides that new family members of active employees can 
    become covered (either automatically or upon an appropriate election) 
    before the next open enrollment period, then the same right must be 
    extended to the new family members of a qualified beneficiary.
        (c) If the addition of a new family member will result in a higher 
    applicable premium (for example, if the qualified beneficiary was 
    previously receiving COBRA continuation coverage as an individual, or 
    if the applicable premium for family coverage depends on family size), 
    the plan can require the payment of a correspondingly higher amount for 
    the COBRA continuation coverage. See Q&A-1 of Sec. 54.4980B-8.
        (d) The right to add new family members under this Q&A-5 is in 
    addition to the rights that newborn and adopted children of covered 
    employees may have as qualified beneficiaries; see Q&A-1 in 
    Sec. 54.4980B-3.
    
    
    Sec. 54.4980B-6  Electing COBRA continuation coverage.
    
        The following questions-and-answers address the manner in which 
    COBRA continuation coverage is elected:
        Q-1: What is the election period and how long must it last?
        A-1: (a) A group health plan can condition the availability of 
    COBRA continuation coverage upon the timely election of such coverage. 
    An election of COBRA continuation coverage is a timely election if it 
    is made during the election period. The election period must begin not 
    later than the date the qualified beneficiary would lose coverage on 
    account of the qualifying event. (See paragraph (c) of Q&A-1 of 
    Sec. 54.4980B-4 for the meaning of lose coverage.) The election period 
    must not end before the date that is 60 days after the later of--
        (1) The date the qualified beneficiary would lose coverage on 
    account of the qualifying event; or
        (2) The date notice is provided to the qualified beneficiary of her 
    or his right to elect COBRA continuation coverage.
        (b) An election is considered to be made on the date it is sent to 
    the plan administrator.
        (c) The rules of this Q&A-1 are illustrated by the following 
    example:
    
        Example. (i) An unmarried employee without children who is 
    receiving employer-paid coverage under a group health plan 
    voluntarily terminates employment on June 1, 2001. The employee is 
    not disabled at the time of the termination of employment nor at any 
    time thereafter, and the plan does not provide for the extension of 
    the required periods (as is permitted under section 4980B(f)(8)).
        (ii) Case 1: If the plan provides that the employer-paid 
    coverage ends immediately upon the termination of employment, the 
    election period must begin not later than June 1, 2001, and must not 
    end earlier than July 31, 2001. If notice of the right to elect 
    COBRA continuation coverage is not provided to the employee until 
    June 15, 2001, the election period must not end earlier than August 
    14, 2001.
        (iii) Case 2: If the plan provides that the employer-paid 
    coverage does not end until 6 months after the termination of 
    employment, the employee does not lose coverage until December 1, 
    2001. The election period can therefore begin as late as December 1, 
    2001, and must not end before January 30, 2002.
        (iv) Case 3: If employer-paid coverage for 6 months after the 
    termination of employment is offered only to those qualified 
    beneficiaries who waive COBRA continuation coverage, the employee 
    loses coverage on June 1, 2001, so the election period is the same 
    as in Case 1. The difference between Case 2 and Case 3 is that in 
    Case 2 the employee can receive 6 months of employer-paid coverage 
    and then elect to pay for up to an additional 12 months of COBRA 
    continuation coverage, while in Case
    
    [[Page 5183]]
    
    3 the employee must choose between 6 months of employer-paid 
    coverage and paying for up to 18 months of COBRA continuation 
    coverage. In all three cases, COBRA continuation coverage need not 
    be provided for more than 18 months after the termination of 
    employment, and in certain circumstances might be provided for a 
    shorter period (see Q&A-1 of Sec. 54.4980B-7).
    
