[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Rules and Regulations]
[Pages 5160-5188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1520]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
[TD 8812]
RIN 1545-AI93
Continuation Coverage Requirements Applicable to Group Health
Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: The Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA) added health care continuation requirements that apply to group
health plans. Coverage required to be provided under those requirements
is referred to as COBRA continuation coverage. Proposed regulations
interpreting the COBRA continuation coverage requirements were
published in the Federal Register of June 15, 1987 and of January 7,
1998. This document contains final regulations based on these two sets
of proposed regulations. The final regulations also reflect statutory
amendments to the COBRA continuation coverage requirements since COBRA
was enacted. A new set of proposed regulations addressing additional
issues under the COBRA continuation coverage provisions is being
published elsewhere in this issue of the Federal Register. The
regulations will generally affect sponsors of and participants in group
health plans, and they provide plan sponsors and plan administrators
with guidance necessary to comply with the law.
DATES: Effective Date: These regulations are effective February 3,
1999.
Applicability Dates: Sections 54.4980B-1 through 54.4980B-8 apply
to group health plans with respect to qualifying events occurring in
plan years beginning on or after January 1, 2000. See the Effective
Date portion of this preamble and Q&A-2 of Sec. 54.4980B-1.
FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis, 202-622-4695. This is
not a toll-free number.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545-1581. Responses to these collections of
information are mandatory in some cases and required in order to obtain
a benefit in other cases. Group health plans are required to provide
certain individuals a notice of their COBRA continuation coverage
rights when certain qualifying events occur and are required to inform
health care providers who contact the plan to confirm the coverage of
certain individuals of the individuals' complete rights to coverage. To
obtain COBRA continuation coverage or extended coverage, certain
individuals are required to notify the plan administrator of certain
events or that they are electing COBRA continuation coverage, and plans
are required to notify certain individuals of insignificant
underpayments if the plan wishes to require the individuals to pay the
deficiency. This information will be used to advise employers and plan
administrators of their obligation to offer COBRA continuation
coverage, or an extended period of such coverage; to advise qualified
beneficiaries of their right to elect COBRA continuation coverage and
of insignificant errors in payment; and to inform health care providers
of individuals' rights to COBRA continuation coverage.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated average annual burden per respondent varies from 30
seconds to 330 hours, depending on individual circumstances, with an
estimated average of 14 minutes.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Books or records relating to these collections of information must
be retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On June 15, 1987, proposed regulations (EE-143-86) relating to
continuation coverage requirements applicable to group health plans
were published in the Federal Register (52 FR 22716). A public hearing
was held on November 4, 1987. Written comments were also received. A
supplemental set of proposed regulations (REG-209485-86) was published
in the Federal Register of January 7, 1998 (63 FR 708). No public
hearing was requested or held after the publication of the supplemental
proposed regulations; written comments were received. After
consideration of these comments, after review of the reported court
decisions under the parallel COBRA continuation coverage provisions of
the Employee Retirement Income Security Act of 1974 (ERISA) and the
Public Health Service Act, and based on the experience of the IRS in
administering the COBRA continuation coverage requirements, a portion
of the regulations proposed by EE-143-86 and REG-209485-86 is adopted
as revised by this Treasury decision. The revisions are summarized in
the explanation below. Also being published elsewhere in this issue of
the Federal Register is a new set of proposed regulations, which
addresses additional issues.
Explanation of Provisions
Overview
The regulations are intended to provide clear, administrable rules
regarding COBRA continuation coverage. The regulations give
comprehensive guidance on many questions under COBRA, with a view to
enhancing the certainty and reliance available to all parties--
including employees, qualified beneficiaries, employers, employee
organizations, and group health plans--in determining their COBRA
rights and obligations. The guidance is designed to further the
protective purposes of COBRA without undue administrative burdens or
costs on employers, employee organizations, or group health plans.
For example, the regulations:
Prevent group health plans from terminating COBRA
continuation coverage on the basis of other coverage that a qualified
beneficiary had prior to electing COBRA continuation coverage, in
accordance with the Supreme Court's
[[Page 5161]]
decision in Geissal v. Moore Medical Corp.
Give employers and employee organizations significant
flexibility in determining, for purposes of COBRA, the number of group
health plans they maintain. This will reduce burdens on employers and
employee organizations by permitting them to structure their group
health plans in an efficient and cost-effective manner and to satisfy
their COBRA obligations based upon that structure.
Provide baseline rules for determining the COBRA
liabilities of buyers and sellers of corporate stock and corporate
assets and permit buyers and sellers to reallocate and carry out those
liabilities by agreement. This will significantly enhance employers'
ability to negotiate and to plan appropriately for the treatment of
qualified beneficiaries in connection with mergers and acquisitions,
while protecting the rights of qualified beneficiaries affected by the
transactions.
Limit the application of COBRA for most health flexible
spending arrangements. This will ensure that COBRA continuation
coverage under health flexible spending arrangements is available in
appropriate cases without requiring continuation coverage where that
would not serve the statutory purposes.
Eliminate the requirement that group health plans offer
qualified beneficiaries the option to elect only core (health) coverage
under a group health plan that otherwise provides both core and noncore
(vision and dental) coverage.
Give employers, in determining whether the small-employer
plan exception applies, the option of counting by pay period rather
than by every business day, and provide, for that exception, for the
consistent treatment of part-time employees through the use of full-
time equivalents.
The COBRA continuation coverage requirements enacted on April 7,
1986 have been amended by the Omnibus Budget Reconciliation Act of 1986
(OBRA 1986), the Tax Reform Act of 1986 (TRA 1986), the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA), the Omnibus Budget
Reconciliation Act of 1989 (OBRA 1989), the Omnibus Budget
Reconciliation Act of 1990 (OBRA 1990), the Small Business Job
Protection Act of 1996 (SBJPA), and the Health Insurance Portability
and Accountability Act of 1996 (HIPAA).\1\ These amendments made
numerous clarifications and modifications to the COBRA continuation
coverage requirements, moved the requirements from section 162(k) to
section 4980B, added various other features, such as the disability
extension to the required period of coverage, and significantly altered
the sanctions imposed on employers and plans for failing to comply with
the requirements. The specific changes made by these amendments are
discussed below in connection with the provisions of the regulations
that relate to them.
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\1\ The COBRA continuation coverage requirements have also been
affected by an amendment made to the definition of group health plan
by the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993). OBRA
1993 amended the definition of group health plan in section
5000(b)(1), which the COBRA continuation coverage provisions of the
International Revenue Code incorporate by reference.
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The legislative history of COBRA provides that the Department of
the Treasury has the authority to interpret the coverage and tax
sanction provisions of COBRA and that the Department of Labor has the
authority to interpret the reporting and disclosure provisions.
Accordingly, these regulations apply in interpreting the coverage
provisions of COBRA in Title I of ERISA, as well as those in the
Internal Revenue Code. With minor exceptions, the final regulations and
the new proposed regulations being published today do not address the
notice provisions of the COBRA continuation coverage requirements.
Organization
The final regulations being published today follow the structure of
the 1987 proposed regulations, with related questions-and-answers
grouped into topics. Each topic is now in a separate section, and
sections have been added to the new proposed regulations being
published today for (1) business reorganizations and employer
withdrawals from multiemployer plans and (2) the interaction of the
Family and Medical Leave Act of 1993 (FMLA) and COBRA. The substance of
the 1998 proposed regulations has been integrated into the questions-
and-answers of the 1987 proposed regulations. The ordering of some of
the questions-and-answers has changed, and all of the questions-and-
answers relating to the original statutory effective date have been
deleted. In addition, in a few cases, the content of two separate
questions-and-answers in the 1987 proposed regulations has been
combined into a single question-and-answer; in other cases the content
of a single question-and-answer has been expanded to two or more
questions-and-answers. These changes have resulted in the renumbering
of the questions-and-answers. The new proposed regulations being
published today are designed to fill gaps designated in the final
regulations as reserved.
Effective Date
The 1987 proposed regulations provide that they will be effective
upon publication as final regulations. Some commenters suggested that
the final regulations should have a delayed effective date. The final
regulations follow this suggestion; they apply with respect to
qualifying events occurring in plan years beginning on or after January
1, 2000. For any period before the effective date of the final
regulations, the plan and the employer must operate in good faith
compliance with a reasonable interpretation of the requirements in
section 4980B. For the period before the effective date of the final
regulations, the IRS will consider compliance with the proposed
regulations in Sec. 1.162-26 (the 1987 proposed regulations) and
Sec. 54.4980B-1 (the 1998 proposed regulations) to constitute good
faith compliance with a reasonable interpretation of the statutory
requirements for the topics that those proposed regulations address,
except to the extent inconsistent with a statutory amendment adopted
after the dates the proposed regulations were issued, during the period
the amendment is effective, or with a decision of the United States
Supreme Court released after the proposed regulations were issued,
during the period after the decision is released. For any period
beginning on or after the effective date of the final regulations with
respect to topics not addressed in the final regulations, such as how
to calculate the applicable premium, the plan and the employer must
operate in good faith compliance with a reasonable interpretation of
the requirements in section 4980B.
Compliance with the new proposed regulations will constitute good
faith compliance with a reasonable interpretation of the statutory
requirements addressed in the new proposed regulations until the new
proposed regulations are finalized. In addition, actions inconsistent
with the terms of the new proposed regulations will not necessarily
constitute a lack of good faith compliance with a reasonable
interpretation of the statutory requirements addressed in the new
proposed regulations; whether there has been good faith compliance with
a reasonable interpretation of the statutory requirements will depend
on
[[Page 5162]]
all the facts and circumstances of each case.
The IRS will not assess the excise tax with respect to a plan that
operates in good faith compliance with a reasonable interpretation of
the statutory requirements, as described in the preceding two
paragraphs. Note, however, that in the case of lawsuits brought by
qualified beneficiaries to enforce their COBRA continuation coverage
rights under ERISA or the Public Health Service Act, the courts
generally have not applied any good faith compliance standard.
Plans That Must Comply
The final regulations provide rules regarding which group health
plans are subject to COBRA. These rules are generally similar to those
set forth in the 1987 proposed regulations. However, the rules for
determining, for purposes of the COBRA continuation coverage
requirements, the number of group health plans maintained by an
employer have been deleted, and the new proposed regulations set forth
substantially different rules, which provide that employers and
employee organizations generally have broad discretion to determine the
number of group health plans that they maintain. Other significant
changes to the 1987 proposed regulations on this point (some of which
are set forth in the 1998 proposed regulations) include exceptions for
long-term care services and medical savings accounts and new rules
regarding the small-employer plan exception.
As in the 1987 proposed regulations, the final regulations provide
that, in general, all group health plans are subject to the COBRA
continuation coverage requirements. However, small-employer plans
(discussed below), church plans (within the meaning of section 414(e)),
and governmental plans (within the meaning of section 414(d)) are not
subject to COBRA. (The final regulations refer to these as plans
excepted from COBRA.) Plans excepted from COBRA are generally not
subject to the COBRA continuation coverage requirements or the COBRA
excise tax, although group health plans maintained by state or local
governments are subject to parallel continuation coverage requirements
in the Public Health Service Act (which is administered by the
Department of Health and Human Services). Also, the Federal Employees
Health Benefit Program is subject to generally similar, although not
parallel, temporary continuation of coverage provisions under the
Federal Employees Health Benefits Amendments Act of 1988.
The final regulations define group health plan in a manner
generally similar to that in the 1987 proposed regulations. However,
certain changes in terminology have been made to reflect the statutory
cross-reference to section 5000(b)(1) set forth in section 4980B(g)(2)
(such as the use of the term health care and the definition of
employee). Additionally, the final regulations, in accordance with
section 4980B(g)(2), provide that a plan is not a group health plan if
substantially all the coverage provided under the plan is for qualified
long-term care services (as defined in section 7702B(c)). The final
regulations allow plans to use any reasonable method in determining
whether a plan satisfies this exception. The final regulations also
provide, in accordance with section 106(b)(5), that amounts contributed
by an employer to a medical savings account (as defined in section
220(d)) are not considered part of a group health plan for purposes of
COBRA (although a high-deductible health plan will not fail to be a
group health plan simply because it covers a holder of a medical
savings account).
Under the final regulations, a group health plan is a plan
maintained by an employer or employee organization to provide health
care to individuals who have an employment-related connection to the
employer or employee organization or to the families of such
individuals. In accordance with section 5000(b)(1), these individuals
include employees, former employees, the employer, and others
associated or formerly associated with the employer or employee
organization in a business relationship. The final regulations
generally refer to all individuals covered under a plan by virtue of
the performance of services or by virtue of membership in an employee
organization as employees. (As discussed below, the term employee has a
narrower meaning for purposes of the small-employer plan exception.)
The final regulations use the term employer to refer to a person for
whom an individual performs services. Pursuant to section 414(t), the
term employer also includes, with respect to such a person, any member
of a group described in section 414(b), (c), (m), or (o) that includes
the person (a controlled group) as well as any successor of the person
or of a member of the controlled group.
