[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Proposed Rules]
[Pages 5237-5251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1519]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[REG-121865-98]
RIN 1545-AW94
Continuation Coverage Requirements Applicable to Group Health
Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that provide
guidance under section 4980B of the Internal Revenue Code relating to
the COBRA continuation coverage requirements applicable to group health
plans. The proposed regulations in this document supplement final
regulations 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: Written or electronic comments and outlines of topics to be
discussed at the public hearing scheduled for June 8, 1999 at 10 a.m.
must be received by May 14, 1999.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-121865-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-121865-98), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.
The public hearing scheduled for June 8, 1999 will be held in room
2615 of the Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Yurlinda
Mathis at 202-622-4695; concerning submissions of comments, the
hearing, or to be placed on the building access list to attend the
hearing, LaNita Van Dyke at 202-622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
amended the Internal Revenue Code (Code) to add health care
continuation coverage requirements. These provisions, now set forth in
section 4980B,\1\ generally apply to a group health plan maintained by
an employer or employee organization, with certain exceptions, and
require such a plan to offer each qualified beneficiary who would
otherwise lose coverage as a result of a qualifying event an
opportunity to elect, within the applicable election period, COBRA
continuation coverage. The COBRA continuation coverage requirements
were amended on various occasions,\2\ most recently under the Health
Insurance Portability and Accountability Act of 1996 (HIPAA).
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\1\ The COBRA continuation coverage requirements were initially
set forth in section 162(k), but were moved to section 4980B by the
Technical and Miscellaneous Revenue Act of 1988 (TAMRA). TAMRA
changed the sanction for failure to comply with the continuation
coverage requirements of the Internal Revenue Code from disallowance
of certain employer deductions under section 162 (and denial of the
income exclusion under section 106(a) to certain highly compensated
employees of the employer) to an excise tax under section 4980B.
\2\ Changes affecting the COBRA continuation coverage provisions
were made under the Omnibus Budget Reconciliation Act of 1986, the
Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act
of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus
Budget Reconciliation Act of 1990, the Small Business Job Protection
Act of 1996, and the Health Insurance Portability and Accountability
Act of 1996. The statutory continuation coverage requirements have
also been affected by an amendment made to the definition of group
health plan in section 5000(b)(1) by the Omnibus Budget
Reconciliation Act of 1993; that definition is incorporated by
reference in section 4980B(g)(2).
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Proposed regulations providing guidance under the continuation
coverage requirements as originally enacted by COBRA, and as amended by
the Tax Reform Act of 1986, were published as proposed Treasury
Regulation Sec. 1.162-26 in the Federal Register of June 15, 1987 (52
FR 22716). Supplemental proposed regulations were published as proposed
Treasury Regulation Sec. 54.4980B-1 in the Federal Register of January
7, 1998 (63 FR 708). Final regulations are being published elsewhere in
this issue of the Federal Register.
The new set of proposed regulations being published in this notice
of proposed rulemaking addresses how the COBRA continuation coverage
requirements apply in business reorganizations. Also proposed are rules
relating to the interaction of the COBRA continuation coverage
requirements and the Family and Medical Leave Act of 1993, which were
previously published as Notice 94-103 (1994-2 C.B. 569), and certain
other issues. These provisions in the new set of proposed regulations
are summarized in the explanation below. For a summary of the new
proposed regulations integrated with a summary of the final
regulations, see the ``Explanation of Provisions'' section of the
preamble to the final regulations published elsewhere in this issue of
the Federal Register.
[[Page 5238]]
Explanation of Provisions
Plans That Must Comply
The new proposed regulations would make a number of changes to the
section in the final regulations that addresses which plans must comply
with the COBRA continuation coverage requirements. The principal
changes being proposed are to add rules simplifying the determination
of whether the small-employer plan exception applies, giving employers
and employee organizations broad discretion to determine the number of
group health plans that they maintain, and providing an exception for
certain health flexible spending accounts.
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.
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 rules) 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.
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,\3\ 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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\3\ 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 proposed 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
though 9833 because the benefits provided under the health FSA are
excepted benefits. (See sections 9831 and 9832.) \4\ 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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\4\ 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.
Duration of COBRA Continuation Coverage
The new proposed regulations would make two principal changes to
the section in the final regulations
[[Page 5239]]
addressing the duration of COBRA continuation coverage.
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 1987 proposed regulations incorporate the statutory bases for
terminating COBRA continuation coverage except the rule (added in 1989
and amended in 1996) 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.
Business Reorganizations
The 1987 proposed regulations provide little direct guidance on the
allocation of responsibility for COBRA continuation coverage in the
event of corporate transactions, such as a sale of stock of a
subsidiary or a sale of substantial assets. Commenters on the 1987
proposed regulations requested further guidance on corporate
transactions, pointing out that the existing degree of uncertainty
tends to drive up the costs and risks of a transaction to both buyers
and sellers. The IRS and Treasury share this view and believe also that
greater certainty helps to protect the rights of qualified
beneficiaries in these transactions. The IRS has been contacted by many
qualified beneficiaries whose COBRA continuation coverage has been
dropped or denied in the context of a corporate transaction. In many
cases, these qualified beneficiaries have been told by each of the
buyer and the seller that the other party is the one responsible for
providing them with COBRA continuation coverage.
The preamble to the 1998 proposed regulations requested comments on
a possible approach to allocating responsibility for COBRA continuation
coverage in corporate transactions. Commenters suggested that, in a
stock sale, as in an asset sale, it would be consistent with standard
commercial practice to provide that the seller retains liability for
all existing qualified beneficiaries, including those formerly
associated with the subsidiary being sold. The IRS and Treasury have
studied the comments and given consideration to several alternatives
with a view to establishing rules that will minimize the administrative
burden and transaction costs for the parties to transactions while
protecting the rights of qualified beneficiaries and maintaining
consistency with the statute.
Accordingly, the new proposed regulations 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,
[[Page 5240]]
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.
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 notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information requirement
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for
[[Page 5241]]
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (a signed original and eight (8) copies) to the IRS. Comments
are specifically requested on the clarity of the proposed regulations
and how they may be made easier to understand. All comments will be
available for public inspection and copying.
A public hearing has been scheduled for June 8, 1999, beginning at
10 a.m. in room 2615 of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time to
be devoted to each topic (signed original and eight (8) copies) by May
14, 1999. A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the scheduling of the speakers will
be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.
Drafting information. The principal author of these proposed
regulations is Russ Weinheimer, Office of the Associate Chief Counsel
(Employee Benefits and Exempt Organizations). However, other personnel
from the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 54
Excise taxes, Health care, Health insurance, Pensions, Reporting
and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 54 is proposed to be amended as follows:
PART 54--PENSION EXCISE TAXES
Paragraph 1. The authority citation for part 54 is amended in part
by adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B-9 also issued under 26 U.S.C. 4980B.
Section 54.4980B-10 also issued under 26 U.S.C. 4980B. * * *
Par. 2. Section 54.4980B-0 is amended by:
1. Revising the introductory text.
2. Adding entries for Secs. 54.4980B-9 and 54.4980B-10 at the end
of the list of sections.
3. Revising the entries for Q-3 and Q-6 of Sec. 54.4980B-2 in the
list of questions.
4. Revising the entry for Q-4 of Sec. 54.4980B-7 in the list of
questions.
5. Adding an entry for the section heading for Sec. 54.4980B-9 in
the list of questions.
6. Adding an entry for the section heading for Sec. 54.4980B-10 in
the list of questions.
The additions and revisions 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-10.
List of Sections
* * * * *
Sec. 54.4980B-9 Business reorganizations and employer withdrawals
from multiemployer plans.
Sec. 54.4980B-10 Interaction of FMLA and COBRA.
List of Questions
* * * * *
Sec. 54.4980B-2 Plans that must comply.