        Q-2: Is a covered employee or qualified beneficiary responsible for 
    informing the plan administrator of the occurrence of a qualifying 
    event?
        A-2: (a) In general, the employer or plan administrator must 
    determine when a qualifying event has occurred. However, each covered 
    employee or qualified beneficiary is responsible for notifying the plan 
    administrator of the occurrence of a qualifying event that is either a 
    dependent child's ceasing to be a dependent child under the generally 
    applicable requirements of the plan or a divorce or legal separation of 
    a covered employee. The group health plan is not required to offer the 
    qualified beneficiary an opportunity to elect COBRA continuation 
    coverage if the notice is not provided to the plan administrator within 
    60 days after the later of--
        (1) The date of the qualifying event; or
        (2) The date the qualified beneficiary would lose coverage on 
    account of the qualifying event.
        (b) For purposes of this Q&A-2, if more than one qualified 
    beneficiary would lose coverage on account of a divorce or legal 
    separation of a covered employee, a timely notice of the divorce or 
    legal separation that is provided by the covered employee or any one of 
    those qualified beneficiaries will be sufficient to preserve the 
    election rights of all of the qualified beneficiaries.
        Q-3: During the election period and before the qualified 
    beneficiary has made an election, must coverage be provided?
        A-3: (a) In general, each qualified beneficiary has until 60 days 
    after the later of the date the qualifying event would cause her or him 
    to lose coverage or the date notice is provided to the qualified 
    beneficiary of her or his right to elect COBRA continuation coverage to 
    decide whether to elect COBRA continuation coverage. If the election is 
    made during that period, coverage must be provided from the date that 
    coverage would otherwise have been lost (but see Q&A-4 of this 
    section). This can be accomplished as described in paragraph (b) or (c) 
    of this Q&A-3.
        (b) In the case of an indemnity or reimbursement arrangement, the 
    employer or employee organization can provide for plan coverage during 
    the election period or, if the plan allows retroactive reinstatement, 
    the employer or employee organization can terminate the coverage of the 
    qualified beneficiary and reinstate her or him when the election is 
    made. Claims incurred by a qualified beneficiary during the election 
    period do not have to be paid before the election (and, if applicable, 
    payment for the coverage) is made. If a provider of health care (such 
    as a physician, hospital, or pharmacy) contacts the plan to confirm 
    coverage of a qualified beneficiary during the election period, the 
    plan must give a complete response to the health care provider about 
    the qualified beneficiary's COBRA continuation coverage rights during 
    the election period. For example, if the plan provides coverage during 
    the election period but cancels coverage retroactively if COBRA 
    continuation coverage is not elected, then the plan must inform a 
    provider that a qualified beneficiary for whom coverage has not been 
    elected is covered but that the coverage is subject to retroactive 
    termination. Similarly, if the plan cancels coverage but then 
    retroactively reinstates it once COBRA continuation coverage is 
    elected, then the plan must inform the provider that the qualified 
    beneficiary currently does not have coverage but will have coverage 
    retroactively to the date coverage was lost if COBRA continuation 
    coverage is elected. (See paragraph (c) of Q&A-5 in Sec. 54.4980B-8 for 
    similar rules that a plan must follow in confirming coverage during a 
    period when the plan has not received payment but that is still within 
    the grace period for a qualified beneficiary for whom COBRA 
    continuation coverage has been elected.)
        (c)(1) In the case of a group health plan that provides health 
    services (such as a health maintenance organization or a walk-in 
    clinic), the plan can require with respect to a qualified beneficiary 
    who has not elected and paid for COBRA continuation coverage that the 
    qualified beneficiary choose between--
        (i) Electing and paying for the coverage; or
        (ii) Paying the reasonable and customary charge for the plan's 
    services, but only if a qualified beneficiary who chooses to pay for 
    the services will be reimbursed for that payment within 30 days after 
    the election of COBRA continuation coverage (and, if applicable, the 
    payment of any balance due for the coverage).
        (2) In the alternative, the plan can provide continued coverage and 
    treat the qualified beneficiary's use of the facility as a constructive 
    election. In such a case, the qualified beneficiary is obligated to pay 
    any applicable charge for the coverage, but only if the qualified 
    beneficiary is informed that use of the facility will be a constructive 
    election before using the facility.
        Q-4: Is a waiver before the end of the election period effective to 
    end a qualified beneficiary's election rights?
        A-4: If, during the election period, a qualified beneficiary waives 
    COBRA continuation coverage, the waiver can be revoked at any time 
    before the end of the election period. Revocation of the waiver is an 
    election of COBRA continuation coverage. However, if a waiver of COBRA 
    continuation coverage is later revoked, coverage need not be provided 
    retroactively (that is, from the date of the loss of coverage until the 
    waiver is revoked). Waivers and revocations of waivers are considered 
    made on the date they are sent to the employer, employee organization, 
    or plan administrator, as applicable.
        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?
        A-5: No. An employer, and an employee organization, must not 
    withhold anything to which a qualified beneficiary is otherwise 
    entitled (by operation of law or other agreement) in order to compel 
    payment for COBRA continuation coverage or to coerce the qualified 
    beneficiary to give up rights to COBRA continuation coverage (including 
    the right to use the full election period to decide whether to elect 
    such coverage). Such a withholding constitutes a failure to comply with 
    the COBRA continuation coverage requirements. Furthermore, any 
    purported waiver obtained by means of such a withholding is invalid.
        Q-6: Can each qualified beneficiary make an independent election 
    under COBRA?
        A-6: Yes. Each qualified beneficiary (including a child who is born 
    to or placed for adoption with a covered employee during a period of 
    COBRA continuation coverage) must be offered the opportunity to make an 
    independent election to receive COBRA continuation coverage. If the 
    plan allows similarly situated active employees with respect to whom a 
    qualifying event has not occurred to choose among several options 
    during an open enrollment period (for example, to switch to another 
    group health plan or to another benefit package under the same group 
    health plan), then each qualified beneficiary must also be offered an 
    independent election to choose during an open enrollment period among 
    the
    