Under the final regulations, as under the 1987 proposed
regulations, a plan generally is considered to provide health care
whether it does so directly or through insurance, reimbursement, or
other means and whether it does so through an on-site facility or a
cafeteria or other flexible benefit arrangement. Insurance includes
group insurance policies and one or more individual policies under an
arrangement maintained by the employer or employee organization to
provide health care to two or more employees. Under the final
regulations, as under the 1987 proposed regulations, in the case of a
cafeteria plan or other flexible benefit arrangement, the COBRA
continuation coverage requirements apply only to the health care
benefits under the cafeteria plan or other flexible benefit arrangement
that an employee has actually chosen to receive.
Many commenters on the 1987 proposed regulations requested
clarification of the application of COBRA to health care benefits
provided under flexible spending arrangements (health FSAs). Some
commentators argued that health FSAs should not be subject to COBRA.
Health FSAs satisfy the definition of group health plan in section
5000(b)(1) and, accordingly, are generally subject to the COBRA
continuation coverage requirements. However, COBRA is intended to
ensure that a qualified beneficiary has guaranteed access to coverage
under a group health plan and that the cost of that coverage is no
greater than 102 percent of the applicable premium.
The IRS and Treasury believe that the purposes of COBRA are not
furthered by requiring an employer to offer COBRA for a plan year if
the amount that the employer could require to be paid for the COBRA
coverage for the plan year would exceed the maximum benefit that the
qualified beneficiary could receive under the FSA for that plan year
and if the qualified beneficiary could not avoid a break in coverage,
for purposes of the HIPAA portability provisions,\2\ by electing COBRA
coverage under the FSA. Accordingly, the new proposed regulations
contain a rule limiting the application of the COBRA continuation
coverage requirements in the case of health FSAs.
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\2\ Under HIPAA, a qualified beneficiary who maintains coverage
after termination of employment under a group health plan that is
subject to HIPAA can avoid a break in coverage and thereby avoid
becoming subject to a preexisting condition exclusion upon later
becoming covered by another group health plan.
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Under this rule, if the health FSA satisfies two conditions, the
health FSA need not make COBRA continuation coverage available to a
qualified beneficiary for any plan year after the plan year in which
the qualifying event occurs. The first condition that the health FSA
must satisfy for this exception to apply is that the health FSA is not
subject to the HIPAA portability provisions in sections 9801
[[Page 5163]]
though 9833 because the benefits provided under the health FSA are
excepted benefits. (See sections 9831 and 9832.) \3\ The second
condition is that, in the plan year in which the qualifying event of a
qualified beneficiary occurs, the maximum amount that the health FSA
could require to be paid for a full plan year of COBRA continuation
coverage equals or exceeds the maximum benefit available under the
health FSA for the year. It is contemplated that this second condition
will be satisfied in most cases.
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\3\ The IRS and Treasury, together with the U.S. Department of
Labor and the U.S. Department of Health and Human Services, have
issued a notice (62 FR 67688) holding that a health FSA is exempt
from HIPAA because the benefits provided under it are excepted
benefits under sections 9831 and 9832 if the employer also provides
another group health plan, the benefits under the other plan are not
limited to excepted benefits, and the maximum reimbursement under
the health FSA is not greater than two times the employee's salary
reduction election (or if greater, the employee's salary reduction
election plus five hundred dollars.)
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Moreover, if a third condition is satisfied, the health FSA need
not make COBRA continuation coverage available with respect to a
qualified beneficiary at all. This third condition is satisfied if, as
of the date of the qualifying event, the maximum benefit available to
the qualified beneficiary under the health FSA for the remainder of the
plan year is not more than the maximum amount that the plan could
require as payment for the remainder of that year to maintain coverage
under the health FSA.
A plan is maintained by an employer or employee organization even
if the employer or employee organization does not directly or
indirectly contribute to it if coverage under the plan would not be
available to an individual at the same cost if the individual did not
have an employment-related connection to the employer or employee
organization. The final regulations, for purposes of the definition of
a group health plan, use the term health care instead of the term
medical care (which was used in the 1987 proposed regulations). This
change reflects the change in the definition of group health plan made
by OBRA 1989. However, the final regulations provide that health care
has the same meaning as the term medical care under section 213(d).
Like the 1987 proposed regulations, the final regulations set forth a
summary of items that do and do not constitute health care.
The final regulations, generally following the 1987 proposed
regulations, set forth rules for determining whether a group health
plan is a small-employer plan. In general, a group health plan other
than a multiemployer plan is a small-employer plan if it is maintained
for a calendar year by an employer that normally employed fewer than 20
employees during the preceding calendar year, and a group health plan
that is a multiemployer plan is a small-employer plan if each of the
employers contributing to the plan for a calendar year normally
employed fewer than 20 employees during the preceding calendar year.
Whether the plan is a multiemployer plan or not, the term employer
includes all members of a controlled group. An example in the final
regulations clarifies that the controlled group includes foreign
members, and thus a U.S. subsidiary with fewer than 20 employees is
subject to COBRA if the controlled group has 20 or more employees
world-wide. The final regulations set forth additional rules for the
application of the small-employer plan exception to multiemployer
plans, and the new proposed regulations contain the same definition of
multiemployer plan that is in section 414(f).
Under the final regulations, an employer is considered to have
normally employed fewer than 20 employees during a particular calendar
year if it had fewer than 20 employees on at least 50 percent of its
typical business days during that year. This rule differs from the rule
in the 1987 proposed regulations in two ways. First, the 1987 proposed
regulations use the term working days, whereas the final regulations
use the statutory term typical business days.
The second difference relates to the term employee. Under the 1987
proposed regulations, self-employed individuals and independent
contractors are counted as employees for purposes of the small-employer
plan exception if they are covered under a plan of the employer.
Commenters argued that only common law employees should be counted for
this purpose. Unlike the definition of covered employee (amended by
OBRA 1989 to make clear that individuals who are not common law
employees but who are covered under the group health plan of an
employer or employee organization by virtue of the performance of
services are still considered covered employees) and the definition of
group health plan (amended by OBRA 1993 to make clear that a health
plan covering individuals who are not common law employees of the
employer or employee organization, and who are not family members of
common law employees, is still a group health plan) the reference to
employees for purposes of the small-employer plan exception have not
been amended to include individuals who are not common law employees.
Consequently, under the final regulations, only common law employees
are taken into account for purposes of the small-employer plan
exception; self-employed individuals, independent contractors, and
directors are not counted.
Although a small-employer plan is generally excepted from COBRA, a
plan that is not a small-employer plan for a period remains subject to
COBRA for qualifying events that occurred during that period, even if
it subsequently becomes a small-employer plan.
In determining whether a plan is eligible for the small-employer
plan exception, part-time employees, as well as full-time employees,
must be taken into account. Several commenters on the 1987 proposed
regulations requested clarification of how to count part-time employees
for the small-employer plan exception, and the new proposed regulations
provide guidance on this issue. Under the new proposed regulations,
instead of each part-time employee counting as a full employee, each
part-time employee counts as a fraction of an employee, with the
fraction equal to the number of hours that the part-time employee works
for the employer divided by the number of hours that an employee must
work in order to be considered a full-time employee. The number of
hours that must be worked to be considered a full-time employee is
determined in a manner consistent with the employer's general
employment practices, although for this purpose not more than eight
hours a day or 40 hours a week may be used. An employer may count
employees for each typical business day or may count employees for a
pay period and attribute the total number of employees for that pay
period to each typical business day that falls within the pay period.
The employer must use the same method for all employees and for the
entire year for which the small-employer plan determination is made.
In determining whether a multiemployer plan satisfies the
requirements for the small-employer plan exception, the 1987 proposed
regulations provide a special rule permitting the multiemployer plan to
be considered a small-employer plan for a year if any contributing
employer that grew to be too large to qualify for the exception during
the preceding year ceases to contribute to the plan by February 1 of
the current year. Questions have been raised about the need for and the
authority for this special rule, and one commenter pointed out the
uncertainty of how to
[[Page 5164]]
deal with a qualified beneficiary experiencing a qualifying event under
such a plan in January of the current year if the qualified beneficiary
needed confirmation of coverage for urgent services before it was clear
that the too-large employer would cease contributing to the
multiemployer plan by February 1. Based on these concerns, the final
regulations eliminate this special rule for multiemployer plans.
The new proposed regulations provide guidance, for purposes of the
COBRA continuation coverage requirements, on how to determine the
number of group health plans that an employer or employee organization
maintains. Under these rules, the employer or employee organization is
generally permitted to establish the separate identity and number of
group health plans under which it provides health care benefits to
employees. Thus, if an employer or employee organization provides a
variety of health care benefits to employees, it generally may
aggregate the benefits into a single group health plan or disaggregate
benefits into separate group health plans. The status of health care
benefits as part of a single group health plan or as separate plans is
determined by reference to the instruments governing those
arrangements. If it is not clear from the instruments governing an
arrangement or arrangements to provide health care benefits whether the
benefits are provided under one plan or more than one plan, or if there
are no instruments governing the arrangement or arrangements, all such
health care benefits (other than those for qualified long-term care
services) provided by a single entity (determined without regard to the
controlled group) constitute a single group health plan.
Under the new proposed regulations, a multiemployer plan and a plan
other than a multiemployer plan are always separate plans. In addition,
any treatment of health care benefits as constituting separate group
health plans will be disregarded if a principal purpose of the
treatment is to evade any requirement of law. Of course, an employer's
flexibility to treat benefits as part of separate plans may be limited
by the operation of other laws, such as the prohibition in section 9802
on conditioning eligibility to enroll in a group health plan on the
basis of any health factor of an individual.
The final regulations modify the rules set forth in the 1987
proposed regulations for determining the plan year of a group health
plan under COBRA. These modifications are made to be consistent with
the rules in the temporary regulations under HIPAA. The definition of
plan year is important in applying, for example, the effective date
provisions under the final regulations and the rules for health FSAs
under the new proposed regulations. Under the final regulations, the
plan year is the year designated as such in the plan documents. If the
plan documents do not designate a plan year (or if there are no plan
documents), the plan year is the deductible/limit year used by the
plan. If the plan does not impose deductibles or limits on an annual
basis, the plan year is the policy year. If the plan does not impose
deductibles or limits on an annual basis and the plan is not insured
(or the insurance policy is not renewed annually), the plan year is the
taxable year of the employer. In any other case, the plan year is the
calendar year.
The final regulations reflect the statutory provisions that provide
for the imposition of an excise tax in the event of a failure by a
group health plan to comply with the COBRA continuation coverage
requirements of section 4980B(f). In the case of a multiemployer plan,
the excise tax is imposed on the plan; \4\ in the case of any other
plan, the excise tax is imposed on the employer maintaining the plan.
In certain circumstances, the excise tax can be imposed on other
persons involved with the provision of benefits under the plan, such as
an insurer providing benefits under the plan or a third party
administrator administering claims under the plan. Separate, non-tax
remedies may be available in the case of a plan that fails to comply
with the COBRA continuation coverage requirements in ERISA.
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\4\ In this regard, the U.S. Department of labor has advised the
IRS and Treasury that to the extent a plan fiduciary subjects a plan
to liability for the COBRA excise tax on account of her or his
imprudent actions, the plan fiduciary may be held personally liable
under Title I of ERISA for the amount of the tax.
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Qualified Beneficiaries
The rules in the final regulations for determining who is a
qualified beneficiary generally follow those set forth in the 1987
proposed regulations, as well as those set forth in the 1998 proposed
regulations regarding the status of newborn and adopted children as
qualified beneficiaries. However, certain provisions have been added to
the final regulations to reflect the special statutory rules that apply
in the case of bankruptcy of the employer as a qualifying event.
Modifications have also been made to reflect the decision of the
Supreme Court in Geissal v. Moore Medical Corp., 118 S. Ct. 1869
(1998), which held that an individual covered under another group
health plan at the time she or he elects COBRA continuation coverage
cannot be denied COBRA continuation coverage on the basis of that other
coverage.
Under the final regulations, a qualified beneficiary is, in
general: (1) any individual who, on the day before a qualifying event,
is covered under a group health plan either as a covered employee, the
spouse of a covered employee, or the dependent child of a covered
employee; or (2) any child born to or placed for adoption with a
covered employee during a period of COBRA continuation coverage. (The
final regulations retain the definitions of the terms placement for
adoption and being placed for adoption that were in the 1998 proposed
regulations.) For a qualifying event that is the bankruptcy of the
employer, any covered employee who retired on or before the date of any
substantial elimination of group health plan coverage is a qualified
beneficiary; the spouse, surviving spouse, or dependent child of the
retired covered employee is also a qualified beneficiary if the spouse,
surviving spouse, or dependent child was a beneficiary under the plan
on the day before the bankruptcy qualifying event. The final
regulations add a provision clarifying that if an individual is denied
coverage under a group health plan in violation of applicable law
(including HIPAA) and experiences an event that would be a qualifying
event if the coverage had not been wrongfully denied, the individual is
considered a qualified beneficiary.