* * * * *
Q-3: What is a multiemployer plan?
* * * * *
Q-6: For purposes of COBRA, how is the number of group health
plans that an employer or employee organization maintains
determined?
* * * * *
Sec. 54.4980B-7 Duration of COBRA continuation coverage.
* * * * *
Q-4: When does the maximum coverage period end?
* * * * *
Sec. 54.4980B-9 Business reorganizations and employer withdrawals
from multiemployer plans.
Q-1: For purposes of this section, what are a business
reorganization, a stock sale, and an asset sale?
Q-2: In the case of a stock sale, what are the selling group,
the acquired organization, and the buying group?
Q-3: In the case of an asset sale, what are the selling group
and the buying group?
Q-4: Who is an M&A qualified beneficiary?
Q-5: In the case of a stock sale, is the sale a qualifying event
with respect to a covered employee who is employed by the acquired
organization before the sale and who continues to be employed by the
acquired organization after the sale, or with respect to the spouse
or dependent children of such a covered employee?
Q-6: In the case of an asset sale, is the sale a qualifying
event with respect to a covered employee whose employment
immediately before the sale was associated with the purchased
assets, or with respect to the spouse or dependent children of such
a covered employee who are covered under a group health plan of the
selling group immediately before the sale?
Q-7: In a business reorganization, are the buying group and the
selling group permitted to allocate by contract the responsibility
to make COBRA continuation coverage available to M&A qualified
beneficiaries?
Q-8: Which group health plan has the obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries in a
business reorganization?
Q-9: Can the cessation of contributions by an employer to a
multiemployer group health plan be a qualifying event?
Q-10: If an employer stops contributing to a multiemployer group
health plan, does the multiemployer plan have the obligation to make
COBRA continuation coverage available to a qualified beneficiary who
was receiving coverage under the multiemployer plan on the day
before the cessation of contributions and who is, or whose
qualifying event occurred in connection with, a covered employee
whose last employment prior to the qualifying event was with the
employer that has stopped contributing to the multiemployer plan?
Sec. 54.4980B-10 Interaction of FMLA and COBRA.
Q-1: In what circumstances does a qualifying event occur if an
employee does not return from leave taken under FMLA?
Q-2: If a qualifying event described in Q&A-1 of this section
occurs, when does it occur, and how is the maximum coverage period
measured?
Q-3: If an employee fails to pay the employee portion of
premiums for coverage under a group health plan during FMLA leave or
declines coverage under a group health plan during FMLA leave, does
this affect the determination of whether or when the employee has
experienced a qualifying event?
Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of
this section affected by a requirement of state or local law to
provide a period of coverage longer than that required under FMLA?
Q-5: May COBRA continuation coverage be conditioned upon
reimbursement of the premiums paid by the employer for coverage
[[Page 5242]]
under a group health plan during FMLA leave?
Par. 3. Section 54.4980B-1, A-1 is amended by:
1. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''
in its place in the last sentence of paragraph (a).
2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''
in its place in the third sentence and last sentence of paragraph (b).
3. Removing the last sentence of paragraph (c) and adding two
sentences in its place to read as follows:
Sec. 54.4980B-1 COBRA in general.
* * * * *
A-1: * * *
(c) * * * Section 54.4980B-9 contains special rules for how COBRA
applies in connection with business reorganizations and employer
withdrawals from a multiemployer plan, and Sec. 54.4980B-10 addresses
how COBRA applies for individuals who take leave under the Family and
Medical Leave Act of 1993. Unless the context indicates otherwise, any
reference in Secs. 54.4980B-1 through Sec. 54.4980B-10 to COBRA refers
to section 4980B (as amended) and to the parallel provisions of ERISA.
* * * * *
Par. 4. Section 54.4980B-2 is amended by:
1. Revising paragraph (a) in A-1.
2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''
in its place in the first sentence of paragraph (b) in A-1.
3. Revising A-2.
4. Adding Q&A-3.
5. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''
in its place in the last sentence of paragraph (a) in A-4.
6. Adding a sentence immediately before the last sentence of the
introductory text of paragraph (a) in A-5.
7. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''
in its place in the last sentence of paragraph (c) in A-5.
8. Adding paragraphs (d), (e), and (f) in A-5.
9. Adding Q&A-6.
10. Revising A-8.
11. Revising paragraph (a) in A-10.
The additions and revisions read as follows:
Sec. 54.4980B-2 Plans that must comply.
* * * * *
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. (See paragraphs (b) through (e) in Q&A-8 of this section
for rules regarding the application of the COBRA continuation coverage
requirements to certain health flexible spending arrangements.) 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. See Q&A-6 of this
section for rules to determine the number of group health plans that an
employer or employee organization maintains.
* * * * *
A-2: (a) For purposes of section 4980B, employer refers to--
(1) A person for whom services are performed;
(2) 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)(1) of this Q&A-2; and
(3) Any successor of a person described in paragraph (a)(1) or (2)
of this Q&A-2.
(b) An employer is a successor employer if it results from a
consolidation, merger, or similar restructuring of the employer or if
it is a mere continuation of the employer. See paragraph (c) in Q&A-8
of Sec. 54.4980B-9 for rules describing the circumstances in which a
purchaser of substantial assets is a successor employer to the employer
selling the assets.
Q-3: What is a multiemployer plan?
A-3: For purposes of Secs. 54.4980B-1 through 54.4980B-10, a
multiemployer plan is a plan to which more than one employer is
required to contribute, that is maintained pursuant to one or more
collective bargaining agreements between one or more employee
organizations and more than one employer, and that satisfies such other
requirements as the Secretary of Labor may prescribe by regulation.
Whenever reference is made in Secs. 54.4980B-1 through 54.4980B-10 to a
plan of or maintained by an employer or employee organization, the
reference includes a multiemployer plan.
* * * * *
A-5: (a) * * * See Q&A-6 of this section for rules to determine the
number of plans that an employer or employee organization maintains. *
* *
* * * * *
(d) In determining the number of the employees of an employer, each
full-time employee is counted as one employee and each part-time
employee is counted as a fraction of an employee, determined in
accordance with paragraph (e) of this Q&A-5.
(e) An employer may determine the number of its employees on a
daily basis or a pay period basis. The basis used by the employer must
be used with respect to all employees of the employer and must be used
for the entire year for which the number of employees is being
determined. If an employer determines the number of its employees on a
daily basis, it must determine the actual number of full-time employees
on each typical business day and the actual number of part-time
employees and the hours worked by each of those part-time employees on
each typical business day. Each full-time employee counts as one
employee on each typical business day and each part-time employee
counts as a fraction, with the numerator of the fraction equal to the
number of hours worked by that employee and the denominator equal to
the number of hours that must be worked on a typical business day in
order to be considered
[[Page 5243]]
a full-time employee. If an employer determines the number of its
employees on a pay period basis, it must determine the actual number of
full-time employees employed during that pay period and the actual
number of part-time employees employed and the hours worked by each of
those part-time employees during the pay period. For each day of that
pay period, each full-time employee counts as one employee and each
part-time employee counts as a fraction, with the numerator of the
fraction equal to the number of hours worked by that employee during
that pay period and the denominator equal to the number of hours that
must be worked during that pay period in order to be considered a full-
time employee. The determination of the number of hours required to be
considered a full-time employee is based upon the employer's employment
practices, except that in no event may the hours required to be
considered a full-time employee exceed eight hours for any day or 40
hours for any week.