    [[Page 5184]]
    
    options made available to similarly situated active employees with 
    respect to whom a qualifying event has not occurred. If a qualified 
    beneficiary who is either 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 all other qualified beneficiaries with respect to that qualifying 
    event. An election on behalf of a minor child can be made by the 
    child's parent or legal guardian. An election on behalf of a qualified 
    beneficiary who is incapacitated or dies can be made by the legal 
    representative of the qualified beneficiary or the qualified 
    beneficiary's estate, as determined under applicable state law, or by 
    the spouse of the qualified beneficiary. (See also Q&A-5 of 
    Sec. 54.4980B-7 relating to the independent right of each qualified 
    beneficiary with respect to the same qualifying event to receive COBRA 
    continuation coverage during the disability extension.) The rules of 
    this Q&A-6 are illustrated by the following examples; in each example 
    each group health plan is subject to COBRA:
    
        Example 1. (i) Employee H and H 's spouse are covered under a 
    group health plan immediately before H 's termination of employment 
    (for reasons other than gross misconduct). Coverage under the plan 
    will end as a result of the termination of employment.
        (ii) Upon H 's termination of employment, both H and H 's spouse 
    are qualified beneficiaries and each must be allowed to elect COBRA 
    continuation coverage. Thus, H might elect COBRA continuation 
    coverage while the spouse declines to elect such coverage, or H 
    might elect COBRA continuation coverage for both of them. In 
    contrast, H cannot decline COBRA continuation coverage on behalf of 
    H 's spouse. Thus, if H does not elect COBRA continuation coverage 
    on behalf of the spouse, the spouse must still be allowed to elect 
    COBRA continuation coverage.
        Example 2. (i) An employer maintains a group health plan under 
    which all employees receive employer-paid coverage. Employees can 
    arrange to cover their families by paying an additional amount. The 
    employer also maintains a cafeteria plan, under which one of the 
    options is to pay part or all of the employee share of the cost for 
    family coverage under the group health plan. Thus, an employee might 
    pay for family coverage under the group health plan partly with 
    before-tax dollars and partly with after-tax dollars.
        (ii) If an employee's family is receiving coverage under the 
    group health plan when a qualifying event occurs, each of the 
    qualified beneficiaries must be offered an opportunity to elect 
    COBRA continuation coverage, regardless of how that qualified 
    beneficiary's coverage was paid for before the qualifying event.
    
    
    Sec. 54.4980B-7  Duration of COBRA continuation coverage.
    
        The following questions-and-answers address the duration of COBRA 
    continuation coverage:
        Q-1: How long must COBRA continuation coverage be made available to 
    a qualified beneficiary?
        A-1: (a) Except for an interruption of coverage in connection with 
    a waiver, as described in Q&A-4 of Sec. 54.4980B-6, COBRA continuation 
    coverage that has been elected for a qualified beneficiary must extend 
    for at least the period beginning on the date of the qualifying event 
    and ending not before the earliest of the following dates--
        (1) The last day of the maximum required period under section 
    4980B(f)(2)(B)(i) (the maximum coverage period) and, if applicable, 
    section 4980B(f)(8) (relating to the optional extension of required 
    periods in a case where coverage is lost after the date of, instead of 
    on the date of, the qualifying event);
        (2) The first day for which timely payment is not made to the plan 
    with respect to the qualified beneficiary (see Q&A-5 in Sec. 54.4980B-
    8);
        (3) The date upon which the employer or employee organization 
    ceases to provide any group health plan (including successor plans) to 
    any employee;
        (4) The date, after the date of the election, upon which the 
    qualified beneficiary first becomes covered under any other group 
    health plan, as described in Q&A-2 of this section; and
        (5) The date, after the date of the election, upon which the 
    qualified beneficiary first becomes entitled to Medicare benefits, as 
    described in Q&A-3 of this section.
        (b) However, a group health plan can terminate for cause the 
    coverage of a qualified beneficiary receiving COBRA continuation 
    coverage on the same basis that the plan terminates for cause the 
    coverage of similarly situated nonCOBRA beneficiaries. For example, if 
    a group health plan terminates the coverage of active employees for the 
    submission of a fraudulent claim, then the coverage of a qualified 
    beneficiary can also be terminated for the submission of a fraudulent 
    claim. Notwithstanding the preceding two sentences, the coverage of a 
    qualified beneficiary can be terminated for failure to make timely 
    payment to the plan only if payment is not timely under the rules of 
    Q&A-5 in Sec. 54.4980B-8.
        (c) In the case of an individual who is not a qualified beneficiary 
    and who is receiving coverage under a group health plan solely because 
    of the individual's relationship to a qualified beneficiary, if the 
    plan's obligation to make COBRA continuation coverage available to the 
    qualified beneficiary ceases under this section, the plan is not 
    obligated to make coverage available to the individual who is not 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?
        A-2: (a) If a qualified beneficiary first becomes covered under 
    another group health plan (including for this purpose any group health 
    plan of a governmental employer or employee organization) after the 
    date on which COBRA continuation coverage is elected for the qualified 
    beneficiary and the other coverage satisfies the requirements of 
    paragraphs (b), (c), and (d) of this Q&A-2, then the plan may terminate 
    the qualified beneficiary's COBRA continuation coverage upon the date 
    on which the qualified beneficiary first becomes covered under the 
    other group health plan (even if the other coverage is less valuable to 
    the qualified beneficiary). By contrast, if a qualified beneficiary 
    first becomes covered under another group health plan on or before the 
    date on which COBRA continuation coverage is elected, then the other 
    coverage cannot be a basis for terminating the qualified beneficiary's 
    COBRA continuation coverage.
        (b) The requirement of this paragraph (b) is satisfied if the 
    qualified beneficiary is actually covered, rather than merely eligible 
    to be covered, under the other group health plan.
        (c) The requirement of this paragraph (c) is satisfied if the other 
    group health plan is a plan that is not maintained by the employer or 
    employee organization that maintains the plan under which COBRA 
    continuation coverage must otherwise be made available.
        (d) The requirement of this paragraph (d) is satisfied if the other 
    group health plan does not contain any exclusion or limitation with 
    respect to any preexisting condition of the qualified beneficiary 
    (other than such an exclusion or limitation that does not apply to, or 
    is satisfied by, the qualified beneficiary by reason of the provisions 
    in section 9801 (relating to limitations on preexisting condition 
    exclusion periods in group health plans)).
        (e) The rules of this Q&A-2 are illustrated by the following 
    examples:
    