A covered employee can be a qualified beneficiary only in
connection with a qualifying event that is the termination (or
reduction of hours) of the covered employee's employment or the
employer's bankruptcy. As under the 1987 proposed regulations, the
final regulations provide that a covered employee is not a qualified
beneficiary if her or his status as a covered employee is attributable
to certain periods in which she or he was a nonresident alien (in which
case the covered employee's spouse and dependent children are also not
qualified beneficiaries). Although a child born to or placed for
adoption with a covered employee during a period of COBRA continuation
coverage is a qualified beneficiary, a child born to or placed for
adoption with a qualified beneficiary other than the covered employee
after a qualifying event, or a person who becomes the spouse of a
qualified beneficiary (regardless of whether the qualified beneficiary
is the covered employee) after a qualifying event is not a qualified
[[Page 5165]]
beneficiary. The final regulations retain the rule of the 1987 proposed
regulations under which an individual is not a qualified beneficiary
if, on the day before the qualifying event, the individual is covered
under the group health plan solely because of another individual's
election of COBRA continuation coverage. However, consistent with
Geissal, the final regulations eliminate the rule in the 1987 proposed
regulations that an individual is not a qualified beneficiary if, on
the day before the qualifying event, the individual was entitled to
Medicare benefits.
An individual ceases to be a qualified beneficiary if she or he
does not elect COBRA continuation coverage by the end of the election
period (discussed below). The final regulations clarify that an
individual who elects COBRA continuation coverage ceases to be a
qualified beneficiary once the plan's obligation to provide COBRA
continuation coverage has ended.
The term covered employee is defined in the final regulations in a
manner substantially the same as in the 1987 proposed regulations.
Although some commenters on the 1987 proposed regulations objected to
the inclusion in this definition of individuals other than common law
employees, the statutory definition was amended by OBRA 1989 to include
such individuals.
Under the final regulations, a covered employee generally includes
any individual who is or has been provided coverage under a group
health plan (other than one excepted from COBRA as of the date of what
would otherwise be a qualifying event) because of her or his present or
past performance of services for the employer maintaining the group
health plan (or by reason of membership in the employee organization
maintaining the plan). Thus, retirees and former employees covered by a
group health plan are covered employees if the coverage is provided in
whole or in part because of the previous employment. Any individual who
performs services for the employer maintaining the plan or who is a
member of the employee organization maintaining the plan may be a
covered employee. Thus, common law employees, self-employed
individuals, independent contractors, and corporate directors can be
covered employees. Generally, mere eligibility for coverage--as opposed
to actual coverage--does not make an individual a covered employee.
However, if an individual who otherwise would be a covered employee is
denied coverage under a group health plan in violation of applicable
law (including HIPAA), the individual is considered a covered employee.
Qualifying Events
The rules regarding qualifying events under the final regulations
generally are the same as those in the 1987 proposed regulations. Under
the final regulations, a qualifying event is any of a set of specified
events that occurs while a group health plan is subject to COBRA and
that causes a covered employee (or the spouse or dependent child of the
covered employee) to lose coverage under the plan. These specified
events are: the death of a covered employee; the termination (other
than by reason of gross misconduct), or reduction of hours, of a
covered employee's employment; the divorce or legal separation of a
covered employee from the covered employee's spouse; a covered
employee's becoming entitled to Medicare benefits under Title XVIII of
the Social Security Act; a dependent child's ceasing to be a dependent
child of the covered employee under the plan; and a proceeding in
bankruptcy under Title 11 of the United States Code with respect to an
employer from whose employment a covered employee retired at any time.
The addition of employer bankruptcy as a qualifying event reflects the
amendments made to COBRA by OBRA 1986.
The reasons for which an employee has a termination of employment
or a reduction of hours of employment generally are not relevant in
determining whether the termination or reduction of hours is a
qualifying event. Thus, a voluntary termination, a strike, a lockout, a
layoff, or an involuntary discharge each may constitute a qualifying
event. However, if an employee is discharged for gross misconduct, the
termination of employment does not constitute a qualifying event. The
final regulations clarify that a reduction of hours of a covered
employee's employment includes any decrease in the number of hours that
a covered employee works or is required to work that does not
constitute a termination of employment. Thus, if a covered employee
takes a leave of absence, is laid off, or otherwise performs no hours
of work during a period, the covered employee has experienced a
reduction in hours that, if the other applicable requirements are
satisfied, constitutes a qualifying event. (But see Notice 94-103
(1994-2 C.B. 569) and the new proposed regulations, described below,
for special rules regarding FMLA leave.) A covered employee's loss of
coverage by reason of a failure to work the minimum number of hours
required for coverage constitutes a reduction of hours of employment.
Under the final regulations, to lose coverage means to cease to be
covered under the same terms and conditions as in effect immediately
before the event. The final regulations clarify that a loss of coverage
includes an increase in an employee premium or contribution resulting
from one of the events described above. The loss of coverage need not
be concurrent with the event; it is enough that the loss of coverage
occur at any time before the end of the maximum coverage period
(described below). For employer bankruptcies, the term to lose coverage
also includes a substantial elimination of coverage that occurs within
12 months before or after the date on which the bankruptcy proceeding
begins.
Under the final regulations, as under the 1987 proposed
regulations, reductions or eliminations in coverage in anticipation of
an event are disregarded in determining whether the event results in a
loss of coverage. Although several commenters objected to this rule,
the final regulations retain the provision in order to protect
qualified beneficiaries from being deprived of their COBRA rights
because an employer or employee organization transposes a loss or
reduction of coverage to a time before the qualifying event. This rule
also applies in cases where a covered employee discontinues the
coverage of a spouse in anticipation of a divorce or legal separation.
In such a case, upon receiving notice of the divorce or legal
separation, a plan is required to make COBRA continuation coverage
available, effective on the date of the divorce or legal separation
(but not for any period before the date of the divorce or legal
separation).
Under the final regulations, as under the 1987 proposed
regulations, an event must occur while the group health plan is subject
to COBRA in order to constitute a qualifying event. A plan that is
excepted from COBRA (for example, by reason of the small-employer plan
exception) and that later becomes subject to COBRA is not required to
provide COBRA continuation coverage to individuals who experienced what
would otherwise be a qualifying event during the period when the plan
was not subject to COBRA.
Finally, in the case of a child born to or placed for adoption with
a covered employee during a period of COBRA continuation coverage, the
qualifying event that gives rise to that period of COBRA continuation
coverage is the qualifying event applicable to that child. Thus, if a
second qualifying event has
[[Page 5166]]
occurred before such a child is born (for example, if the covered
employee dies), the second qualifying event also applies to the newborn
child.
COBRA Continuation Coverage
The 1987 proposed regulations generally refer to the coverage that
a qualified beneficiary is entitled to as the coverage that was in
effect on the day before the qualifying event. While that is generally
true, the final regulations have been revised to incorporate the
statutory standard that a qualified beneficiary is entitled to the
coverage made available to similarly situated beneficiaries with
respect to whom a qualifying event has not occurred. The final
regulations generally use as a shorthand for this statutory language
the phrase ``similarly situated nonCOBRA beneficiaries'' instead of the
phrase ``similarly situated active employees'' used in the 1987
proposed regulations. In certain contexts in the final regulations,
though, the phrase ``similarly situated active employees'' is still
used because in those contexts--such as the right to make an
independent election for COBRA continuation coverage--qualified
beneficiaries who are spouses and dependent children of covered
employees are entitled to the rights that employees have (and in those
contexts, spouses and dependent children who are not qualified
beneficiaries typically do not have the rights that employees have).
The 1987 proposed regulations address in a separate question-and-
answer the type of coverage that must be made available to qualified
beneficiaries if a change is made in the coverage provided to similarly
situated nonCOBRA beneficiaries. The final regulations include this
rule in the question-and-answer that defines COBRA continuation
coverage. In doing so, the final regulations delete several specific
requirements in the 1987 proposed regulations. For example, if coverage
for the similarly situated nonCOBRA beneficiaries is changed or
eliminated, the 1987 proposed regulations require that qualified
beneficiaries be permitted to elect coverage under any remaining plan
made available to the similarly situated active employees. Many
commenters objected that in the case of a mere change in benefits, the
requirement to give qualified beneficiaries an election among other
plans would give them greater rights than those active employees might
have. The final regulations follow the suggestion of the commenters in
providing that the general principle--that qualified beneficiaries have
the same rights as similarly situated nonCOBRA beneficiaries--applies
in this situation. The same principle also applies in determining
whether credit for deductibles must be carried over from a discontinued
plan to a new plan. Nevertheless, if an employer or employee
organization providing more than one plan to a group of similarly
situated nonCOBRA beneficiaries eliminates benefits under one plan
without giving the similarly situated nonCOBRA beneficiaries the right
to enroll in another plan, that option would still have to be made
available to qualified beneficiaries if the employer continued to
maintain a group health plan because of the employer's obligation to
continue to make COBRA continuation coverage available.
The 1987 proposed regulations include detailed rules requiring that
qualified beneficiaries generally be offered the option of electing
only core coverage or both core and noncore coverage. These rules were
based on a reference in the conference report to the Tax Reform Act of
1986. Many commenters expressed the opinion that the reference in the
conference report is an insufficient basis for including this concept
in the regulations when nothing in the statute itself suggests a
distinction between core and noncore coverage. Commenters also
contended that the core/noncore distinction would create undue
administrative complexity and promote adverse selection. After careful
consideration, the IRS and Treasury have decided not to include in
either the final or the new proposed regulations any such requirement
to offer for core coverage separately. However, comments are invited on
whether such a requirement should be adopted.
The 1987 proposed regulations establish standards for determining
the deductibles and limits that apply to COBRA continuation coverage in
a period in which an individual or a group of family members has
coverage that is not COBRA continuation coverage and then elects COBRA
continuation coverage. (Of course, during a period in which an
individual or group of family members had only COBRA continuation
coverage, the rules for deductibles and limits would apply to them in
the same manner as they would to similarly situated nonCOBRA
beneficiaries.) Some commenters objected to the provisions of the 1987
proposed regulations for computing deductibles or limits on a family
basis in the case of a qualifying event (such as divorce) that splits a
family into two (or more) units. The 1987 proposed regulations would
require that each resulting family unit be credited with all the
expenses incurred by the entire family before the qualifying event. The
final regulations revise this rule. Under the final regulations, in
computing deductibles and limits for the family unit receiving COBRA
coverage, the plan is required to take into account only those expenses
incurred before the qualifying event by family members who are part of
the resulting family unit after the qualifying event.
The 1987 proposed regulations provide that qualified beneficiaries
moving outside the area served by a region-specific plan must be given
the right to obtain other coverage from the employer maintaining the
region-specific plan. The rule conditions the right to other coverage
on the employer having employees in the area to which the qualified
beneficiary is moving. This proposed rule unduly limits the application
of the rule in the case of an employer or employee organization that
could provide other coverage to the qualified beneficiary without
having to establish a new plan or enter into a new group insurance
contract even though the employer did not have employees or the
employee organization did not have members in the area that the
qualified beneficiary was moving to. This might be the case, for
example, if the employer or employee organization maintained a self-
insured plan or maintained an insured plan through an insurance company
licensed to provide that same product in the area that the qualified
beneficiary was moving to. The final regulations eliminate the
condition that an employer have employees in the area to which the
qualified beneficiary is moving and instead require that coverage be
made available to the qualified beneficiary if the employer or employee
organization would be able to provide coverage to the qualified
beneficiary under one of its existing plans. Generally the coverage
that must be made available is that made available to the similarly
situated nonCOBRA beneficiaries. If, however, the coverage made
available to the similarly situated nonCOBRA beneficiaries cannot be
made available in the area that the qualified beneficiary is moving to,
then the coverage that must be made available is coverage provided to
other employees.
The 1987 proposed regulations require, in the case of a plan
providing open enrollment rights, that open enrollment rights be
extended to qualified beneficiaries if an employer maintains two or
more plans. Thus, that rule, by its terms, does not require that open
enrollment rights be given if an
[[Page 5167]]
employer maintains a single plan and allows active employees during
open enrollment to switch between categories of coverage such as single
and family or among categories such as employee-only, employee-plus-
one-dependent, or employee-plus-two-or-more-dependents. The final
regulations eliminate the condition that an employer or employee
organization maintain two or more plans for a qualified beneficiary to
have open enrollment rights. Thus, open enrollment rights must be
extended to qualified beneficiaries in any case in which they are
extended to similarly situated active employees. (Note that the open
enrollment right of employees to enroll when not previously enrolled
would not have to be extended to individuals who previously did not
elect to receive COBRA continuation coverage because an individual
ceases to be a qualified beneficiary if COBRA continuation coverage is
not elected.)