(f) In the case of a multiemployer plan, the determination of
whether the plan is a small-employer plan on any particular date
depends on which employers are contributing to the plan on that date
and on the workforce of those employers during the preceding calendar
year. If a plan that is otherwise subject to COBRA ceases to be a
small-employer plan because of the addition during a calendar year of
an employer that did not normally employ fewer than 20 employees on a
typical business day during the preceding calendar year, the plan
ceases to be excepted from COBRA immediately upon the addition of the
new employer. In contrast, if the plan ceases to be a small-employer
plan by reason of an increase during a calendar year in the workforce
of an employer contributing to the plan, the plan ceases to be excepted
from COBRA on the January 1 immediately following the calendar year in
which the employer's workforce increased.
* * * * *
Q-6: For purposes of COBRA, how is the number of group health plans
that an employer or employee organization maintains determined?
A-6: (a) The rules of this Q&A-6 apply, for purposes of COBRA, in
determining the number of group health plans that an employer or
employee organization maintains. Except as provided in paragraph (c) of
this Q&A-6, in the case of health care benefits provided under an
arrangement or arrangements of an employer or employee organization,
the number of group health plans pursuant to which those benefits are
provided is determined by the instruments governing the arrangement or
arrangements. However, a multiemployer plan and a nonmultiemployer plan
are always separate plans. All references elsewhere in Secs. 54.4980B-1
through 54.4980B-10 to a group health plan are references to a group
health plan as determined under Q&A-1 of this section and this Q&A-6.
(b) 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, except benefits for qualified long-term care
services (as defined in section 7702B(c)), provided by a corporation,
partnership, or other entity or trade or business, or by an employee
organization, constitute one group health plan.
(c) Notwithstanding paragraph (a) of this Q&A-6, if a principal
purpose of establishing separate plans is to evade any requirement of
law, then the separate plans will be considered a single plan to the
extent necessary to prevent the evasion.
(d) The significance of treating an arrangement as two or more
separate group health plans is illustrated by the following examples:
Example 1. (i) Employer X maintains a single group health plan,
which provides major medical and prescription drug benefits.
Employer Y maintains two group health plans; one provides major
medical benefits and the other provides prescription drug benefits.
(ii) X's plan could comply with the COBRA continuation coverage
requirements by giving a qualified beneficiary experiencing a
qualifying event with respect to X's plan the choice of either
electing both major medical and prescription drug benefits or not
receiving any COBRA continuation coverage under X's plan. By
contrast, for Y's plans to comply with the COBRA continuation
coverage requirements, a qualified beneficiary experiencing a
qualifying event with respect to each of Y's plans must be given the
choice of electing COBRA continuation coverage under either the
major medical plan or the prescription drug plan or both.
Example 2. If a joint board of trustees administers one
multiemployer plan, that plan will fail to qualify for the small-
employer plan exception if any one of the employers whose employees
are covered under the plan normally employed 20 or more employees
during the preceding calendar year. However, if the joint board of
trustees maintains two or more multiemployer plans, then the
exception would be available with respect to each of those plans in
which each of the employers whose employees are covered under the
plan normally employed fewer than 20 employees during the preceding
calendar year.
* * * * *
A-8: (a) 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. See paragraphs (b) through (e) of this
Q&A-8 for rules limiting the obligations of certain health flexible
spending arrangements. The rules of this paragraph (a) 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).
(b) If a health flexible spending arrangement (health FSA), within
the meaning of regulations project EE-130-86 (1989-1 C.B. 944, 986)
(see Sec. 601.601(d)(2) of this chapter), satisfies the two conditions
in paragraph (c) of this Q&A-8 for a plan year, the obligation of the
health FSA to make COBRA continuation coverage available to a qualified
beneficiary who
[[Page 5244]]
experiences a qualifying event in that plan year is limited in
accordance with paragraphs (d) and (e) of this Q&A-8, as illustrated by
an example in paragraph (f) of this Q&A-8.
(c) The conditions of this paragraph (c) are satisfied if--
(1) Benefits provided under the health FSA are excepted benefits
within the meaning of sections 9831 and 9832; and
(2) The maximum amount that the health FSA can require to be paid
for a year of COBRA continuation coverage under Q&A-1 of Sec. 54.4980B-
8 equals or exceeds the maximum benefit available under the health FSA
for the year.
(d) If the conditions in paragraph (c) of this Q&A-8 are satisfied
for a plan year, then the health FSA is not obligated to make COBRA
continuation coverage available for any subsequent plan year to any
qualified beneficiary who experiences a qualifying event during that
plan year.
(e) If the conditions in paragraph (c) of this Q&A-8 are satisfied
for a plan year, the health FSA is not obligated to make COBRA
continuation coverage available for that plan year to any qualified
beneficiary who experiences a qualifying event during that plan year
unless, as of the date of the qualifying event, the qualified
beneficiary can become entitled to receive during the remainder of the
plan year a benefit that exceeds the maximum amount that the health FSA
is permitted to require to be paid for COBRA continuation coverage for
the remainder of the plan year. In determining the amount of the
benefit that a qualified beneficiary can become entitled to receive
during the remainder of the plan year, the health FSA may deduct from
the maximum benefit available to that qualified beneficiary for the
year (based on the election made under the health FSA for that
qualified beneficiary before the date of the qualifying event) any
reimbursable claims submitted to the health FSA for that plan year
before the date of the qualifying event.
(f) The rules of paragraphs (b), (c), (d), and (e) of this Q&A-8
are illustrated by the following example:
Example: (i) An employer maintains a group health plan providing
major medical benefits and a group health plan that is a health FSA,
and the plan year for each plan is the calendar year. Both the plan
providing major medical benefits and the health FSA are subject to
COBRA. Under the health FSA, during an open season before the
beginning of each calendar year, employees can elect to reduce their
compensation during the upcoming year by up to $1200 per year and
have that same amount contributed to a health flexible spending
account. The employer contributes an additional amount to the
account equal to the employee's salary reduction election for the
year. Thus, the maximum amount available to an employee under the
health FSA for a year is two times the amount of the employee's
salary reduction election for the year. This amount may be paid to
the employee during the year as reimbursement for health expenses
not covered by the employer's major medical plan (such as
deductibles, copayments, prescription drugs, or eyeglasses). The
employer determined, in accordance with section 4980B(f)(4), that a
reasonable estimate of the cost of providing coverage for similarly
situated nonCOBRA beneficiaries for 2002 under this health FSA is
equal to two times their salary reduction election for 2002 and,
thus, that two times the salary reduction election is the applicable
premium for 2002.
(ii) Because the employer provides major medical benefits under
another group health plan, and because the maximum benefit that any
employee can receive under the health FSA is not greater than two
times the employee's salary reduction election for the plan year,
benefits under this health FSA are excepted benefits within the
meaning of sections 9831 and 9832. Thus, the first condition of
paragraph (c) of this Q&A-8 is satisfied for the year. The maximum
amount that a plan can require to be paid for coverage (outside of
coverage required to be made available due to a disability
extension) under Q&A-1 of Sec. 54.4980B-8 is 102 percent of the
applicable premium. Thus, the maximum amount that the health FSA can
require to be paid for coverage for the 2002 plan year is 2.04 times
the employee's salary reduction election for the plan year. Because
the maximum benefit available under the health FSA is 2.0 times the
employee's salary reduction election for the year, the maximum
benefit available under the health FSA for the year is less than the
maximum amount that the health FSA can require to be paid for
coverage for the year. Thus, the second condition in paragraph (c)
of this Q&A-8 is also satisfied for the 2002 plan year. Because both
conditions in paragraph (c) of this Q&A-8 are satisfied for 2002,
with respect to any qualifying event occurring in 2002, the health
FSA is not obligated to make COBRA continuation coverage available
for any year after 2002.
(iii) Whether the health FSA is obligated to make COBRA
continuation coverage available in 2002 to a qualified beneficiary
with respect to a qualifying event that occurs in 2002 depends upon
the maximum benefit that would be available to the qualified
beneficiary under COBRA continuation coverage for that plan year.