        Example 1. (i) Employer X maintains a group health plan subject 
    to COBRA. C is an employee covered under the plan. C is also covered 
    under a group health plan
    
    [[Page 5185]]
    
    maintained by Employer Y, the employer of C 's spouse. C terminates 
    employment (for reasons other than gross misconduct), and the 
    termination of employment causes C to lose coverage under X 's plan 
    (and, thus, is a qualifying event). C elects to receive COBRA 
    continuation coverage under X 's plan.
        (ii) Under these facts, X 's plan cannot terminate C 's COBRA 
    continuation coverage on the basis of C 's coverage under Y 's plan.
        Example 2. (i) Employer W maintains a group health plan subject 
    to COBRA. D is an employee covered under the plan. D terminates 
    employment (for reasons other than gross misconduct), and the 
    termination of employment causes D to lose coverage under W 's plan 
    (and, thus, is a qualifying event). D elects to receive COBRA 
    continuation coverage under W 's plan. Later D becomes employed by 
    Employer V and is covered under V 's group health plan. D 's 
    coverage under V 's plan is not subject to any exclusion or 
    limitation with respect to any preexisting condition of D.
        (ii) Under these facts, W can terminate D 's COBRA continuation 
    coverage on the date D becomes covered under V 's plan.
        Example 3. (i) The facts are the same as in Example 2, except 
    that D becomes employed by V and becomes covered under V 's group 
    health plan before D elects COBRA continuation coverage under W 's 
    plan.
        (ii) Because the termination of employment is a qualifying 
    event, D must be offered COBRA continuation coverage under W 's 
    plan, and W is not permitted to terminate D 's COBRA continuation 
    coverage on account of D 's coverage under V 's plan because D first 
    became covered under V 's plan before COBRA continuation coverage 
    was elected for D.
    