The 1987 proposed regulations require that qualified beneficiaries
be given the same right to add new family members that similarly
situated active employees have. Many commenters objected to this rule,
arguing that it requires more than a mere continuation of coverage.
However, COBRA continuation coverage is more than just a continuation
of the coverage a qualified beneficiary had before the qualifying
event; it includes the same procedural rights to expand or change
coverage that similarly situated active employees have. Moreover, the
policy behind the 1987 proposed regulations is reflected in the HIPAA
amendment to COBRA creating special qualified beneficiary status for
certain newborn and adopted children as well as in the HIPAA special
enrollment rights in section 9801(f) for new spouses and for newborn
and adopted children. Accordingly, the final regulations provide
guidance on the application of the HIPAA special enrollment rights to
qualified beneficiaries and retain the rule in the 1987 proposed
regulations regarding the right of qualified beneficiaries to add new
family members (even though not eligible for the HIPAA special
enrollment rights) to the same extent that active employees are
permitted to add new family members.
Electing COBRA Continuation Coverage
The final regulations set forth rules regarding elections of COBRA
continuation coverage by qualified beneficiaries. In general, a group
health plan is required to offer a qualified beneficiary the
opportunity to elect COBRA continuation coverage at any time during the
election period. The election period begins not later than the date the
qualified beneficiary would lose coverage by reason of a qualifying
event and ends not earlier than 60 days after the later of that date or
60 days after the date on which the qualified beneficiary is provided
notice of her or his right to elect COBRA continuation coverage. For
purposes of determining whether a qualified beneficiary's election of
COBRA continuation coverage is timely, the election is deemed to be
made on the date it is sent to the employer or plan administrator. The
final regulations clarify that a qualified beneficiary need not herself
or himself elect COBRA continuation coverage; that election can be made
on behalf of the qualified beneficiary by a third party (including a
third party that is not a qualified beneficiary).
Generally, the employer or plan administrator must determine when a
qualifying event has occurred, and a qualified beneficiary is not
required to give notice of the event. However, a covered employee or
qualified beneficiary is required to notify the plan administrator of a
qualifying event that is a divorce or legal separation of the covered
employee or a dependent child's ceasing to be a dependent child under
the plan terms. The 1987 proposed regulations prescribe that the
notification should be given to the employer or other plan
administrator. The final regulations simply require that the notice be
provided to the plan administrator.
The notice must be provided within 60 days after the date of the
qualifying event or the date on which the qualified beneficiary would
lose coverage because of the qualifying event, whichever is later. If
the notice is not provided, the group health plan is not required to
make COBRA continuation coverage available to the qualified
beneficiary.\5\ In the case of the covered employee's divorce or legal
separation, a single notice sent by or on behalf of the covered
employee or any one of the qualified beneficiaries (that is, the spouse
or a dependent child) satisfies the notice requirement for all those
who become qualified beneficiaries as a result of the divorce or legal
separation.
---------------------------------------------------------------------------
\5\ The U.S. Department of Labor has advised the IRS and
Treasury that, if a covered employee or qualified beneficiary has
not been adequately informed of the obligation to provide notice in
the case of a qualifying event that is the divorce or legal
separation of the covered employee or that is a dependent child's
ceasing to be covered under the generally applicable requirements of
the plan, the covered employee's or qualified beneficiary's failure
to provide timely notice to the plan administrator will not affect
the plan's obligation to make continuation coverage available upon
receiving notice of such event.
---------------------------------------------------------------------------
The group health plan must make COBRA continuation coverage
available for the entire election period if the qualified beneficiary
elects coverage prior to the end of the period (except in the case of a
revoked waiver, as discussed below). An employer or employee
organization maintaining a group health plan using an indemnity or
reimbursement arrangement can satisfy this requirement by continuing
the qualified beneficiary's coverage during the election period or by
discontinuing the coverage until the qualified beneficiary elects COBRA
and then retroactively reinstating the qualified beneficiary's
coverage. Under the final regulations, as under the 1987 proposed
regulations, the date of the qualifying event (and thus, the beginning
of the maximum coverage period) is not delayed merely because a plan
provides coverage during the election period. Claims incurred by the
qualified beneficiary during the election period do not have to be paid
until COBRA continuation coverage is elected and any payment required
for coverage is made.
For a group health plan providing health services--including a
health maintenance organization or a walk-in clinic--a qualified
beneficiary who has not elected and paid for COBRA continuation
coverage can be required to choose either to elect and to pay for
coverage or to pay a reasonable and customary charge for plan services
(but only if the qualified beneficiary will be reimbursed for that
charge within 30 days after she or he elects COBRA continuation
coverage and makes any payment for coverage). Alternatively, the plan
can treat the qualified beneficiary's use of the plan's health services
as a constructive election of COBRA continuation coverage and, if it so
notifies the qualified beneficiary prior to the use of services, can
require payment for COBRA continuation coverage.
The final regulations adopt the position in Communications Workers
of America v. NYNEX Corp., 898 F.2d 887 (2d Cir. 1989), regarding the
responses that a group health plan must make with respect to the rights
of a qualified beneficiary during that qualified beneficiary's election
period. Specifically, the final regulations require that the plan make
a complete response to any inquiry from a health care provider
regarding the qualified beneficiary's right to coverage under the plan
during the election period. Thus, if the qualified beneficiary has not
yet elected COBRA continuation coverage
[[Page 5168]]
but remains covered under the plan during the election period (subject
to retroactive cancellation if no election is made), the plan must so
inform the health care provider. Conversely, if the qualified
beneficiary is not covered during the election period prior to her or
his election, the plan must inform the health care provider that the
qualified beneficiary does not have current coverage but will have
retroactive coverage if COBRA continuation coverage is elected. (The
final regulations also include similar requirements with respect to
inquiries made by health care providers during the 30- and 45-day grace
periods for paying for COBRA continuation coverage.)
A qualified beneficiary who waives COBRA continuation coverage
during the election period can revoke the waiver before the end of the
election period, but the group health plan is not then required to
provide coverage as of any date prior to the revocation. Although
several commenters objected to the rule in the 1987 proposed
regulations allowing the revocation during the election period of any
previous waiver, the final regulations retain this rule. If the rule
permitted irrevocable waivers, plans might induce qualified
beneficiaries to execute waivers hastily before becoming fully informed
of their rights and having the opportunity to carefully consider
whether to elect COBRA. As with the election of COBRA continuation
coverage, a waiver or a revocation of a waiver is deemed to be made on
the date sent. The employer or employee organization maintaining the
group health plan is not permitted to withhold money, benefits, or
anything else to which the qualified beneficiary is entitled under any
law or agreement in order to induce a qualified beneficiary to make
payment for COBRA continuation coverage or to surrender any rights
under COBRA. Any waiver of COBRA continuation coverage rights obtained
through such means will be invalid. However, the general rules for
coverage during the election period apply in the case of waivers and
revocations of waivers. Thus, in the case of an indemnity arrangement,
the plan can deny coverage for claims until payment for the coverage
has been made (as can also be done with those health maintenance
organizations or walk-in clinics that adopt this method for complying
with the COBRA continuation coverage requirements during the election
period).
A group health plan must offer each qualified beneficiary the
opportunity to make an independent election to receive COBRA
continuation coverage and, during an open enrollment period, to choose
among any options available to similarly situated active employees.
This requirement also applies to any child born to or placed for
adoption with a covered employee during a period of COBRA continuation
coverage. (An election for a minor child may be made by the child's
parent or legal guardian.) If a covered employee or the spouse of a
covered employee elects COBRA continuation coverage and the election
does not specify whether the election is for self-only coverage, the
election is deemed to include an election of COBRA continuation
coverage on behalf of other qualified beneficiaries with respect to
that qualifying event.
Duration of COBRA Continuation Coverage
The 1987 proposed regulations incorporate the statutory bases for
terminating COBRA continuation coverage except the rule (added by OBRA
1989 and amended by HIPAA) that COBRA coverage can be terminated in the
month that is more than 30 days after a final determination that a
qualified beneficiary is no longer disabled. The new proposed
regulations add this statutory basis for terminating COBRA coverage,
with two clarifications. First, the new proposed regulations clarify
that a determination that a qualified beneficiary is no longer disabled
allows termination of COBRA continuation coverage for all qualified
beneficiaries who were entitled to the disability extension by reason
of the disability of the qualified beneficiary who has been determined
to no longer be disabled. Second, the new proposed regulations clarify
that such a determination does not allow termination of the COBRA
continuation coverage of a qualified beneficiary before the end of the
maximum coverage period that would apply without regard to the
disability extension.
Section 4980B(f)(2)(B)(iv) provides that a qualified beneficiary's
right to COBRA continuation coverage may be terminated when the
qualified beneficiary ``first becomes,'' after the date of the COBRA
election, covered under another group health plan (subject to certain
additional conditions) or entitled to Medicare benefits. The final
regulations add two new questions-and-answers that provide guidance on
this provision.
The 1987 proposed regulations substitute ``is'' for the statutory
phrase ``first becomes.'' The effect of this substitution was to permit
an employer to cut off a qualified beneficiary's right to COBRA
continuation coverage based upon other group health plan coverage that
the qualified beneficiary first became covered under before she or he
elected COBRA coverage. In the case of entitlement to Medicare
benefits, the 1987 proposed regulations not only shift the statutory
``becomes'' to ``is,'' they also exclude from the definition of
qualified beneficiary anyone who is entitled to Medicare benefits on
the day before the qualifying event. After careful consideration, the
IRS and Treasury concluded that the better interpretation of the
statute is that other group health plan coverage that a qualified
beneficiary has before the COBRA election is not a basis for cutting
off the qualified beneficiary's right to COBRA continuation coverage.
(The same rule applies for entitlement to Medicare benefits.)
Based upon the recommendation of the IRS, the Solicitor General
filed an amicus brief before the Supreme Court urging this position,
which was unanimously adopted by the Supreme Court in Geissal v. Moore
Medical Corp., 118 S. Ct. 1869 (1998). The final regulations adopt the
position urged by the IRS and Treasury and adopted by the Court in
Geissal. They provide that an employer may cut off the right to COBRA
continuation coverage based upon other group health plan coverage or
entitlement to Medicare benefits only if the qualified beneficiary
first becomes covered under the other group health plan coverage or
entitled to the Medicare benefits after the date of the COBRA election.
The statutory rule allowing a plan to discontinue COBRA
continuation coverage on account of coverage under another group health
plan was amended by OBRA 1989 to prohibit the discontinuance if the
qualified beneficiary's other coverage was subject to a preexisting
condition exclusion. This amendment was further modified by HIPAA to
allow discontinuance of COBRA continuation coverage if the preexisting
condition exclusion does not apply or is satisfied by reason of the
limitations on preexisting condition exclusions in section 9801. The
final regulations reflect this amendment and clarify that coverage
under another group health plan includes coverage under a governmental
plan.
Many commenters asked whether mere eligibility for Medicare
justifies a discontinuance of COBRA continuation coverage. In addition,
many inquiries have been received that ask whether the qualified
beneficiary must be entitled to both Part A and B of Medicare. The
final regulations clarify that entitlement to Medicare benefits means
being enrolled
[[Page 5169]]
in Medicare and does not mean merely being eligible to enroll in
Medicare. The final regulations also clarify that being entitled to
either Part A or B is sufficient for the plan to discontinue COBRA
continuation coverage (assuming that the entitlement to Medicare
benefits first arises after COBRA continuation coverage has been
elected).
The 1987 proposed regulations allow a plan to discontinue providing
COBRA continuation coverage to a qualified beneficiary for cause on the
same basis that the plan could terminate for cause the coverage of a
similarly situated active employee (except for payments that would be
untimely if made by a nonCOBRA beneficiary but that are made within the
grace periods provided by COBRA). The final regulations provide that,
for example, if a plan terminates the coverage of similarly situated
active employees for the submission of a fraudulent claim, then the
COBRA continuation coverage of a qualified beneficiary can also be
terminated for the submission of a fraudulent claim.
The 1987 proposed regulations reflect the statutory rules that were
then in effect for the maximum period that a plan is required to make
COBRA continuation coverage available. Since then the statute has been
amended to add the disability extension, to permit plans to extend the
notice period if the maximum coverage period is also extended (referred
to as the optional extension of the required periods), and to add a
special rule in the case of Medicare entitlement preceding a qualifying
event that is the termination or reduction of hours of employment. The
new proposed regulations reflect these statutory changes. The maximum
coverage period for a qualifying event that is the bankruptcy of the
employer has also been added to the new proposed regulations.
The 1998 proposed regulations set forth the requirements for a
disability extension to apply to a qualified beneficiary. Those
requirements have been incorporated into the final regulations, with
one clarification. One of the conditions for a disability extension to
apply is that the qualified beneficiary be disabled during the first 60
days of COBRA continuation coverage. In the case of a qualified
beneficiary who is born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage, the final
regulations clarify that the 60-day period is measured from the date of
the child's birth or placement for adoption.