Case 1: Employee B has elected to reduce B's salary by $1200 for
2002. Thus, the maximum benefit that B can become entitled to
receive under the health FSA during the entire year is $2400. B
experiences a qualifying event that is the termination of B's
employment on May 31, 2002. As of that date, B had submitted $300 of
reimbursable expenses under the health FSA. Thus, the maximum
benefit that B could become entitled to receive for the remainder of
2002 is $2100. The maximum amount that the health FSA can require to
be paid for COBRA continuation coverage for the remainder of 2002 is
102 percent times \1/12\ of the applicable premium for 2002 times
the number of months remaining in 2002 after the date of the
qualifying event. In B's case, the maximum amount that the health
FSA can require to be paid for COBRA continuation coverage for 2002
is 2.04 times $1200, or $2448. One-twelfth of $2448 is $204. Because
seven months remain in the plan year, the maximum amount that the
health FSA can require to be paid for B's coverage for the remainder
of the year is seven times $204, or $1428. Because $1428 is less
than the maximum benefit that B could become entitled to receive for
the remainder of the year ($2100), the health FSA is required to
make COBRA continuation coverage available to B for the remainder of
2002 (but not for any subsequent year).
(iv) Case 2: The facts are the same as in Case 1 except that B
had submitted $1000 of reimbursable expenses as of the date of the
qualifying event. In that case, the maximum benefit available to B
for the remainder of the year would be $1400 instead of $2100.
Because the maximum amount that the health FSA can require to be
paid for B's coverage is $1428, and because the $1400 maximum
benefit for the remainder of the year does not exceed $1428, the
health FSA is not obligated to make COBRA continuation coverage
available to B in 2002 (or any later year). (Of course, the
administrator of the health FSA is permitted to make COBRA
continuation coverage available to every qualified beneficiary in
the year that the qualified beneficiary's qualifying event occurs in
order to avoid having to determine the maximum benefit available for
each qualified beneficiary for the remainder of the plan year.)
* * * * *
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
(see Q&A-3 of this section for a definition of multiemployer plan) the
excise tax is imposed on the plan.
* * * * *
Sec. 54.4980 B-3 [Amended]
Par. 5. In Sec. 54.4980B-3, the language ``54.4980B-8'' is removed
and ``54.4980B-10'' is added in its place in the last sentence of
paragraph (a)(3) and the first sentence of paragraph (g) in A-1; in the
first and second sentences of paragraph (a)(1), the first sentence of
paragraph (a)(2), and the first and last sentences in paragraph (b) in
A-2; and in A-3.
Par. 6. Section 54.4980B-4 is amended by:
1. Adding a sentence at the end of paragraph (a) in A-1.
2. Removing the language ``Q&A-1'' and adding ``Q&A-4'' in its
place in the fifth sentence of paragraph (c) of A-1.
3. Revising the third sentence in paragraph (e) of A-1.
The addition and revision read as follows:
[[Page 5245]]
Sec. 54.4980B-4 Qualifying events.
* * * * *
A-1: (a) * * * See Q&A-1 through Q&A-3 of Sec. 54.4980B-10 for
special rules in the case of leave taken under the Family and Medical
Leave Act of 1993 (29 U.S.C. 2601-2619).
* * * * *
(e) * * * For example, an absence from work due to disability, a
temporary layoff, or any other reason (other than due to leave that is
FMLA leave; see Sec. 54.4980B-10) is a reduction of hours of a covered
employee's employment if there is not an immediate termination of
employment. * * *
* * * * *
Sec. 54.4980B-5 [Amended]
Par. 7. In Sec. 54.4980B-5, the penultimate sentence in paragraph
(a) of A-1 is amended by removing the language ``54.4980B-8'' and
adding ``54.4980B-10'' in its place.
Par. 8. In Sec. 54.4980B-6, the Example in paragraph (c) of A-1 is
revised to read as follows:
Sec. 54.4980B-6 Electing COBRA continuation coverage.
* * * * *
A-1: * * *
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 paragraph (b) of Q&A-4
of Sec. 54.4980B-7).
(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 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 (see Q&A-4 of Sec. 54.4980B-7),
and in certain circumstances might be provided for a shorter period
(see Q&A-1 of Sec. 54.4980B-7).
* * * * *
Par. 9. Section 54.4980B-7 is amended by:
1. Revising paragraph (a) of A-1.
2. Adding Q&A-4.
3. Revising the second sentence in paragraph (c) of A-5.
4. Revising paragraph (b) of Q&A-6.
5. Removing the language ``Q&A-1'' and adding ``Q&A-4'' in its
place in paragraph (a) of A-7.
The addition and revisions read as follows:
Sec. 54.4980B-7 Duration of COBRA continuation coverage.
* * * * *
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 coverage period (see Q&A-4 of this
section);
(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;
(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; and
(6) In the case of a qualified beneficiary entitled to a disability
extension (see Q&A-5 of this section), the later of--
(i) Either 29 months after the date of the qualifying event, or the
first day of the month that is more than 30 days after the date of a
final determination under Title II or XVI of the Social Security Act
(42 U.S.C. 401-433 or 1381-1385) that the disabled qualified
beneficiary whose disability resulted in the qualified beneficiary's
being entitled to the disability extension is no longer disabled,
whichever is earlier; or
(ii) The end of the maximum coverage period that applies to the
qualified beneficiary without regard to the disability extension.
* * * * *
Q-4: When does the maximum coverage period end?
A-4: (a) Except as otherwise provided in this Q&A-4, the maximum
coverage period ends 36 months after the qualifying event. The maximum
coverage period for 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 maximum coverage period for the qualifying
event giving rise to the period of COBRA continuation coverage during
which the child was born or placed for adoption. Paragraph (b) of this
Q&A-4 describes the starting point from which the end of the maximum
coverage period is measured. The date that the maximum coverage period
ends is described in paragraph (c) of this Q&A-4 in a case where the
qualifying event is a termination of employment or reduction of hours
of employment, in paragraph (d) of this Q&A-4 in a case where a covered
employee becomes entitled to Medicare benefits under Title XVIII of the
Social Security Act (42 U.S.C. 1395-1395ggg) before experiencing a
qualifying event that is a termination of employment or reduction of
hours of employment, and in paragraph (e) of this Q&A-4 in the case of
a qualifying event that is the bankruptcy of the employer. See Q&A-8 of
Sec. 54.4980B-2 for limitations that apply to certain health flexible
spending arrangements. See also Q&A-6 of this section in the case of
multiple qualifying events. Nothing in Secs. 54.4980B-1 through
54.4980B-10 prohibits a group health plan from providing coverage that
continues beyond the end of the maximum coverage period.
(b)(1) The end of the maximum coverage period is measured from the
date of the qualifying event even if the qualifying event does not
result in a loss of coverage under the plan until a later date. If,
however, coverage under the plan is lost at a later date and the plan
provides for the extension of the required periods, then the maximum
coverage period is measured from the date when coverage is lost. A plan
provides for the extension of the required periods if it provides
both--
(i) That the 30-day notice period (during which the employer is
required to notify the plan administrator of the occurrence of certain
qualifying events
[[Page 5246]]
such as the death of the covered employee or the termination of
employment or reduction of hours of employment of the covered employee)
begins on the date of the loss of coverage rather than on the date of
the qualifying event; and
(ii) That the end of the maximum coverage period is measured from
the date of the loss of coverage rather than from the date of the
qualifying event.
(2) In the case of a plan that provides for the extension of the
required periods, whenever the rules of Secs. 54.4980B-1 through
54.4980B-10 refer to the measurement of a period from the date of the
qualifying event, those rules apply in such a case by measuring the
period instead from the date of the loss of coverage.