        Q-3: When may a plan terminate a qualified beneficiary's COBRA 
    continuation coverage due to the qualified beneficiary's entitlement to 
    Medicare benefits?
        A-3: (a) If a qualified beneficiary first becomes entitled to 
    Medicare benefits under Title XVIII of the Social Security Act (42 
    U.S.C. 1395-1395ggg) after the date on which COBRA continuation 
    coverage is elected for the qualified beneficiary, then the plan may 
    terminate the qualified beneficiary's COBRA continuation coverage upon 
    the date on which the qualified beneficiary becomes so entitled. By 
    contrast, if a qualified beneficiary first becomes entitled to Medicare 
    benefits on or before the date that COBRA continuation coverage is 
    elected, then the qualified beneficiary's entitlement to Medicare 
    benefits cannot be a basis for terminating the qualified beneficiary's 
    COBRA continuation coverage.
        (b) A qualified beneficiary becomes entitled to Medicare benefits 
    upon the effective date of enrollment in either part A or B, whichever 
    occurs earlier. Thus, merely being eligible to enroll in Medicare does 
    not constitute being entitled to Medicare benefits.
        Q-4: [Reserved]
        A-4: [Reserved]
        Q-5: How does a qualified beneficiary become entitled to a 
    disability extension?
        A-5: (a) A qualified beneficiary becomes entitled to a disability 
    extension if the requirements of paragraphs (b), (c), and (d) of this 
    Q&A-5 are satisfied with respect to the qualified beneficiary. If the 
    disability extension applies with respect to a qualifying event, it 
    applies with respect to each qualified beneficiary entitled to COBRA 
    continuation coverage because of that qualifying event. Thus, for 
    example, the 29-month maximum coverage period applies to each qualified 
    beneficiary who is not disabled as well as to the qualified beneficiary 
    who is disabled, and it applies independently with respect to each of 
    the qualified beneficiaries. See Q&A-1 in Sec. 54.4980B-8, which 
    permits a plan to require payment of an increased amount during the 
    disability extension.
        (b) The requirement of this paragraph (b) is satisfied if a 
    qualifying event occurs that is a termination, or reduction of hours, 
    of a covered employee's employment.
        (c) The requirement of this paragraph (c) is satisfied if an 
    individual (whether or not the covered employee) who is a qualified 
    beneficiary in connection with the qualifying event described in 
    paragraph (b) of this Q&A-5 is determined under Title II or XVI of the 
    Social Security Act (42 U.S.C. 401-433 or 1381-1385) to have been 
    disabled at any time during the first 60 days of COBRA continuation 
    coverage. For this purpose, the period of the first 60 days of COBRA 
    continuation coverage is measured from the date of the qualifying event 
    described in paragraph (b) of this Q&A-5 (except that if a loss of 
    coverage would occur at a later date in the absence of an election for 
    COBRA continuation coverage and if the plan provides for the extension 
    of the required periods in accordance with section 4980B(f)(8), then 
    the period of the first 60 days of COBRA continuation coverage is 
    measured from the date on which the coverage would be lost). However, 
    in the case of a qualified beneficiary who is a child born to or placed 
    for adoption with a covered employee during a period of COBRA 
    continuation coverage, the period of the first 60 days of COBRA 
    continuation coverage is measured from the date of birth or placement 
    for adoption. For purposes of this paragraph (c), an individual is 
    determined to be disabled within the first 60 days of COBRA 
    continuation coverage if the individual has been determined under Title 
    II or XVI of the Social Security Act to have been disabled before the 
    first day of COBRA continuation coverage and has not been determined to 
    be no longer disabled at any time between the date of that disability 
    determination and the first day of COBRA continuation coverage.
        (d) The requirement of this paragraph (d) is satisfied if any of 
    the qualified beneficiaries affected by the qualifying event described 
    in paragraph (b) of this Q&A-5 provides notice to the plan 
    administrator of the disability determination on a date that is both 
    within 60 days after the date the determination is issued and before 
    the end of the original 18-month maximum coverage period that applies 
    to the qualifying event.
        Q-6: Under what circumstances can the maximum coverage period be 
    expanded?
        A-6: (a) The maximum coverage period can be expanded if the 
    requirements of Q&A-5 of this section (relating to the disability 
    extension) or paragraph (b) of this Q&A-6 are satisfied.
        (b) The requirements of this paragraph (b) are satisfied if a 
    qualifying event that gives rise to an 18-month maximum coverage period 
    (or a 29-month maximum coverage period in the case of a disability 
    extension) is followed, within that 18-month period (or within that 29-
    month period, in the case of a disability extension), by a second 
    qualifying event (for example, a death or a divorce) that gives rise to 
    a 36-month maximum coverage period. (Thus, a termination of employment 
    following a qualifying event that is a reduction of hours of employment 
    cannot be a second qualifying event that expands the maximum coverage 
    period; the bankruptcy of the employer also cannot be a second 
    qualifying event that expands the maximum coverage period.) In such a 
    case, the original 18-month period (or 29-month period, in the case of 
    a disability extension) is expanded to 36 months, but only for those 
    individuals who were qualified beneficiaries under the group health 
    plan in connection with the first qualifying event and who are still 
    qualified beneficiaries at the time of the second qualifying event. No 
    qualifying event (other than a qualifying event that is the bankruptcy 
    of the employer) can give rise to a maximum coverage period that ends 
    more than 36 months after the date of the first qualifying event (or 
    more than 36 months after the date of the loss of coverage, in the case 
    of a plan that provides for the extension of the required periods). For 
    example, if an
    
    [[Page 5186]]
    