The 1987 proposed regulations set forth standards for expanding the
maximum coverage period in the case of multiple qualifying events.
Since 1987, the statutory rules for multiple qualifying events have
been affected by the addition of the disability extension and the
optional extension of required periods. The final regulations reflect
the statutory changes.
In addition, the final regulations clarify that a termination of
employment following a qualifying event that is a reduction of hours of
employment does not expand the maximum coverage period. Accord, Burgess
v. Adams Tool & Engineering, Inc., 908 F. Supp. 473 (W.D. Mich. 1995);
contra, Gibbs v. Anchorage School District, 1995 U.S. LEXIS 6290 (D.
Ark. 1995). The underlying pattern in the statute is generally to
require 18 months (or 29 months, in the case of a disability extension)
of coverage for qualifying events that are the termination or reduction
of hours of a covered employee's employment and 36 months for other
qualifying events. The statutory provision for expansion of the 18-
month period to 36 months upon the occurrence of a second qualifying
event generally follows this pattern by allowing a qualified
beneficiary who would have been entitled to 36 months of coverage if
the second qualifying event had occurred first to get a total of 36
months of COBRA continuation coverage. The statute lists six categories
of qualifying events, and termination of employment and reduction of
hours of employment are in the same category (just as divorce and legal
separation are in the same category of qualifying event). Treating a
reduction of hours of employment and a termination of employment as
variations of a single qualifying event rather than as two distinct
qualifying events is consistent with the overall design of the statute.
The 1987 proposed regulations address situations in which,
following a qualifying event, an employer provides alternative
coverage, rather than COBRA continuation coverage, to a former employee
and her or his spouse and dependent children. The 1987 proposed
regulations provide that if the alternative coverage does not satisfy
the requirements for COBRA continuation coverage, each qualified
beneficiary must be given the opportunity to elect COBRA continuation
coverage instead of the alternative coverage. If, however, the
alternative coverage would satisfy the requirements for COBRA
continuation coverage, the 1987 proposed regulations provide that, at
the time of the original qualifying event, the employee, spouse, and
dependent children need not be provided with the opportunity to elect
COBRA continuation coverage. The final regulations generally retain
these rules but also clarify that if the employer increases the
employee share of premiums upon the occurrence of a qualifying event,
the qualified beneficiaries must be offered the opportunity to elect
COBRA continuation coverage.
The 1987 proposed regulations further provide that, if the
alternative coverage does not satisfy the requirements for COBRA
continuation coverage and if, after the original qualifying event, a
qualifying event occurs that would cause a spouse or dependent child to
lose the alternative coverage, the spouse or child must be offered
COBRA continuation coverage. However, if the alternative coverage
satisfies the requirements for COBRA continuation coverage, and if
another qualifying event that causes the spouse or dependent child to
lose the alternative coverage occurs more than 18 months after the
original qualifying event, the 1987 proposed regulations provide that
the spouse or dependent child need not be offered COBRA continuation
coverage. The final regulations modify the 1987 proposed regulations
and provide that if an event such as the death of or divorce from the
covered employee would end the right of a spouse or dependent child to
receive the alternative coverage (whether during or after the first 18
months of COBRA continuation coverage), then that event is a qualifying
event, regardless of whether the alternative coverage would satisfy the
requirements for COBRA continuation coverage.
The Uniformed Services Employment and Reemployment Rights Act of
1994 (USERRA) gives certain members of the military reserves the right
to up to 18 months of continuation coverage when they are called to
active duty. Many people have asked if the USERRA and COBRA periods of
continuation coverage run concurrently or consecutively. The final
regulations clarify that USERRA coverage is alternative coverage. Thus,
the periods run concurrently.
The 1987 proposed regulations include the statutory rule requiring
that a conversion option otherwise made available under the plan be
made available within 180 days before the end of the maximum coverage
period. The final regulations adopt this rule without change.
Paying for COBRA Continuation Coverage
The 1987 proposed regulations identify the qualified beneficiary as
the person that can be required to pay the
[[Page 5170]]
applicable premium. Many plans and employers have asked whether they
must accept payment on behalf of a qualified beneficiary from third
parties, such as a hospital or a new employer. Nothing in the statute
requires the qualified beneficiary to pay the amount required by the
plan; the statute merely permits the plan to require that payment be
made. In order to make clear that any person may make the required
payment on behalf of a qualified beneficiary, the final regulations
modify the rule in the 1987 proposed regulations to refer to the
payment requirement without identifying the person who makes the
payment.
The 1998 proposed regulations address the amount that a plan can
require to be paid for COBRA continuation coverage during the
disability extension. This amount is 150 percent of the applicable
premium instead of the limit of 102 percent of the applicable premium
that applies for coverage outside the disability extension. The 1998
proposed regulations specifically reserve the issue of the amount a
plan could require to be paid in a case where only nondisabled family
members of the disabled individual receive COBRA continuation coverage
during the disability extension. The preamble to the 1998 proposed
regulations solicited comments on this issue. Commenters suggested that
the 150 percent rate could be required if the disabled individual was
part of the coverage group but that the limit could be the 102 percent
rate if only nondisabled qualified beneficiaries were in the coverage
group. The final regulations adopt this suggestion.
The 1987 proposed regulations provide that the amount required to
be paid for a qualified beneficiary's COBRA continuation coverage must
be fixed in advance for each 12-month determination period. Many
commenters suggested exceptions that could be made to this general
rule. Section 4980B(f)(4)(C) explicitly requires that the determination
of the applicable premium be made for a period of 12 months and that
the determination be made before the beginning. Therefore, the final
regulations do not permit an increase in the applicable premium during
the 12-month determination period. However, the final regulations do
revise the general rule from the 1987 proposed regulations to recognize
the difference between the applicable premium (which may not be
increased during a 12-month determination period and which is the basis
for calculating the maximum amount that the plan can require to be paid
for COBRA continuation coverage) and the maximum amount that the plan
can require to be paid for COBRA continuation coverage. Thus, the final
regulations permit a plan to increase the amount it requires to be paid
for COBRA continuation coverage during a determination period to take
into account the permitted increases during the disability extension,
to explicitly permit a plan that is requiring payment of less than the
maximum permissible amount to increase the amount required to be paid
during the 12-month determination period, and to permit an increase if
a qualified beneficiary changes to more expensive coverage (but also to
require a reduction if the qualified beneficiary changes to less
expensive coverage).
The 1987 proposed regulations set forth the statutory requirement
that qualified beneficiaries be allowed to pay for COBRA coverage in
monthly installments. The 1987 proposed regulations add that plans may
allow payment to be made at other intervals, and specifically mention
quarterly or semiannual payment as examples. The final regulations
adopt the rule in the 1987 proposed regulations, but the final
regulations add weekly payment as an example to make clear that shorter
than monthly installments are also permitted.
The 1987 proposed regulations provide that the first payment for
COBRA continuation coverage does not apply prospectively only. In order
to make clear that a plan is not precluded from allowing a qualified
beneficiary to apply the first payment prospectively only, the final
regulations provide that qualified beneficiaries need not be given the
option of having the first payment for COBRA continuation coverage
apply prospectively only.
The 1987 proposed regulations address the issue of timely payment
for COBRA continuation coverage, including an interpretation of the
statutory grace periods of 45 days for the initial payment and 30 days
for all other payments. Commenters pointed out that the application of
the statutory grace period rules could produce an anomalous result in
some situations, such as allowing a plan to require payment for the
third month of COBRA continuation coverage earlier than the plan could
require payment for the first two months. OBRA 1989 amended the 45-day
grace period rule to prevent this, and the final regulations conform to
the OBRA 1989 change. The final regulations also clarify that payment
is considered made on the date it is sent.
The final regulations also add a requirement (similar to the one
described above for the election period) relating to the response that
a plan must give when a health care provider, such as a physician, a
hospital, or a pharmacy, contacts the plan to confirm coverage of a
qualified beneficiary with respect to whom the required payment has not
been made for the current period (but for whom any applicable grace
period has not expired). In such a case, the plan is required to inform
the health care provider of all of the details of the qualified
beneficiary's right to coverage during the applicable grace periods.
Many individuals have inquired about a plan's right to discontinue
their COBRA continuation coverage because the amount of the payment
made was short by an amount that is not significant. Sometimes the
error has been clearly one of transposed digits on a check tendered for
payment; in other instances, payment has been short by such a small
amount that it would be unreasonable to attribute the shortfall to
anything other than mistake. The final regulations establish a
mechanism for the treatment of payments that are short by an
insignificant amount. Either the plan must treat the payment as
satisfying the plan's payment requirement or it must notify the
qualified beneficiary of the amount of the deficiency and grant the
qualified beneficiary a reasonable period of time for the deficiency to
be paid. The final regulations provide that, as a safe harbor, a period
of 30 days is deemed to be a reasonable period for this purpose.
Business Reorganizations
The 1987 proposed regulations provide little direct guidance on the
allocation of responsibility for COBRA continuation coverage in the
event of corporate transactions, such as a sale of stock of a
subsidiary or a sale of substantial assets. Commenters on the 1987
proposed regulations requested further guidance on corporate
transactions, pointing out that the existing degree of uncertainty
tends to drive up the costs and risks of a transaction to both buyers
and sellers. The IRS and Treasury share this view and believe also that
greater certainty helps to protect the rights of qualified
beneficiaries in these transactions. The IRS has been contacted by many
qualified beneficiaries whose COBRA continuation coverage has been
dropped or denied in the context of a corporate transaction. In many
cases, these qualified beneficiaries have been told by each of the
buyer and the seller that the other party is the one responsible for
providing them with COBRA continuation coverage.
[[Page 5171]]
The preamble to the 1998 proposed regulations requested comments on
a possible approach to allocating responsibility for COBRA continuation
coverage in corporate transactions. Commenters suggested that, in a
stock sale, as in an asset sale, it would be consistent with standard
commercial practice to provide that the seller retains liability for
all existing qualified beneficiaries, including those formerly
associated with the subsidiary being sold. The IRS and Treasury have
studied the comments and given consideration to several alternatives
with a view to establishing rules that will minimize the administrative
burden and transaction costs for the parties to transactions while
protecting the rights of qualified beneficiaries and maintaining
consistency with the statute.
Accordingly, the new proposed regulations make clear that the
parties to a transaction are free to allocate the responsibility for
providing COBRA continuation coverage by contract, even if the contract
imposes responsibility on a different party than would the new proposed
regulations. So long as the party to whom the contract allocates
responsibility performs its obligations, the other party will have no
responsibility for providing COBRA continuation coverage. If, however,
the party allocated responsibility under the contract defaults on its
obligation, and if, under the new proposed regulations, the other party
would have the obligation to provide COBRA continuation coverage in the
absence of a contractual provision, then the other party would retain
that obligation. This approach would avoid prejudicing the rights of
qualified beneficiaries to COBRA continuation coverage based upon the
provisions of a contract to which they were not a party and under which
the employer with the underlying obligation under the regulations to
provide COBRA continuation coverage could otherwise contract away that
obligation to a party that fails to perform. Moreover, the party with
the underlying responsibility under the regulations can insist on
appropriate security and, of course, could pursue contractual remedies
against the defaulting party.
The new proposed regulations provide, for both sales of stock and
sales of substantial assets, such as a division or plant or
substantially all the assets of a trade or business, that the seller
retains the obligation to make COBRA continuation coverage available to
existing qualified beneficiaries. In addition, in situations in which
the seller ceases to provide any group health plan to any employee in
connection with the sale whether such a cessation is in connection with
the sale is determined on the basis of the facts and circumstances of
each case and thus is not responsible for providing COBRA continuation
coverage, the new proposed regulations provide that the buyer is
responsible for providing COBRA continuation coverage to existing
qualified beneficiaries. This secondary liability for the buyer applies
in all stock sales and in all sales of substantial assets in which the
buyer continues the business operations associated with the assets
without interruption or substantial change.
A particular type of asset sale raises issues for which the new
proposed regulations do not provide any special rules. (Thus, the
general rules in the new proposed regulations for business
reorganizations would apply to this type of transaction.) This type of
asset sale is one in which, after purchasing a business as a going
concern, the buyer continues to employ the employees of that business
and continues to provide those employees exactly the same health
coverage that they had before the sale (either by providing coverage
through the same insurance contract or by establishing a plan that
mirrors the one that provided benefits before the sale). The
application of the rules in the new proposed regulations to this type
of asset sale would require the seller to make COBRA continuation
coverage available to the employees continuing in employment with the
buyer (and to other family members who are qualified beneficiaries).
Ordinarily, the continuing employees (or their family members) would be
very unlikely to elect COBRA continuation coverage from the seller when
they can receive the same coverage (usually at much lower cost) as
active employees of the buyer.