(c) In the case of a qualifying event that is a termination of
employment or reduction of hours of employment, the maximum coverage
period ends 18 months after the qualifying event if there is no
disability extension, and 29 months after the qualifying event if there
is a disability extension. See Q&A-5 of this section for rules to
determine if there is a disability extension. If there is a disability
extension and the disabled qualified beneficiary is later determined to
no longer be disabled, then a plan may terminate the COBRA continuation
coverage of an affected qualified beneficiary before the end of the
disability extension; see paragraph (a)(6) in Q&A-1 of this section.
(d)(1) If a covered employee becomes entitled to Medicare benefits
under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg)
before experiencing a qualifying event that is a termination of
employment or reduction of hours of employment, the maximum coverage
period for qualified beneficiaries other than the covered employee ends
on the later of--
(i) 36 months after the date the covered employee became entitled
to Medicare benefits; or
(ii) 18 months (or 29 months, if there is a disability extension)
after the date of the covered employee's termination of employment or
reduction of hours of employment.
(2) See paragraph (b) of Q&A-3 of this section regarding when a
covered employee becomes entitled to Medicare benefits.
(e) In the case of a qualifying event that is the bankruptcy of the
employer, the maximum coverage period for a qualified beneficiary who
is the retired covered employee ends on the date of the retired covered
employee's death. The maximum coverage period for a qualified
beneficiary who is the spouse, surviving spouse, or dependent child of
the retired covered employee ends on the earlier of--
(1) The date of the qualified beneficiary's death; or
(2) The date that is 36 months after the death of the retired
covered employee.
* * * * *
A-5: * * *
(c) * * * 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 (as described in paragraph (b) of
Q&A-4 of this section) then the period of the first 60 days of COBRA
continuation coverage is measured from the date on which the coverage
would be lost). * * *
* * * * *
A-6: * * *
(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 an 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; see
paragraph (b) in Q&A-4 of this section). For example, if an 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. See Q&A-8(b) of Sec. 54.4980B-2 for a
special rule that applies to certain health flexible spending
arrangements.
* * * * *
Par. 10. Sections 54.4980B-9 and 54.4980B-10 are added to read as
follows:
Sec. 54.4980B-9 Business reorganizations and employer withdrawals from
multiemployer plans.
The following questions-and-answers address who has the obligation
to make COBRA continuation coverage available to affected qualified
beneficiaries in the context of business reorganizations and employer
withdrawals from multiemployer plans:
Q-1: For purposes of this section, what are a business
reorganization, a stock sale, and an asset sale?
A-1: For purposes of this section:
(a) A business reorganization is a stock sale or an asset sale.
(b) A stock sale is a transfer of stock in a corporation that
causes the corporation to become a different employer or a member of a
different employer. (See Q&A-2 of Sec. 54.4980B-2, which defines
employer to include all members of a controlled group of corporations.)
Thus, for example, a sale or distribution of stock in a corporation
that causes the corporation to cease to be a member of one controlled
group of corporations, whether or not it becomes a member of another
controlled group of corporations, is a stock sale.
(c) An asset sale is a sale of substantial assets, such as a plant
or division or substantially all the assets of a trade or business.
(d) The rules of Sec. 1.414(b)-1 of this chapter apply in
determining what constitutes a controlled group of corporations, and
the rules of Secs. 1.414(c)-1 through 1.414(c)-5 of this chapter apply
in determining what constitutes a group of trades or businesses under
common control.
[[Page 5247]]
Q-2: In the case of a stock sale, what are the selling group, the
acquired organization, and the buying group?
A-2: In the case of a stock sale--
(a) The selling group is the controlled group of corporations, or
the group of trades or businesses under common control, of which a
corporation ceases to be a member as a result of the stock sale;
(b) The acquired organization is the corporation that ceases to be
a member of the selling group as a result of the stock sale; and
(c) The buying group is the controlled group of corporations, or
the group of trades or businesses under common control, of which the
acquired organization becomes a member as a result of the stock sale.
If the acquired organization does not become a member of such a group,
the buying group is the acquired organization.
Q-3: In the case of an asset sale, what are the selling group and
the buying group?
A-3: In the case of an asset sale--
(a) The selling group is the controlled group of corporations or
the group of trades or businesses under common control that includes
the corporation or other trade or business that is selling the assets;
and
(b) The buying group is the controlled group of corporations or the
group of trades or businesses under common control that includes the
corporation or other trade or business that is buying the assets.
Q-4: Who is an M&A qualified beneficiary?
A-4: (a) Asset sales: In the case of an asset sale, an individual
is an M&A qualified beneficiary if the individual is a qualified
beneficiary whose qualifying event occurred prior to or in connection
with the sale and who is, or whose qualifying event occurred in
connection with, a covered employee whose last employment prior to the
qualifying event was associated with the assets being sold.
(b) Stock sales: In the case of a stock sale, an individual is an
M&A qualified beneficiary if the individual is a qualified beneficiary
whose qualifying event occurred prior to or in connection with the sale
and who is, or whose qualifying event occurred in connection with, a
covered employee whose last employment prior to the qualifying event
was with the acquired organization.
(c) In the case of a qualified beneficiary who has experienced more
than one qualifying event with respect to her or his current right to
COBRA continuation coverage, the qualifying event referred to in
paragraphs (a) and (b) of this Q&A-4 is the first qualifying event.
Q-5: In the case of a stock sale, is the sale a qualifying event
with respect to a covered employee who is employed by the acquired
organization before the sale and who continues to be employed by the
acquired organization after the sale, or with respect to the spouse or
dependent children of such a covered employee?
A-5: No. A covered employee who continues to be employed by the
acquired organization after the sale does not experience a termination
of employment as a result of the sale. Accordingly, the sale is not a
qualifying event with respect to the covered employee, or with respect
to the covered employee's spouse or dependent children, regardless of
whether they are provided with group health coverage after the sale,
and neither the covered employee, nor the covered employee's spouse or
dependent children, become qualified beneficiaries as a result of the
sale.
Q-6: In the case of an asset sale, is the sale a qualifying event
with respect to a covered employee whose employment immediately before
the sale was associated with the purchased assets, or with respect to
the spouse or dependent children of such a covered employee who are
covered under a group health plan of the selling group immediately
before the sale?
A-6: (a) Yes, unless--
(1) The buying group is a successor employer under paragraph (c) of
Q&A-8 of this section or Q&A-2 of Sec. 54.4980B-2, and the covered
employee is employed by the buying group immediately after the sale; or
(2) The covered employee (or the spouse or any dependent child of
the covered employee) does not lose coverage (within the meaning of
paragraph (c) in Q&A-1 of Sec. 54.4980B-4) under a group health plan of
the selling group after the sale.
(b) Unless the conditions in paragraph (a)(1) or (2) of this Q&A-6
are satisfied, such a covered employee experiences a termination of
employment with the selling group as a result of the asset sale,
regardless of whether the covered employee is employed by the buying
group or whether the covered employee's employment is associated with
the purchased assets after the sale. Accordingly, the covered employee,
and the spouse and dependent children of the covered employee who lose
coverage under a plan of the selling group in connection with the sale,
are M&A qualified beneficiaries in connection with the sale.
Q-7: In a business reorganization, are the buying group and the
selling group permitted to allocate by contract the responsibility to
make COBRA continuation coverage available to M&A qualified
beneficiaries?
A-7: Yes. Nothing in this section prohibits a selling group and a
buying group from allocating to one or the other of the parties in a
purchase agreement the responsibility to provide the coverage required
under Secs. 54.4980B-1 through 54.4980B-10. However, if and to the
extent that the party assigned this responsibility under the terms of
the contract fails to perform, the party who has the obligation under
Q&A-8 of this section to make COBRA continuation coverage available to
M&A qualified beneficiaries continues to have that obligation.
Q-8: Which group health plan has the obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries in a
business reorganization?