    employee covered by a group health plan that is subject to COBRA 
    terminates employment (for reasons other than gross misconduct) on 
    December 31, 2000, the termination is a qualifying event giving rise to 
    a maximum coverage period that extends for 18 months to June 30, 2002. 
    If the employee dies after the employee and the employee's spouse and 
    dependent children have elected COBRA continuation coverage and on or 
    before June 30, 2002, the spouse and dependent children (except anyone 
    among them whose COBRA continuation coverage had already ended for some 
    other reason) will be able to receive COBRA continuation coverage 
    through December 31, 2003.
        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?
        A-7: (a) No. The end of the maximum coverage period is measured 
    solely as described in Q&A-1 and Q&A-6 of this section, which is 
    generally from the date of the qualifying event.
        (b) If the alternative coverage does not satisfy all the 
    requirements for COBRA continuation coverage, or if the amount that the 
    group health plan requires to be paid for the alternative coverage is 
    greater than the amount required to be paid by similarly situated 
    nonCOBRA beneficiaries for the coverage that the qualified beneficiary 
    can elect to receive as COBRA continuation coverage, the plan covering 
    the qualified beneficiary immediately before the qualifying event must 
    offer the qualified beneficiary receiving the alternative coverage the 
    opportunity to elect COBRA continuation coverage. See Q&A-1 of 
    Sec. 54.4980B-6.
        (c) If an individual rejects COBRA continuation coverage in favor 
    of alternative coverage, then, at the expiration of the alternative 
    coverage period, the individual need not be offered a COBRA election. 
    However, if the individual receiving alternative coverage is a covered 
    employee and the spouse or a dependent child of the individual would 
    lose that alternative coverage as a result of a qualifying event (such 
    as the death of the covered employee), the spouse or dependent child 
    must be given an opportunity to elect to continue that alternative 
    coverage, with a maximum coverage period of 36 months measured from the 
    date of that qualifying event.
        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?
        A-8: If a qualified beneficiary's COBRA continuation coverage under 
    a group health plan ends as a result of the expiration of the maximum 
    coverage period, the group health plan must, during the 180-day period 
    that ends on that expiration date, provide the qualified beneficiary 
    the option of enrolling under a conversion health plan if such an 
    option is otherwise generally available to similarly situated nonCOBRA 
    beneficiaries under the group health plan. If such a conversion option 
    is not otherwise generally available, it need not be made available to 
    qualified beneficiaries.
    
    
    Sec. 54.4980B-8  Paying for COBRA continuation coverage.
    
        The following questions-and-answers address paying for COBRA 
    continuation coverage:
        Q-1: Can a group health plan require payment for COBRA continuation 
    coverage?
        A-1: (a) Yes. For any period of COBRA continuation coverage, a 
    group health plan can require the payment of an amount that does not 
    exceed 102 percent of the applicable premium for that period. (See 
    paragraph (b) of this Q&A-1 for a rule permitting a plan to require 
    payment of an increased amount due to the disability extension.) The 
    applicable premium is defined in section 4980B(f)(4). A group health 
    plan can terminate a qualified beneficiary's COBRA continuation 
    coverage as of the first day of any period for which timely payment is 
    not made to the plan with respect to that qualified beneficiary (see 
    Q&A-1 of Sec. 54.4980B-7). For the meaning of timely payment, see Q&A-5 
    of this section.
        (b) A group health plan is permitted to require the payment of an 
    amount that does not exceed 150 percent of the applicable premium for 
    any period of COBRA continuation coverage covering a disabled qualified 
    beneficiary (for example, whether single or family coverage) if the 
    coverage would not be required to be made available in the absence of a 
    disability extension. (See Q&A-5 of Sec. 54.4980B-7 for rules to 
    determine whether a qualified beneficiary is entitled to a disability 
    extension.) A plan is not permitted to require the payment of an amount 
    that exceeds 102 percent of the applicable premium for any period of 
    COBRA continuation coverage to which a qualified beneficiary is 
    entitled without regard to the disability extension. Thus, if a 
    qualified beneficiary entitled to a disability extension experiences a 
    second qualifying event within the original 18-month maximum coverage 
    period, then the plan is not permitted to require the payment of an 
    amount that exceeds 102 percent of the applicable premium for any 
    period of COBRA continuation coverage. By contrast, if a qualified 
    beneficiary entitled to a disability extension experiences a second 
    qualifying event after the end of the original 18-month maximum 
    coverage period, then the plan may require the payment of an amount 
    that is up to 150 percent of the applicable premium for the remainder 
    of the period of COBRA continuation coverage (that is, from the 
    beginning of the 19th month through the end of the 36th month) as long 
    as the disabled qualified beneficiary is included in that coverage. The 
    rules of this paragraph (b) are illustrated by the following examples; 
    in each example the group health plan is subject to COBRA:
    
        Example 1. (i) An employer maintains a group health plan. The 
    plan determines the cost of covering individuals under the plan by 
    reference to two categories, individual coverage and family 
    coverage, and the applicable premium is determined for those two 
    categories. An employee and members of the employee's family are 
    covered under the plan. The employee experiences a qualifying event 
    that is the termination of the employee's employment. The employee's 
    family qualifies for the disability extension because of the 
    disability of the employee's spouse. (Timely notice of the 
    disability is provided to the plan administrator.) Timely payment of 
    the amount required by the plan for COBRA continuation coverage for 
    the family (which does not exceed 102 percent of the cost of family 
    coverage under the plan) was made to the plan with respect to the 
    employee's family for the first 18 months of COBRA continuation 
    coverage, and the disabled spouse and the rest of the family 
    continue to receive COBRA continuation coverage through the 29th 
    month.
        (ii) Under these facts, the plan may require payment of up to 
    150 percent of the applicable premium for family coverage in order 
    for the family to receive COBRA continuation coverage from the 19th 
    month through the 29th month. If the plan determined the cost of 
    coverage by reference to three categories (such as employee, 
    employee-plus-one-dependent, employee-plus-two-or-more-dependents) 
    or more than three categories, instead of two categories, the plan 
    could still require, from the 19th month through the 29th month of 
    COBRA continuation coverage, the payment of 150 percent of the cost 
    of coverage for the category of coverage that included the disabled 
    spouse.
        Example 2. (i) The facts are the same as in Example 1, except 
    that only the covered
    