Consideration is being given to whether, under appropriate
circumstances, such an asset sale would be considered not to result in
a loss of coverage for those employees who continue in employment with
the buyer after the sale. A countervailing concern, however, relates to
those qualified beneficiaries who might have a reason to elect COBRA
continuation coverage from the seller. An example of such a qualified
beneficiary would be an employee who continues in employment with the
buyer, whose family is likely to have medical expenses that exceed the
cost of COBRA coverage, and who has significant questions about the
solvency of the buyer or other concerns about how long the buyer might
continue to provide the same health coverage.
Under one possible approach, a loss of coverage would be considered
not to have occurred so long as the purchasing employer in an asset
sale continued to maintain the same group health plan coverage that the
seller maintained before the sale without charging the employees any
greater percentage of the total cost of coverage than the seller had
charged before the sale. For this purpose, the coverage would be
considered unchanged if there was no obligation to provide a summary of
material modifications within 60 days after the change due to a
material reduction in covered services or benefits under the rules that
apply under Title I of ERISA. If these conditions were satisfied for
the maximum coverage period that would otherwise apply to the seller's
termination of employment of the continuing employees (generally 18
months from the date of the sale), then those terminations of
employment would never be considered qualifying events. If the
conditions were not satisfied for the full maximum coverage period,
then on the date when they ceased to be satisfied the seller would be
obligated to make COBRA continuation coverage available for the balance
of the maximum coverage period.
Comments are invited on the utility of such a rule, either in
situations in which the seller retains an ownership interest in the
buyer after the sale (for example, a sale of assets from a 100-percent
owned subsidiary to a 75-percent owned subsidiary) or, more generally,
in situations in which the seller and the buyer are unrelated.
Suggestions are also solicited for other rules that would protect
qualified beneficiaries while providing relief to employers in these
situations.
Although the new proposed regulations address how COBRA obligations
are affected by a sale of stock (and a sale of substantial assets), the
new proposed regulations do not address how the obligation to make
COBRA continuation coverage available is affected by the transfer of an
ownership interest in a noncorporate entity that causes the
noncorporate entity to cease to be a member of a group of trades or
businesses under common control (whether or not it becomes a member of
a different group of trades or business under common control). Comments
are invited on this issue.
[[Page 5172]]
Employer Withdrawals From Multiemployer Plans
The new proposed regulations also address COBRA obligations in
connection with an employer's cessation of contributions to a
multiemployer group health plan. The new proposed regulations provide
that the multiemployer plan generally continues to have the obligation
to make COBRA continuation coverage available to qualified
beneficiaries associated with that employer. (There generally would not
be any obligation to make COBRA continuation coverage available to
continuing employees in this situation because a cessation of
contributions is not a qualifying event.) However, once the employer
provides group health coverage to a significant number of employees who
were formerly covered under the multiemployer plan, or starts
contributing to another multiemployer plan on their behalf, the
employer's plan (or the new multiemployer plan) would have the
obligation to make COBRA continuation coverage available to the
existing qualified beneficiaries. This rule is contrary to the holding
in In re Appletree Markets, Inc., 19 F.3d 969 (5th Cir. 1994), which
held that the multiemployer plan continued to have the COBRA
obligations with respect to existing qualified beneficiaries after the
withdrawing employer established a plan for the same class of employees
previously covered under the multiemployer plan.
Interaction of FMLA and COBRA
The new proposed regulations set forth rules regarding the
interaction of the COBRA continuation coverage requirements with the
provisions of the Family and Medical Leave Act of 1993 (FMLA). The
rules under the new proposed regulations are substantially the same as
those set forth in Notice 94-103. The last two questions-and-answers in
that notice have not been included in the new proposed regulations
because they relate to general subject matter that is addressed
elsewhere in the regulations.
Under the new proposed regulations, the taking of FMLA leave by a
covered employee is not itself a qualifying event. Instead, a
qualifying event occurs when an employee who is covered under a group
health plan immediately prior to FMLA leave (or who becomes covered
under a group health plan during FMLA leave) does not return to work
with the employer at the end of FMLA leave and would, but for COBRA
continuation coverage, lose coverage under the group health plan. (As
under the general rules of COBRA, this would also constitute a
qualifying event with respect to the spouse or any dependent child of
the employee.) The qualifying event is deemed to occur on the last day
of the employee's FMLA leave, and the maximum coverage period generally
begins on that day. (The new proposed regulations provide a special
rule for cases where coverage is not lost until a later date and the
plan provides for the optional extension of the required periods.) In
the case of such a qualifying event, the employer cannot condition the
employee's rights to COBRA continuation coverage on the employee's
reimbursement of any premiums paid by the employer to maintain the
employee's group health plan coverage during the period of FMLA leave.
Any lapse of coverage under the group health plan during the period
of FMLA leave and any state or local law requiring that group health
plan coverage be provided for a period longer than that required by the
FMLA are disregarded in determining whether the employee has a
qualifying event on the last day of that leave. However, the employee's
loss of coverage at the end of FMLA leave will not constitute a
qualifying event if, prior to the employee's return from FMLA leave,
the employer has eliminated group health plan coverage for the class of
employees to which the employee would have belonged if she or he had
not taken FMLA leave.
Special Analyses.
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that the collections of information in these regulations will
not have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that employers with
fewer than 20 employees are not subject to the requirements set forth
in the final regulations and, thus, the very smallest employers are not
affected by the collection of information requirements. Moreover, even
for small entities with 20 or more employees who maintain group health
plans and who, thus, are subject to the requirements of COBRA, the
collections of information will not impose a substantial economic
impact. The only collections of information imposed on small entities
by the regulations are (1) to notify qualified beneficiaries of their
right to elect COBRA continuation coverage upon the occurrence of a
qualifying event and (2) to notify certain qualified beneficiaries that
make insignificant payment errors of those errors. With respect to this
first notice requirement, it is estimated that, on average, in a given
year, qualifying events will occur with respect to approximately 10
percent of all covered employees. Thus, an employer with 100 employees
would be required to send 10 notices to qualified beneficiaries each
year. The average cost of sending such a notice is estimated to be
$.50. Thus, the total estimated cost for 10 notices is $5.00, which is
the estimated annual average burden on an employer with 100 employees.
With respect to the second notice requirement, it is estimated that, on
average, at any time, the number of qualified beneficiaries is
approximately equal to two percent of an employer's workforce. Of that
number, approximately 1 in 10 will make an insignificant error in
payment each year that requires the employer to send such a notice. For
example, an employer with 100 employees will have an average of two
qualified beneficiaries at any time. Thus, the employer will receive an
insignificant underpayment about once every five years. Even if the
employer chose to send out a notice each time such an insignificant
underpayment occurred, this would amount to only one notice every five
years. The average cost of sending such a notice is estimated to be
$5.00, resulting in an average annual burden of $1.00 for an employer
with 100 employees. Thus, the total annual cost of these two notice
requirements for an employer with 100 employees is $6.00, which is not
a significant economic impact. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is
not required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. Pursuant to section 7805(f) of the Internal Revenue
Code, the 1998 notice of proposed rulemaking preceding these final
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting information. The principal author of these regulations is
Russ Weinheimer, Office of the Associate Chief Counsel (Employee
Benefits and Exempt Organizations), IRS. However, other personnel from
the IRS and Treasury Department participated in their development.
[[Page 5173]]
List of Subjects
26 CFR Part 54
Excise taxes, Health care, Health insurance, Pensions, Reporting
and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 54 and 602 are amended as follows:
PART 54--PENSION EXCISE TAXES
Paragraph 1. The authority citation for part 54 is amended by
adding the following entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B-1 also issued under 26 U.S.C. 4980B.
Section 54.4980B-2 also issued under 26 U.S.C. 4980B.
Section 54.4980B-3 also issued under 26 U.S.C. 4980B.
Section 54.4980B-4 also issued under 26 U.S.C. 4980B.
Section 54.4980B-5 also issued under 26 U.S.C. 4980B.
Section 54.4980B-6 also issued under 26 U.S.C. 4980B.
Section 54.4980B-7 also issued under 26 U.S.C. 4980B.
Section 54.4980B-8 also issued under 26 U.S.C. 4980B. * * *
Par. 2. Sections 54.4980B-0, 54.4980B-1, 54.4980B-2, 54.4980B-3,
54.4980B-4, 54.4980B-5, 54.4980B-6, 54.4980B-7, and 54.4980B-8 are
added to read as follows:
Sec. 54.4980B-0 Table of contents.
This section contains first a list of the section headings and then
a list of the questions in each section in Secs. 54.4980B-1 through
54.4980B-8.
List of Sections
Sec. 54.4980B-1 COBRA in general.
Sec. 54.4980B-2 Plans that must comply.
Sec. 54.4980B-3 Qualified beneficiaries.
Sec. 54.4980B-4 Qualifying events.
Sec. 54.4980B-5 COBRA continuation coverage.
Sec. 54.4980B-6 Electing COBRA continuation coverage.
Sec. 54.4980B-7 Duration of COBRA continuation coverage.
Sec. 54.4980B-8 Paying for COBRA continuation coverage.
List of Questions
Sec. 54.4980B-1 COBRA in general.
Q-1: What are the health care continuation coverage requirements
contained in section 4980B of the Internal Revenue Code and in
ERISA?
Q-2: What is the effective date of Secs. 54.4980B-1 through
54.4980B-8?
Sec. 54.4980B-2 Plans that must comply.
Q-1: For purposes of section 4980B, what is a group health plan?
Q-2: For purposes of section 4980B, what is the employer?
Q-3: [Reserved]
Q-4: What group health plans are subject to COBRA?
Q-5: What is a small-employer plan?
Q-6: [Reserved]
Q-7: What is the plan year?
Q-8: How do the COBRA continuation coverage requirements apply
to cafeteria plans and other flexible benefit arrangements?
Q-9: What is the effect of a group health plan's failure to
comply with the requirements of section 4980B(f)?
Q-10: Who is liable for the excise tax if a group health plan
fails to comply with the requirements of section 4980B(f)?
Sec. 54.4980B-3 Qualified beneficiaries.
Q-1: Who is a qualified beneficiary?
Q-2: Who is an employee and who is a covered employee?
Q-3: Who are the similarly situated nonCOBRA beneficiaries?
Sec. 54.4980B-4 Qualifying events.
Q-1: What is a qualifying event?
Q-2: Are the facts surrounding a termination of employment (such
as whether it was voluntary or involuntary) relevant in determining
whether the termination of employment is a qualifying event?
Sec. 54.4980B-5 COBRA continuation coverage.
Q-1: What is COBRA continuation coverage?
Q-2: What deductibles apply if COBRA continuation coverage is
elected?
Q-3: How do a plan's limits apply to COBRA continuation
coverage?
Q-4: Can a qualified beneficiary who elects COBRA continuation
coverage ever change from the coverage received by that individual
immediately before the qualifying event?
Q-5: Aside from open enrollment periods, can a qualified
beneficiary who has elected COBRA continuation coverage choose to
cover individuals (such as newborn children, adopted children, or
new spouses) who join the qualified beneficiary's family on or after
the date of the qualifying event?
4.4980B-6 Electing COBRA continuation coverage.
Q-1: What is the election period and how long must it last?
Q-2: Is a covered employee or qualified beneficiary responsible
for informing the plan administrator of the occurrence of a
qualifying event?
Q-3: During the election period and before the qualified
beneficiary has made an election, must coverage be provided?
Q-4: Is a waiver before the end of the election period effective
to end a qualified beneficiary's election rights?
Q-5: Can an employer or employee organization withhold money or
other benefits owed to a qualified beneficiary until the qualified
beneficiary either waives COBRA continuation coverage, elects and
pays for such coverage, or allows the election period to expire?
Q-6: Can each qualified beneficiary make an independent election
under COBRA?
54.4980B-7 Duration of COBRA continuation coverage.
Q-1: How long must COBRA continuation coverage be made available
to a qualified beneficiary?
Q-2: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to coverage under another group health
plan?
Q-3: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to the qualified beneficiary's entitlement
to Medicare benefits?
Q-4: [Reserved]
Q-5: How does a qualified beneficiary become entitled to a
disability extension?
Q-6: Under what circumstances can the maximum coverage period be
expanded?
Q-7: If health coverage is provided to a qualified beneficiary
after a qualifying event without regard to COBRA continuation
coverage (for example, as a result of state or local law, the
Uniformed Services Employment and Reemployment Rights Act of 1994
(38 U.S.C. 4315), industry practice, a collective bargaining
agreement, severance agreement, or plan procedure), will such
alternative coverage extend the maximum coverage period?
Q-8: Must a qualified beneficiary be given the right to enroll
in a conversion health plan at the end of the maximum coverage
period for COBRA continuation coverage?
54.4980B-8 Paying for COBRA continuation coverage.
Q-1: Can a group health plan require payment for COBRA
continuation coverage?
Q-2: When is the applicable premium determined and when can a
group health plan increase the amount it requires to be paid for
COBRA continuation coverage?
Q-3: Must a plan allow payment for COBRA continuation coverage
to be made in monthly installments?
Q-4: Is a plan required to allow a qualified beneficiary to
choose to have the first payment for COBRA continuation coverage
applied prospectively only?