A-8: (a) In the case of a business reorganization (whether a stock
sale or an asset sale), so long as the selling group maintains a group
health plan after the sale, a group health plan maintained by the
selling group has the obligation to make COBRA continuation coverage
available to M&A qualified beneficiaries with respect to that sale.
This Q&A-8 prescribes rules for cases in which the selling group ceases
to provide any group health plan to any employee in connection with the
sale. Paragraph (b) of this Q&A-8 contains these rules for stock sales,
and paragraph (c) of this Q&A-8 contains these rules for asset sales.
Neither a stock sale nor an asset sale has any effect on the COBRA
continuation coverage requirements applicable to any group health plan
for any period before the sale.
(b)(1) In the case of a stock sale, if the selling group ceases to
provide any group health plan to any employee in connection with the
sale, a group health plan maintained by the buying group has the
obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to that stock sale. A group health
plan of the buying group has this obligation beginning on the later of
the following two dates and continuing as long as the buying group
continues to maintain a group health plan (but subject to the rules in
Sec. 54.4980B-7, relating to the duration of COBRA continuation
coverage)--
(i) The date the selling group ceases to provide any group health
plan to any employee; or
(ii) The date of the stock sale.
[[Page 5248]]
(2) The determination of whether the selling group's cessation of
providing any group health plan to any employee is in connection with
the stock sale is based on all of the relevant facts and circumstances.
A group health plan of the buying group does not, as a result of the
stock sale, have an obligation to make COBRA continuation coverage
available to those qualified beneficiaries of the selling group who are
not M&A qualified beneficiaries with respect to that sale.
(c)(1) In the case of an asset sale, if the selling group ceases to
provide any group health plan to any employee in connection with the
sale and if the buying group continues the business operations
associated with the assets purchased from the selling group without
interruption or substantial change, then the buying group is a
successor employer to the selling group in connection with that asset
sale. If the buying group is a successor employer, a group health plan
maintained by the buying group has the obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries with
respect to that asset sale. A group health plan of the buying group has
this obligation beginning on the later of the following two dates and
continuing as long as the buying group continues to maintain a group
health plan (but subject to the rules in Sec. 54.4980B-7, relating to
the duration of COBRA continuation coverage)--
(i) The date the selling group ceases to provide any group health
plan to any employee; or
(ii) The date of the asset sale.
(2) The determination of whether the selling group's cessation of
providing any group health plan to any employee is in connection with
the asset sale is based on all of the relevant facts and circumstances.
A group health plan of the buying group does not, as a result of the
asset sale, have an obligation to make COBRA continuation coverage
available to those qualified beneficiaries of the selling group who are
not M&A qualified beneficiaries with respect to that sale.
(d) The rules of Q&A-1 through Q&A-7 of this section and this Q&A-8
are illustrated by the following examples; in each example, each group
health plan is subject to COBRA:
Stock Sale Examples
Example 1. (i) Selling Group S consists of three corporations,
A, B, and C. Buying Group P consists of two corporations, D and E. P
enters into a contract to purchase all the stock of C from S
effective July 1, 2002. Before the sale of C, S maintains a single
group health plan for the employees of A, B, and C (and their
families). P maintains a single group health plan for the employees
of D and E (and their families). Effective July 1, 2002, the
employees of C (and their families) become covered under P 's plan.
On June 30, 2002, there are 48 qualified beneficiaries receiving
COBRA continuation coverage under S 's plan, 15 of whom are M&A
qualified beneficiaries with respect to the sale of C. (The other 33
qualified beneficiaries had qualifying events in connection with a
covered employee whose last employment before the qualifying event
was with either A or B.)
(ii) Under these facts, S 's plan continues to have the
obligation to make COBRA continuation coverage available to the 15
M&A qualified beneficiaries under S 's plan after the sale of C to
P. The employees who continue in employment with C do not experience
a qualifying event by virtue of P 's acquisition of C. If they
experience a qualifying event after the sale, then the group health
plan of P has the obligation to make COBRA continuation coverage
available to them.
Example 2. (i) Selling Group S consists of three corporations,
A, B, and C. Each of A, B, and C maintains a group health plan for
its employees (and their families). Buying Group P consists of two
corporations, D and E. P enters into a contract to purchase all of
the stock of C from S effective July 1, 2002. As of June 30, 2002,
there are 14 qualified beneficiaries receiving COBRA continuation
coverage under C 's plan. C continues to employ all of its employees
and continues to maintain its group health plan after being acquired
by P on July 1, 2002.
(ii) Under these facts, C is an acquired organization and the 14
qualified beneficiaries under C 's plan are M&A qualified
beneficiaries. A group health plan of S (that is, either the plan
maintained by A or the plan maintained by B) has the obligation to
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries. S and P could negotiate to have C 's plan continue to
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries. In such a case, neither A 's plan nor B 's plan would
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries unless C 's plan failed to fulfill its contractual
responsibility to make COBRA continuation coverage available to the
M&A qualified beneficiaries. C 's employees (and their spouses and
dependent children) do not experience a qualifying event in
connection with P 's acquisition of C, and consequently no plan
maintained by either P or S has any obligation to make COBRA
continuation coverage available to C 's employees (or their spouses
or dependent children) in connection with the transfer of stock in C
from S to P.
Example 3. (i) The facts are the same as in Example 2, except
that C ceases to employ two employees on June 30, 2002, and those
two employees never become covered under P 's plan.
(ii) Under these facts, the two employees experience a
qualifying event on June 30, 2002 because their termination of
employment causes a loss of group health coverage. A group health
plan of S (that is, either the plan maintained by A or the plan
maintained by B) has the obligation to make COBRA continuation
coverage available to the two employees (and to any spouse or
dependent child of the two employees who loses coverage under C 's
plan in connection with the termination of employment of the two
employees) because they are M&A qualified beneficiaries with respect
to the sale of C.
Example 4. (i) Selling Group S consists of three corporations,
A, B, and C. Buying Group P consists of two corporations, D and E. P
enters into a contract to purchase all of the stock of C from S
effective July 1, 2002. Before the sale of C, S maintains a single
group health plan for the employees of A, B, and C (and their
families). P maintains a single group health plan for the employees
of D and E (and their families). Effective July 1, 2002, the
employees of C (and their families) become covered under P 's plan.
On June 30, 2002, there are 25 qualified beneficiaries receiving
COBRA continuation coverage under S 's plan, 20 of whom are M&A
qualified beneficiaries with respect to the sale of C. (The other
five qualified beneficiaries had qualifying events in connection
with a covered employee whose last employment before the qualifying
event was with either A or B.) S terminates its group health plan
effective June 30, 2002 and begins to liquidate the assets of A and
B and to lay off the employees of A and B.
(ii) Under these facts, S ceases to provide a group health plan
to any employee in connection with the sale of C to P. Thus,
beginning July 1, 2002 P's plan has the obligation to make COBRA
continuation coverage available to the 20 M&A qualified
beneficiaries, but P is not obligated to make COBRA continuation
coverage available to the other 5 qualified beneficiaries with
respect to S's plan as of June 30, 2002 or to any of the employees
of A or B whose employment is terminated by S (or to any of those
employees' spouses or dependent children).
Asset Sale Examples
Example 5. (i) Selling Group S provides group health plan
coverage to employees at each of its operating divisions. S sells
the assets of one of its divisions to Buying Group P. Under the
terms of the group health plan covering the employees at the
division being sold, their coverage will end on the date of the
sale. P hires all but one of those employees, gives them the same
positions that they had with S before the sale, and provides them
with coverage under a group health plan. Immediately before the
sale, there are two qualified beneficiaries receiving COBRA
continuation coverage under a group health plan of S whose
qualifying events occurred in connection with a covered employee
whose last employment prior to the qualifying event was associated
with the assets sold to P.