    [[Page 5187]]
    
    employee elects and pays for the first 18 months of COBRA 
    continuation coverage.
        (ii) Even though the employee's disabled spouse does not elect 
    or pay for COBRA continuation coverage, the employee satisfies the 
    requirements for the disability extension to apply with respect to 
    the employee's qualifying event. Under these facts, the plan may not 
    require the payment of more than 102 percent of the applicable 
    premium for individual coverage for the entire period of the 
    employee's COBRA continuation coverage, including the period from 
    the 19th month through the 29th month. If COBRA continuation 
    coverage had been elected and paid for with respect to other 
    nondisabled members of the employee's family, then the plan could 
    not require the payment of more than 102 percent of the applicable 
    premium for family coverage (or for any other appropriate category 
    of coverage that might apply to that group of qualified 
    beneficiaries under the plan, such as employee-plus-one-dependent or 
    employee-plus-two-or-more-dependents) for those family members to 
    continue their coverage from the 19th month through the 29th month.
    
        (c) A group health plan does not fail to comply with section 
    9802(b) and Sec. 54.9802-1T(b) (which generally prohibit an individual 
    from being charged, on the basis of health status, a higher premium 
    than that charged for similarly situated individuals enrolled in the 
    plan) with respect to a qualified beneficiary entitled to the 
    disability extension merely because the plan requires payment of an 
    amount permitted under paragraph (b) of this Q&A-1.
        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?
        A-2: (a) The applicable premium for each determination period must 
    be computed and fixed by a group health plan before the determination 
    period begins. A determination period is any 12-month period selected 
    by the plan, but it must be applied consistently from year to year. The 
    determination period is a single period for any benefit package. Thus, 
    each qualified beneficiary does not have a separate determination 
    period beginning on the date (or anniversaries of the date) that COBRA 
    continuation coverage begins for that qualified beneficiary.
        (b) During a determination period, a plan can increase the amount 
    it requires to be paid for a qualified beneficiary's COBRA continuation 
    coverage only in the following three cases:
        (1) The plan has previously charged less than the maximum amount 
    permitted under Q&A-1 of this section and the increased amount required 
    to be paid does not exceed the maximum amount permitted under Q&A-1 of 
    this section;
        (2) The increase occurs during the disability extension and the 
    increased amount required to be paid does not exceed the maximum amount 
    permitted under paragraph (b) of Q&A-1 of this section; or
        (3) A qualified beneficiary changes the coverage being received 
    (see paragraph (c) of this Q&A-2 for rules on how the amount the plan 
    requires to be paid may or must change when a qualified beneficiary 
    changes the coverage being received).
        (c) If a plan allows similarly situated active employees who have 
    not experienced a qualifying event to change the coverage they are 
    receiving, then the plan must also allow each qualified beneficiary to 
    change the coverage being received on the same terms as the similarly 
    situated active employees. (See Q&A-4 in Sec. 54.4980B-5.) If a 
    qualified beneficiary changes coverage from one benefit package (or a 
    group of benefit packages) to another benefit package (or another group 
    of benefit packages), or adds or eliminates coverage for family 
    members, then the following rules apply. If the change in coverage is 
    to a benefit package, group of benefit packages, or coverage unit (such 
    as family coverage, self-plus-one-dependent, or self-plus-two-or-more-
    dependents) for which the applicable premium is higher, then the plan 
    may increase the amount that it requires to be paid for COBRA 
    continuation coverage to an amount that does not exceed the amount 
    permitted under Q&A-1 of this section as applied to the new coverage. 
    If the change in coverage is to a benefit package, group of benefit 
    packages, or coverage unit (such as individual or self-plus-one-
    dependent) for which the applicable premium is lower, then the plan 
    cannot require the payment of an amount that exceeds the amount 
    permitted under Q&A-1 of this section as applied to the new coverage.
        Q-3: Must a plan allow payment for COBRA continuation coverage to 
    be made in monthly installments?
        A-3: Yes. A group health plan must allow payment for COBRA 
    continuation coverage to be made in monthly installments. A group 
    health plan is permitted to also allow the alternative of payment for 
    COBRA continuation coverage being made at other intervals (for example, 
    weekly, quarterly, or semiannually).
        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?
        A-4: No. A plan is permitted to apply the first payment for COBRA 
    continuation coverage to the period of coverage beginning immediately 
    after the date on which coverage under the plan would have been lost on 
    account of the qualifying event. Of course, if the group health plan 
    allows a qualified beneficiary to waive COBRA continuation coverage for 
    any period before electing to receive COBRA continuation coverage, the 
    first payment is not applied to the period of the waiver.
        Q-5: What is timely payment for COBRA continuation coverage?
        A-5: (a) Except as provided in this paragraph (a) or in paragraph 
    (b) or (d) of this Q&A-5, timely payment for a period of COBRA 
    continuation coverage under a group health plan means payment that is 
    made to the plan by the date that is 30 days after the first day of 
    that period. Payment that is made to the plan by a later date is also 
    considered timely payment if either--
        (1) Under the terms of the plan, covered employees or qualified 
    beneficiaries are allowed until that later date to pay for their 
    coverage for the period; or
        (2) Under the terms of an arrangement between the employer or 
    employee organization and an insurance company, health maintenance 
    organization, or other entity that provides plan benefits on the 
    employer's or employee organization's behalf, the employer or employee 
    organization is allowed until that later date to pay for coverage of 
    similarly situated nonCOBRA beneficiaries for the period.
        (b) Notwithstanding paragraph (a) of this Q&A-5, a plan cannot 
    require payment for any period of COBRA continuation coverage for a 
    qualified beneficiary earlier than 45 days after the date on which the 
    election of COBRA continuation coverage is made for that qualified 
    beneficiary.
        (c) If, after COBRA continuation coverage has been elected for a 
    qualified beneficiary, a provider of health care (such as a physician, 
    hospital, or pharmacy) contacts the plan to confirm coverage of a 
    qualified beneficiary for a period for which the plan has not yet 
    received payment, the plan must give a complete response to the health 
    care provider about the qualified beneficiary's COBRA continuation 
    coverage rights, if any, described in paragraphs (a), (b), and (d) of 
    this Q&A-5. For example, if the plan provides coverage during the 30- 
    and 45-day grace periods described in paragraphs (a) and (b) of this 
    Q&A-5 but cancels coverage retroactively if payment is not made by the 
    end of the applicable grace
    