Q-5: What is timely payment for COBRA continuation coverage?
Sec. 54.4980B-1 COBRA in general.
The COBRA continuation coverage requirements are described in
general in the following questions-and-answers:
Q-1: What are the health care continuation coverage requirements
contained in section 4980B of the Internal Revenue Code and in ERISA?
A-1: (a) Section 4980B provides generally that a group health plan
must offer each qualified beneficiary who would otherwise lose coverage
under the plan as a result of a qualifying event an opportunity to
elect, within the election period, continuation coverage under the
plan. The continuation coverage requirements were added to section 162
by the Consolidated
[[Page 5174]]
Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272
(100 Stat. 222), and moved to section 4980B by the Technical and
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342).
Continuation coverage required under section 4980B is referred to in
Secs. 54.4980B-1 through 54.4980B-8 as COBRA continuation coverage.
(b) COBRA also added parallel continuation coverage requirements to
Part 6 of Subtitle B of Title I of the Employee Retirement Income
Security Act of 1974 (ERISA) (29 U.S.C. 1161-1168), which is
administered by the U.S. Department of Labor. If a plan does not comply
with the COBRA continuation coverage requirements, the Internal Revenue
Code imposes an excise tax on the employer maintaining the plan (or on
the plan itself), whereas ERISA gives certain parties--including
qualified beneficiaries who are participants or beneficiaries within
the meaning of Title I of ERISA, as well as the Department of Labor--
the right to file a lawsuit to redress the noncompliance. The rules in
Secs. 54.4980B-1 through 54.4980B-8 apply for purposes of section 4980B
and generally also for purposes of the COBRA continuation coverage
requirements in Title I of ERISA. However, certain provisions of the
COBRA continuation coverage requirements (such as the definitions of
group health plan, employee, and employer) are not identical in the
Internal Revenue Code and Title I of ERISA. In those cases in which the
statutory language is not identical, the rules in Secs. 54.4980B-1
though 54.4980B-8 nonetheless apply to the COBRA continuation coverage
requirements of Title I of ERISA, except to the extent those rules are
inconsistent with the statutory language of Title I of ERISA.
(c) A group health plan that is subject to section 4980B (or the
parallel provisions under ERISA) is referred to as being subject to
COBRA. (See Q&A-4 of Sec. 54.4980B-2). A qualified beneficiary can be
required to pay for COBRA continuation coverage. The term qualified
beneficiary is defined in Q&A-1 of Sec. 54.4980B-3. The term qualifying
event is defined in Q&A-1 of Sec. 54.4980B-4. COBRA continuation
coverage is described in Sec. 54.4980B-5. The election procedures are
described in Sec. 54.4980B-6. Duration of COBRA continuation coverage
is addressed in Sec. 54.4980B-7, and payment for COBRA continuation
coverage is addressed in Sec. 54.4980B-8. Unless the context indicates
otherwise, any reference in Secs. 54.4980B-1 through 54.4980B-8 to
COBRA refers to section 4980B (as amended) and to the parallel
provisions of ERISA.
Q-2: What is the effective date of Secs. 54.4980B-1 through
54.4980B-8?
A-2: Sections 54.4980B-1 through 54.4980B-8 apply with respect to
qualifying events occurring in plan years beginning on or after January
1, 2000. For purposes of section 4980B, with respect to qualifying
events that occur in plan years beginning before that date, and with
respect to qualifying events that occur in plan years beginning on or
after that date for topics relating to the COBRA continuation coverage
requirements of section 4980B that are not addressed in Secs. 54.4980B-
1 through 54.4980B-8 (such as methods for calculating the applicable
premium), plans and employers must operate in good faith compliance
with a reasonable interpretation of the statutory requirements in
section 4980B.
Sec. 54.4980B-2 Plans that must comply.
The following questions-and-answers apply in determining which
plans must comply with the COBRA continuation coverage requirements:
Q-1: For purposes of section 4980B, what is a group health plan?
A-1: (a) For purposes of section 4980B, a group health plan is a
plan maintained by an employer or employee organization to provide
health care to individuals who have an employment-related connection to
the employer or employee organization or to their families. Individuals
who have an employment-related connection to the employer or employee
organization consist of employees, former employees, the employer, and
others associated or formerly associated with the employer or employee
organization in a business relationship (including members of a union
who are not currently employees). Health care is provided under a plan
whether provided directly or through insurance, reimbursement, or
otherwise, and whether or not provided through an on-site facility
(except as set forth in paragraph (d) of this Q&A-1), or through a
cafeteria plan (as defined in section 125) or other flexible benefit
arrangement. For purposes of this Q&A-1, insurance includes not only
group insurance policies but also one or more individual insurance
policies in any arrangement that involves the provision of health care
to two or more employees. A plan maintained by an employer or employee
organization is any plan of, or contributed to (directly or indirectly)
by, an employer or employee organization. Thus, a group health plan is
maintained by an employer or employee organization even if the employer
or employee organization does not contribute to it if coverage under
the plan would not be available at the same cost to an individual but
for the individual's employment-related connection to the employer or
employee organization. These rules are further explained in paragraphs
(b) through (d) of this Q&A-1. An exception for qualified long-term
care services is set forth in paragraph (e) of this Q&A-1, and for
medical savings accounts in paragraph (f) of this Q&A-1.
(b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, health
care has the same meaning as medical care under section 213(d). Thus,
health care generally includes the diagnosis, cure, mitigation,
treatment, or prevention of disease, and any other undertaking for the
purpose of affecting any structure or function of the body. Health care
also includes transportation primarily for and essential to health care
as described in the preceding sentence. However, health care does not
include anything that is merely beneficial to the general health of an
individual, such as a vacation. Thus, if an employer or employee
organization maintains a program that furthers general good health, but
the program does not relate to the relief or alleviation of health or
medical problems and is generally accessible to and used by employees
without regard to their physical condition or state of health, that
program is not considered a program that provides health care and so is
not a group health plan. For example, if an employer maintains a spa,
swimming pool, gymnasium, or other exercise/fitness program or facility
that is normally accessible to and used by employees for reasons other
than relief of health or medical problems, such a facility does not
constitute a program that provides health care and thus is not a group
health plan. In contrast, if an employer maintains a drug or alcohol
treatment program or a health clinic, or any other facility or program
that is intended to relieve or alleviate a physical condition or health
problem, the facility or program is considered to be the provision of
health care and so is considered a group health plan.
(c) Whether a benefit provided to employees constitutes health care
is not affected by whether the benefit is excludable from income under
section 132 (relating to certain fringe benefits). For example, if a
department store provides its employees discounted prices on all
merchandise, including health care items such as drugs or eyeglasses,
the mere fact that the discounted prices also apply to health care
items will not cause the program to
[[Page 5175]]
be a plan providing health care, so long as the discount program would
normally be accessible to and used by employees without regard to
health needs or physical condition. If, however, the employer
maintaining the discount program is a health clinic, so that the
program is used exclusively by employees with health or medical needs,
the program is considered to be a plan providing health care and so is
considered to be a group health plan.
(d) The provision of health care at a facility that is located on
the premises of an employer or employee organization does not
constitute a group health plan if--
(1) The health care consists primarily of first aid that is
provided during the employer's working hours for treatment of a health
condition, illness, or injury that occurs during those working hours;
(2) The health care is available only to current employees; and
(3) Employees are not charged for the use of the facility.
(e) A plan does not constitute a group health plan subject to COBRA
if substantially all of the coverage provided under the plan is for
qualified long-term care services (as defined in section 7702B(c)). For
this purpose, a plan is permitted to use any reasonable method in
determining whether substantially all of the coverage provided under
the plan is for qualified long-term care services.
(f) Under section 106(b)(5), amounts contributed by an employer to
a medical savings account (as defined in section 220(d)) are not
considered part of a group health plan subject to COBRA. Thus, a plan
is not required to make COBRA continuation coverage available with
respect to amounts contributed by an employer to a medical savings
account. A high deductible health plan does not fail to be a group
health plan subject to COBRA merely because it covers a medical savings
account holder.
Q-2: For purposes of section 4980B, what is the employer?
A-2: For purposes of section 4980B, employer refers to--
(a) A person for whom services are performed;
(b) Any other person that is a member of a group described in
section 414(b), (c), (m), or (o) that includes a person described in
paragraph (a) of this Q&A-2; and
(c) Any successor of a person described in paragraph (a) or (b) of
this Q&A-2.
Q-3: [Reserved]
A-3: [Reserved]
Q-4: What group health plans are subject to COBRA?
A-4: (a) All group health plans are subject to COBRA except group
health plans described in paragraph (b) of this Q&A-4. Group health
plans described in paragraph (b) of this Q&A-4 are referred to in
Secs. 54.4980B-1 through 54.4980B-8 as excepted from COBRA.
(b) The following group health plans are excepted from COBRA--
(1) Small-employer plans (see Q&A-5 of this section);
(2) Church plans (within the meaning of section 414(e)); and
(3) Governmental plans (within the meaning of section 414(d)).
(c) The COBRA continuation coverage requirements generally do not
apply to group health plans that are excepted from COBRA. However, a
small-employer plan otherwise excepted from COBRA is nonetheless
subject to COBRA with respect to qualified beneficiaries who experience
a qualifying event during a period when the plan is not a small-
employer plan (see paragraph (g) of Q&A-5 of this section).
(d) Although governmental plans are not subject to the COBRA
continuation coverage requirements, group health plans maintained by
state or local governments are generally subject to parallel
continuation coverage requirements that were added by section 10003 of
COBRA to the Public Health Service Act (42 U.S.C. 300bb-1 through
300bb-8), which is administered by the U.S. Department of Health and
Human Services. Federal employees and their family members covered
under the Federal Employees Health Benefit Program are covered by
generally similar, but not parallel, temporary continuation of coverage
provisions enacted by the Federal Employees Health Benefits Amendments
Act of 1988. See 5 U.S.C. 8905a.
Q-5: What is a small-employer plan?
A-5: (a) Except in the case of a multiemployer plan, a small-
employer plan is a group health plan maintained by an employer (within
the meaning of Q&A-2 of this section) that normally employed fewer than
20 employees (within the meaning of paragraph (c) of this Q&A-5) during
the preceding calendar year. In the case of a multiemployer plan, a
small-employer plan is a group health plan under which each of the
employers contributing to the plan for a calendar year normally
employed fewer than 20 employees during the preceding calendar year.
The rules of this paragraph (a) are illustrated in the following
example:
Example. (i) Corporation S employs 12 employees, all of whom
work and reside in the United States. S maintains a group health
plan for its employees and their families. S is a wholly-owned
subsidiary of P. In the previous calendar year, the controlled group
of corporations including P and S employed more than 19 employees,
although the only employees in the United States of the controlled
group that includes P and S are the 12 employees of S.
(ii) Under Sec. 1.414(b)-1 of this chapter, foreign corporations
are not excluded from membership in a controlled group of
corporations. Consequently, the group health plan maintained by S is
not a small-employer plan during the current calendar year because
the controlled group including S normally employed at least 20
employees in the preceding calendar year.
(b) An employer is considered to have normally employed fewer than
20 employees during a particular calendar year if, and only if, it had
fewer than 20 employees on at least 50 percent of its typical business
days during that year.
(c) All full-time and part-time common law employees of an employer
are taken into account in determining whether an employer had fewer
than 20 employees; however, an individual who is not a common law
employee of the employer is not taken into account. Thus, the following
individuals are not counted as employees for purposes of this Q&A-5
even though they are referred to as employees for all other purposes of
Secs. 54.4980B-1 through 54.4980B-8--
(1) Self-employed individuals (within the meaning of section
401(c)(1));
(2) Independent contractors (and their employees and independent
contractors); and
(3) Directors (in the case of a corporation).
(d) [Reserved]
(e) [Reserved]
(f) [Reserved]
(g) A small-employer plan is generally excepted from COBRA. If,
however, a plan that has been subject to COBRA (that is, was not a
small-employer plan) becomes a small-employer plan, the plan remains
subject to COBRA for qualifying events that occurred during the period
when the plan was subject to COBRA. The rules of this paragraph (g) are
illustrated by the following examples:
Example 1. An employer maintains a group health plan. The
employer employed 20 employees on more than 50 percent of its
working days during 2001, and consequently the plan is not excepted
from COBRA during 2002. Employee E resigns and does not work for the
employer after January 31, 2002. Under the terms of the plan, E is
no longer eligible for coverage upon the effective date of the
resignation, that is, February 1, 2002. The employer does not hire a
replacement for E. E timely elects and pays for COBRA continuation
coverage. The employer
[[Page 5176]]
employs 19 employees for the remainder of 2002, and consequently the
plan is not subject to COBRA in 2003. The plan must nevertheless
continue to make COBRA continuation coverage available to E during
2003 until the obligation to make COBRA continuation coverage
available ceases under the rules of Sec. 54.4980B-7. The obligation
could continue until August 1, 2003, the date that is 18 months
after the date of E's qualifying event, or longer if E is eligible
for a disability extension.