(ii) These two qualified beneficiaries are M&A qualified
beneficiaries with respect to the asset sale to P. Under these
facts, a group health plan of S retains the obligation to make COBRA
continuation coverage available to these two M&A qualified
[[Page 5249]]
beneficiaries. In addition, the one employee P does not hire as well
as all of the employees P hires (and the spouses and dependent
children of these employees) who were covered under a group health
plan of S on the day before the sale are M&A qualified beneficiaries
with respect to the sale. A group health plan of S also has the
obligation to make COBRA continuation coverage available to these
M&A qualified beneficiaries.
Example 6. (i) Selling Group S provides group health plan
coverage to employees at each of its operating divisions. S sells
substantially all of the assets of all of its divisions to Buying
Group P, and S ceases to provide any group health plan to any
employee on the date of the sale. P hires all but one of S's
employees on the date of the asset sale by S, gives those employees
the same positions that they had with S before the sale, and
continues the business operations of those divisions without
substantial change or interruption. P provides these employees with
coverage under a group health plan. Immediately before the sale,
there are 10 qualified beneficiaries receiving COBRA continuation
coverage under a group health plan of S whose qualifying events
occurred in connection with a covered employee whose last employment
prior to the qualifying event was associated with the assets sold to
P.
(ii) These 10 qualified beneficiaries are M&A qualified
beneficiaries with respect to the asset sale to P. Under these
facts, P is a successor employer described in paragraph (c) of this
Q&A-8. Thus, a group health plan of P has the obligation to make
COBRA continuation coverage available to these 10 M&A qualified
beneficiaries.
(iii) The one employee that P does not hire and the family
members of that employee are also M&A qualified beneficiaries with
respect to the sale. A group health plan of P also has the
obligation to make COBRA continuation coverage available to these
M&A qualified beneficiaries.
(iv) The employees who continue in employment in connection with
the asset sale (and their family members) and who were covered under
a group health plan of S on the day before the sale are not M&A
qualified beneficiaries because P is a successor employer to S in
connection with the asset sale. Thus, no group health plan of P has
any obligation to make COBRA continuation coverage available to
these continuing employees with respect to the qualifying event that
resulted from their losing coverage under S's plan in connection
with the asset sale.
Example 7. (i) Selling Group S provides group health plan
coverage to employees at each of its two operating divisions. S
sells the assets of one of its divisions to Buying Group P1. Under
the terms of the group health plan covering the employees at the
division being sold, their coverage will end on the date of the
sale. P1 hires all but one of those employees, gives them the same
positions that they had with S before the sale, and provides them
with coverage under a group health plan.
(ii) Under these facts, a group health plan of S has the
obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to the sale to P1. (If an M&A
qualified beneficiary first became covered under P1's plan after
electing COBRA continuation coverage under S's plan, then S's plan
could terminate the COBRA continuation coverage once the M&A
qualified beneficiary became covered under P1's plan, provided that
the remaining conditions of Q&A-2 of Sec. 54.4980B-7 were
satisfied.)
(iii) Several months after the sale to P1, S sells the assets of
its remaining division to Buying Group P2, and S ceases to provide
any group health plan to any employee on the date of that sale.
Thus, under Q&A-1 of Sec. 54.4980B-7, S ceases to have an obligation
to make COBRA continuation coverage available to any qualified
beneficiary on the date of the sale to P2. P1 and P2 are unrelated
organizations.
(iv) Even if it was foreseeable that S would sell its remaining
division to an unrelated third party after the sale to P1, under
these facts the cessation of S to provide any group health plan to
any employee on the date of the sale to P2 is not in connection with
the asset sale to P1. Thus, even after the date S ceases to provide
any group health plan to any employee, no group health plan of P1
has any obligation to make COBRA continuation coverage available to
M&A qualified beneficiaries with respect to the asset sale to P1 by
S. If P2 is a successor employer under the rules of paragraph (c) of
this Q&A-8 and maintains one or more group health plans after the
sale, then a group health plan of P2 would have an obligation to
make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to the asset sale to P2 by S (but in such
a case employees of S before the sale who continued working for P2
after the sale would not be M&A qualified beneficiaries). However,
even in such a case, no group health plan of P2 would have an
obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to the asset sale to P1 by S.
Thus, under these facts, after S has ceased to provide any group
health plan to any employee, no plan has an obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries with
respect to the asset sale to P1.
Example 8. (i) Selling Group S provides group health plan
coverage to employees at each of its operating divisions. S sells
substantially all of the assets of all of its divisions to Buying
Group P. P hires most of S's employees on the date of the purchase
of S's assets, retains those employees in the same positions that
they had with S before the purchase, and continues the business
operations of those divisions without substantial change or
interruption. P provides these employees with coverage under a group
health plan. S continues to employ a few employees for the principal
purpose of winding up the affairs of S in preparation for
liquidation. S continues to provide coverage under a group health
plan to these few remaining employees for several weeks after the
date of the sale and then ceases to provide any group health plan to
any employee.
(ii) Under these facts, the cessation by S to provide any group
health plan to any employee is in connection with the asset sale to
P. Because of this, and because P continued the business operations
associated with those assets without substantial change or
interruption, P is a successor employer to S with respect to the
asset sale. Thus, a group health plan of P has the obligation to
make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to the sale beginning on the date that S
ceases to provide any group health plan to any employee. (A group
health plan of S retains this obligation for the several weeks after
the date of the sale until S ceases to provide any group health plan
to any employee.)
Q-9: Can the cessation of contributions by an employer to a
multiemployer group health plan be a qualifying event?
A-9: The cessation of contributions by an employer to a
multiemployer group health plan is not itself a qualifying event, even
though the cessation of contributions may cause current employees (and
their spouses and dependent children) to lose coverage under the
multiemployer plan. An event coinciding with the employer's cessation
of contributions (such as a reduction of hours of employment in the
case of striking employees) will constitute a qualifying event if it
otherwise satisfies the requirements of Q&A-1 of Sec. 54.4980B-4.
Q-10: If an employer stops contributing to a multiemployer group
health plan, does the multiemployer plan have the obligation to make
COBRA continuation coverage available to a qualified beneficiary who
was receiving coverage under the multiemployer plan on the day before
the cessation of contributions and who is, or whose qualifying event
occurred in connection with, a covered employee whose last employment
prior to the qualifying event was with the employer that has stopped
contributing to the multiemployer plan?
A-10: (a) In general, yes. (See Q&A-3 of Sec. 54.4980B-2 for a
definition of multiemployer plan.) If, however, the employer that stops
contributing to the multiemployer plan establishes one or more group
health plans (or starts contributing to another multiemployer plan that
is a group health plan) covering a significant number of the employer's
employees formerly covered under the multiemployer plan, the plan
established by the employer (or the other multiemployer plan) has the
obligation to make COBRA continuation coverage available to any
qualified beneficiary who was receiving coverage under the
multiemployer plan on the day before the cessation of contributions
[[Page 5250]]
and who is, or whose qualifying event occurred in connection with, a
covered employee whose last employment prior to the qualifying event
was with the employer.
(b) The rules of Q&A-9 of this section and this Q&A-10 are
illustrated by the following examples; in each example, each group
health plan is subject to COBRA:
Example 1. (i) Employer Z employs a class of employees covered
by a collective bargaining agreement and participating in
multiemployer group health plan M. As required by the collective
bargaining agreement, Z has been making contributions to M. Z
experiences financial difficulties and stops making contributions to
M but continues to employ all of the employees covered by the
collective bargaining agreement. Z's cessation of contributions to M
causes those employees (and their spouses and dependent children) to
lose coverage under M. Z does not establish any group health plan
covering any of the employees covered by the collective bargaining
agreement.