    [[Page 5188]]
    
    period, then the plan must inform a provider with respect to a 
    qualified beneficiary for whom payment has not been received that the 
    qualified beneficiary is covered but that the coverage is subject to 
    retroactive termination if timely payment is not made. Similarly, if 
    the plan cancels coverage if it has not received payment by the first 
    day of a period of coverage but retroactively reinstates coverage if 
    payment is made by the end of the grace period for that period of 
    coverage, then the plan must inform the provider that the qualified 
    beneficiary currently does not have coverage but will have coverage 
    retroactively to the first date of the period if timely payment is 
    made. (See paragraph (b) of Q&A-3 in Sec. 54.4980B-6 for similar rules 
    that the plan must follow in confirming coverage during the election 
    period.)
        (d) If timely payment is made to the plan in an amount that is not 
    significantly less than the amount the plan requires to be paid for a 
    period of coverage, then the amount paid is deemed to satisfy the 
    plan's requirement for the amount that must be paid, unless the plan 
    notifies the qualified beneficiary of the amount of the deficiency and 
    grants a reasonable period of time for payment of the deficiency to be 
    made. For this purpose, as a safe harbor, 30 days after the date the 
    notice is provided is deemed to be a reasonable period of time.
        (e) Payment is considered made on the date on which it is sent to 
    the plan.
    
    PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
    
        Par. 3. The authority citation for part 602 continues to read as 
    follows:
    
        Authority: 26 U.S.C. 7805.
        Par. 4. In Sec. 602.101, paragraph (c) is amended by adding entries 
    in numerical order to the table to read as follows:
    
    
    Sec. 602.101  OMB Control numbers.
    
    * * * * *
        (c) * * *
    
     
                                                                 Current OMB
         CFR part or section where identified and described      control No.
     
     
                      *        *        *        *        *
    54.4980B-6.................................................    1545-1581
    54.4980B-7.................................................    1545-1581
    54.4980B-8.................................................    1545-1581
     
                      *        *        *        *        *
     
    
        Approved: December 28, 1998.
    Robert E. Wenzel,
    Deputy Commissioner of Internal Revenue.
    
    Donald C. Lubick,
    Assistant Secretary of the Treasury (Tax Policy).
    [FR Doc. 99-1520 Filed 2-2-99; 8:45 am]
    BILLING CODE 4830-01-P
    
    
    

Document Information

Published:
02/03/1999
Department:
Internal Revenue Service
Entry Type:
Rule
Action:
Final rule.
Document Number:
99-1520
Pages:
5160-5188 (29 pages)
Docket Numbers:
TD 8812
RINs:
1545-AI93: Continuation Coverage Requirements of Group Health Plans
RIN Links:
https://www.federalregister.gov/regulations/1545-AI93/continuation-coverage-requirements-of-group-health-plans
PDF File:
99-1520.pdf
CFR: (21)
26 CFR 54.4980B-6)
26 CFR 54.4980B-3)
26 CFR 54.9801-6T(b).)
26 CFR 54.9801-6T(b)
26 CFR 602.101
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