(ii) After Z stops contributing to M, M continues to have the
obligation to make COBRA continuation coverage available to any
qualified beneficiary who experienced a qualifying event that
preceded or coincided with the cessation of contributions to M and
whose coverage under M on the day before the qualifying event was
due to an employment affiliation with Z. The loss of coverage under
M for those employees of Z who continue in employment (and the loss
of coverage for their spouses and dependent children) does not
constitute a qualifying event.
Example 2. (i) Employer Y employs a class of employees covered
by a collective bargaining agreement and participating in
multiemployer group health plan M. As required by the collective
bargaining agreement, Y has been making contributions to M. Y
experiences financial difficulties and is forced into bankruptcy by
its creditors. Y continues to employ all of the employees covered by
the collective bargaining agreement. Y also continues to make
contributions to M until the current collective bargaining agreement
expires, on June 30, 2001, and then Y stops making contributions to
M. Y's employees (and their spouses and dependent children) lose
coverage under M effective July 1, 2001. Y does not enter into
another collective bargaining agreement covering the class of
employees covered by the expired collective bargaining agreement.
Effective September 1, 2001, Y establishes a group health plan
covering the class of employees formerly covered by the collective
bargaining agreement. The group health plan also covers their
spouses and dependent children.
(ii) Under these facts, M has the obligation to make COBRA
continuation coverage available from July 1, 2001 until August 31,
2001, and the group health plan established by Y has the obligation
to make COBRA continuation coverage available from September 1, 2001
until the obligation ends (see Q&A-1 of Sec. 54.4980B-7) to any
qualified beneficiary who experienced a qualifying event that
preceded or coincided with the cessation of contributions to M and
whose coverage under M on the day before the qualifying event was
due to an employment affiliation with Y. The loss of coverage under
M for those employees of Y who continue in employment (and the loss
of coverage for their spouses and dependent children) does not
constitute a qualifying event.
Example 3. (i) Employer X employs a class of employees covered
by a collective bargaining agreement and participating in
multiemployer group health plan M. As required by the collective
bargaining agreement, X has been making contributions to M. The
employees covered by the collective bargaining agreement vote to
decertify their current employee representative effective January 1,
2002 and vote to certify a new employee representative effective the
same date. As a consequence, on January 1, 2002 they cease to be
covered under M and commence to be covered under multiemployer group
health plan N.
(ii) Effective January 1, 2002, N has the obligation to make
COBRA continuation coverage available to any qualified beneficiary
who experienced a qualifying event that preceded or coincided with
the cessation of contributions to M and whose coverage under M on
the day before the qualifying event was due to an employment
affiliation with X. The loss of coverage under M for those employees
of X who continue in employment (and the loss of coverage for their
spouses and dependent children) does not constitute a qualifying
event.
Sec. 54.4980B-10 Interaction of FMLA and COBRA.
The following questions-and-answers address how the taking of leave
under the Family and Medical Leave Act of 1993 (FMLA) (29 U.S.C. 2601-
2619) affects the COBRA continuation coverage requirements:
Q-1: In what circumstances does a qualifying event occur if an
employee does not return from leave taken under FMLA?
A-1: (a) The taking of leave under FMLA does not constitute a
qualifying event. A qualifying event under Q&A-1 of Sec. 54.4980B-4
occurs, however, if--
(1) An employee (or the spouse or a dependent child of the
employee) is covered on the day before the first day of FMLA leave (or
becomes covered during the FMLA leave) under a group health plan of the
employee's employer;
(2) The employee does not return to employment with the employer at
the end of the FMLA leave; and
(3) The employee (or the spouse or a dependent child of the
employee) would, in the absence of COBRA continuation coverage, lose
coverage under the group health plan before the end of the maximum
coverage period.
(b) However, the satisfaction of the three conditions in paragraph
(a) of this Q&A-1 does not constitute a qualifying event if the
employer eliminates, on or before the last day of the employee's FMLA
leave, coverage under a group health plan for the class of employees
(while continuing to employ that class of employees) to which the
employee would have belonged if the employee had not taken FMLA leave.
Q-2: If a qualifying event described in Q&A-1 of this section
occurs, when does it occur, and how is the maximum coverage period
measured?
A-2: A qualifying event described in Q&A-1 of this section occurs
on the last day of FMLA leave. The maximum coverage period (see Q&A-4
of Sec. 54.4980B-7) is measured from the date of the qualifying event
(that is, the last day of FMLA leave). If, however, coverage under the
group health plan is lost at a later date and the plan provides for the
extension of the required periods (see paragraph (b) of Q&A-4 of
Sec. 54.4980B-7), then the maximum coverage period is measured from the
date when coverage is lost. The rules of this Q&A-2 are illustrated by
the following examples:
Example 1. (i) Employee B is covered under the group health plan
of Employer X on January 31, 2001. B takes FMLA leave beginning
February 1, 2001. B's last day of FMLA leave is 12 weeks later, on
April 25, 2001, and B does not return to work with X at the end of
the FMLA leave. If B does not elect COBRA continuation coverage, B
will not be covered under the group health plan of X as of April 26,
2001.
(ii) B experiences a qualifying event on April 25, 2001, and the
maximum coverage period is measured from that date. (This is the
case even if, for part or all of the FMLA leave, B fails to pay the
employee portion of premiums for coverage under the group health
plan of X and is not covered under X's plan. See Q&A-3 of this
section.)
Example 2. (i) Employee C and C's spouse are covered under the
group health plan of Employer Y on August 15, 2001. C takes FMLA
leave beginning August 16, 2001. C informs Y less than 12 weeks
later, on September 28, 2001, that C will not be returning to work.
Under the FMLA regulations, 29 CFR Part 825 (Secs. 825.100-825.800),
C's last day of FMLA leave is September 28, 2001. C does not return
to work with Y at the end of the FMLA leave. If C and C's spouse do
not elect COBRA continuation coverage, they will not be covered
under the group health plan of Y as of September 29, 2001.
(ii) C and C's spouse experience a qualifying event on September
28, 2001, and the maximum coverage period (generally 18 months) is
measured from that date. (This is the case even if, for part or all
of the FMLA leave, C fails to pay the employee portion of premiums
for coverage under the group health plan of Y and C or C's spouse is
not covered under Y's plan. See Q&A-3 of this section.)
Q-3: If an employee fails to pay the employee portion of premiums
for
[[Page 5251]]
coverage under a group health plan during FMLA leave or declines
coverage under a group health plan during FMLA leave, does this affect
the determination of whether or when the employee has experienced a
qualifying event?
A-3: No. Any lapse of coverage under a group health plan during
FMLA leave is irrelevant in determining whether a set of circumstances
constitutes a qualifying event under Q&A-1 of this section or when such
a qualifying event occurs under Q&A-2 of this section.
Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this
section affected by a requirement of state or local law to provide a
period of coverage longer than that required under FMLA?
A-4: No. Any state or local law that requires coverage under a
group health plan to be maintained during a leave of absence for a
period longer than that required under FMLA (for example, for 16 weeks
of leave rather than for the 12 weeks required under FMLA) is
disregarded for purposes of determining when a qualifying event occurs
under Q&A-1 through Q&A-3 of this section.
Q-5: May COBRA continuation coverage be conditioned upon
reimbursement of the premiums paid by the employer for coverage under a
group health plan during FMLA leave?
A-5: No. The U.S. Department of Labor has published rules
describing the circumstances in which an employer may recover premiums
it pays to maintain coverage, including family coverage, under a group
health plan during FMLA leave from an employee who fails to return from
leave. See 29 CFR 825.213. Even if recovery of premiums is permitted
under 29 CFR 825.213, the right to COBRA continuation coverage cannot
be conditioned upon the employee's reimbursement of the employer for
premiums the employer paid to maintain coverage under a group health
plan during FMLA leave.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-1519 Filed 2-2-99; 8:45 am]
BILLING CODE 4830-01-U