Example 2. The facts are the same as in Example 1. The employer
continues to employ 19 employees throughout 2003 and 2004 and
consequently the plan continues to be excepted from COBRA during
2004 and 2005. Spouse S is covered under the plan because S is
married to one of the employer's employees. On April 1, 2002, S is
divorced from that employee and ceases to be eligible for coverage
under the plan. The plan is subject to COBRA during 2002 because X
normally employed 20 employees during 2001. S timely notifies the
plan administrator of the divorce and timely elects and pays for
COBRA continuation coverage. Even though the plan is generally
excepted from COBRA during 2003, 2004, and 2005, it must
nevertheless continue to make COBRA continuation coverage available
to S during those years until the obligation to make COBRA
continuation coverage available ceases under the rules of
Sec. 54.4980B-7. The obligation could continue until April 1, 2005,
the date that is 36 months after the date of S's qualifying event.
Example 3. The facts are the same as in Example 2. C is a
dependent child of one of the employer's employees and is covered
under the plan. A dependent child is no longer eligible for coverage
under the plan upon the attainment of age 23. C attains age 23 on
November 16, 2005. The plan is excepted from COBRA with respect to C
during 2005 because the employer normally employed fewer than 20
employees during 2004. Consequently, the plan is not obligated to
make COBRA continuation coverage available to C (and would not be
obligated to make COBRA continuation coverage available to C even if
the plan later became subject to COBRA again).
Q-6: [Reserved]
A-6: [Reserved]
Q-7: What is the plan year?
A-7: (a) The plan year is the year that is designated as the plan
year in the plan documents.
(b) If the plan documents do not designate a plan year (or if there
are no plan documents), then the plan year is determined in accordance
with this paragraph (b).
(1) The plan year is the deductible/limit year used under the plan.
(2) If the plan does not impose deductibles or limits on an annual
basis, then the plan year is the policy year.
(3) If the plan does not impose deductibles or limits on an annual
basis, and either the plan is not insured or the insurance policy is
not renewed on an annual basis, then the plan year is the employer's
taxable year.
(4) In any other case, the plan year is the calendar year.
Q-8: How do the COBRA continuation coverage requirements apply to
cafeteria plans and other flexible benefit arrangements?
A-8: The provision of health care benefits does not fail to be a
group health plan merely because those benefits are offered under a
cafeteria plan (as defined in section 125) or under any other
arrangement under which an employee is offered a choice between health
care benefits and other taxable or nontaxable benefits. However, the
COBRA continuation coverage requirements apply only to the type and
level of coverage under the cafeteria plan or other flexible benefit
arrangement that a qualified beneficiary is actually receiving on the
day before the qualifying event. The rules of this Q&A-8 are
illustrated by the following example:
Example: (i) Under the terms of a cafeteria plan, employees can
choose among life insurance coverage, membership in a health
maintenance organization (HMO), coverage for medical expenses under
an indemnity arrangement, and cash compensation. Of these available
choices, the HMO and the indemnity arrangement are the arrangements
providing health care. The instruments governing the HMO and
indemnity arrangements indicate that they are separate group health
plans. These group health plans are subject to COBRA. The employer
does not provide any group health plan outside of the cafeteria
plan. B and C are unmarried employees. B has chosen the life
insurance coverage, and C has chosen the indemnity arrangement.
(ii) B does not have to be offered COBRA continuation coverage
upon terminating employment, nor is a subsequent open enrollment
period for active employees required to be made available to B.
However, if C terminates employment and the termination constitutes
a qualifying event, C must be offered an opportunity to elect COBRA
continuation coverage under the indemnity arrangement. If C makes
such an election and an open enrollment period for active employees
occurs while C is still receiving the COBRA continuation coverage, C
must be offered the opportunity to switch from the indemnity
arrangement to the HMO (but not to the life insurance coverage
because that does not constitute coverage provided under a group
health plan).
Q-9: What is the effect of a group health plan's failure to comply
with the requirements of section 4980B(f)?
A-9: Under section 4980B(a), if a group health plan subject to
COBRA fails to comply with section 4980B(f), an excise tax is imposed.
Moreover, non-tax remedies may be available if the plan fails to comply
with the parallel requirements in ERISA, which are administered by the
Department of Labor.
Q-10: Who is liable for the excise tax if a group health plan fails
to comply with the requirements of section 4980B(f)?
A-10: (a) In general, the excise tax is imposed on the employer
maintaining the plan, except that in the case of a multiemployer plan
the excise tax is imposed on the plan.
(b) In certain circumstances, the excise tax is also imposed on a
person involved with the provision of benefits under the plan (other
than in the capacity of an employee), such as an insurer providing
benefits under the plan or a third party administrator administering
claims under the plan. In general, such a person will be liable for the
excise tax if the person assumes, under a legally enforceable written
agreement, the responsibility for performing the act to which the
failure to comply with the COBRA continuation coverage requirements
relates. Such a person will be liable for the excise tax
notwithstanding the absence of a written agreement assuming
responsibility for complying with COBRA if the person provides coverage
under the plan to a similarly situated nonCOBRA beneficiary (see Q&A-3
of Sec. 54.4980B-3 for a definition of similarly situated nonCOBRA
beneficiaries) and the employer or plan administrator submits a written
request to the person to provide to a qualified beneficiary the same
coverage that the person provides to the similarly situated nonCOBRA
beneficiary. If the person providing coverage under the plan to a
similarly situated nonCOBRA beneficiary is the plan administrator and
the qualifying event is a divorce or legal separation or a dependent
child's ceasing to be covered under the generally applicable
requirements of the plan, the plan administrator will also be liable
for the excise tax if the qualified beneficiary submits a written
request for coverage.
Sec. 54.4980B-3 Qualified beneficiaries.
The determination of who is a qualified beneficiary, an employee,
or a covered employee, and of who are the similarly situated nonCOBRA
beneficiaries is addressed in the following questions-and-answers:
Q-1: Who is a qualified beneficiary?
A-1: (a)(1) Except as set forth in paragraphs (c) through (f) of
this Q&A-1, a qualified beneficiary is--
(i) Any individual who, on the day before a qualifying event, is
covered under a group health plan by virtue of being on that day either
a covered
[[Page 5177]]
employee, the spouse of a covered employee, or a dependent child of the
covered employee; or
(ii) Any child who is born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage.
(2) In the case of a qualifying event that is the bankruptcy of the
employer, a covered employee who had retired on or before the date of
substantial elimination of group health plan coverage is also a
qualified beneficiary, as is any spouse, surviving spouse, or dependent
child of such a covered employee if, on the day before the bankruptcy
qualifying event, the spouse, surviving spouse, or dependent child is a
beneficiary under the plan.
(3) In general, an individual (other than a child who is born to or
placed for adoption with a covered employee during a period of COBRA
continuation coverage) who is not covered under a plan on the day
before the qualifying event cannot be a qualified beneficiary with
respect to that qualifying event, and the reason for the individual's
lack of actual coverage (such as the individual's having declined
participation in the plan or failed to satisfy the plan's conditions
for participation) is not relevant for this purpose. However, if the
individual is denied or not offered coverage under a plan under
circumstances in which the denial or failure to offer constitutes a
violation of applicable law (such as the Americans with Disabilities
Act, 42 U.S.C. 12101-12213, the special enrollment rules of section
9801, or the requirements of section 9802 prohibiting discrimination in
eligibility to enroll in a group health plan based on health status),
then, for purposes of Secs. 54.4980B-1 through 54.4980B-8, the
individual will be considered to have had the coverage that was
wrongfully denied or not offered.
(4) Paragraph (b) of this Q&A-1 describes how certain family
members are not qualified beneficiaries even if they become covered
under the plan; paragraphs (c), (d), and (e) of this Q&A-1 place limits
on the general rules of this paragraph (a) concerning who is a
qualified beneficiary; paragraph (f) of this Q&A-1 provides when an
individual who has been a qualified beneficiary ceases to be a
qualified beneficiary; paragraph (g) of this Q&A-1 defines placed for
adoption; and paragraph (h) of this Q&A-1 contains examples.
(b) In contrast to a child who is born to or placed for adoption
with a covered employee during a period of COBRA continuation coverage,
an individual who marries any qualified beneficiary on or after the
date of the qualifying event and a newborn or adopted child (other than
one born to or placed for adoption with a covered employee) are not
qualified beneficiaries by virtue of the marriage, birth, or placement
for adoption or by virtue of the individual's status as the spouse or
the child's status as a dependent of the qualified beneficiary. These
new family members do not themselves become qualified beneficiaries
even if they become covered under the plan. (For situations in which a
plan is required to make coverage available to new family members of a
qualified beneficiary who is receiving COBRA continuation coverage, see
Q&A-5 of Sec. 54.4980B-5, paragraph (c) in Q&A-4 of Sec. 54.4980B-5,
section 9801(f)(2), and Sec. 54.9801-6T(b).)
(c) An individual is not a qualified beneficiary if, on the day
before the qualifying event referred to in paragraph (a) of this Q&A-1,
the individual is covered under the group health plan by reason of
another individual's election of COBRA continuation coverage and is not
already a qualified beneficiary by reason of a prior qualifying event.
(d) A covered employee can be a qualified beneficiary only in
connection with a qualifying event that is the termination, or
reduction of hours, of the covered employee's employment, or that is
the bankruptcy of the employer.
(e) An individual is not a qualified beneficiary if the
individual's status as a covered employee is attributable to a period
in which the individual was a nonresident alien who received from the
individual's employer no earned income (within the meaning of section
911(d)(2)) that constituted income from sources within the United
States (within the meaning of section 861(a)(3)). If, pursuant to the
preceding sentence, an individual is not a qualified beneficiary, then
a spouse or dependent child of the individual is not considered a
qualified beneficiary by virtue of the relationship to the individual.
(f) A qualified beneficiary who does not elect COBRA continuation
coverage in connection with a qualifying event ceases to be a qualified
beneficiary at the end of the election period (see Q&A-1 of
Sec. 54.4980B-6). Thus, for example, if such a former qualified
beneficiary is later added to a covered employee's coverage (e.g.,
during an open enrollment period) and then another qualifying event
occurs with respect to the covered employee, the former qualified
beneficiary does not become a qualified beneficiary by reason of the
second qualifying event. If a covered employee who is a qualified
beneficiary does not elect COBRA continuation coverage during the
election period, then any child born to or placed for adoption with the
covered employee on or after the date of the qualifying event is not a
qualified beneficiary. Once a plan's obligation to make COBRA
continuation coverage available to an individual who has been a
qualified beneficiary ceases under the rules of Sec. 54.4980B-7, the
individual ceases to be a qualified beneficiary.
(g) For purposes of Secs. 54.4980B-1 through 54.4980B-8, placement
for adoption or being placed for adoption means the assumption and
retention by the covered employee of a legal obligation for total or
partial support of a child in anticipation of the adoption of the
child. The child's placement for adoption with the covered employee
terminates upon the termination of the legal obligation for total or
partial support. A child who is immediately adopted by the covered
employee without a preceding placement for adoption is considered to be
placed for adoption on the date of the adoption.
(h) The rules of this Q&A-1 are illustrated by the following
examples:
Example 1. (i) B is a single employee who voluntarily terminates
employment and elects COBRA continuation coverage under a group
health plan. To comply with the requirements of section 9801(f) and
Sec. 54.9801-6T(b), the plan permits a covered employee who marries
to have her or his spouse covered under the plan. One month after
electing COBRA continuation coverage, B marries and chooses to have
B's spouse covered under the plan.
(ii) B's spouse is not a qualified beneficiary. Thus, if B dies
during the period of COBRA continuation coverage, the plan does not
have to offer B's surviving spouse an opportunity to elect COBRA
continuation coverage.
Example 2. (i) C is a married employee who terminates
employment. C elects COBRA continuation coverage for C but not C's
spouse, and C's spouse declines to elect such coverage. C's spouse
thus ceases to be a qualified beneficiary. At the next open
enrollment period, C adds the spouse as a beneficiary under the
plan.
(ii) The addition of the spouse during the open enrollment
period does not make the spouse a qualified beneficiary. The plan
thus will not have to offer the spouse an opportunity to elect COBRA
continuation coverage upon a later divorce from or death of C.
Example 3. (i) Under the terms of a group health plan, a covered
employee's child, upon attaining age 19, ceases to be a dependent
eligible for coverage.
(ii) At that time, the child must be offered an opportunity to
elect COBRA continuation coverage. If the child elects COBRA
continuation coverage, the child marries during the period of the
COBRA continuation coverage, and the child's spouse becomes covered
under the group health plan, the child's spouse is not a qualified
beneficiary.
[[Page 5178]]
Example 4. (i) D is a single employee who, upon retirement, is
given the opportunity to elect COBRA continuation coverage but
declines it in favor of an alternative offer of 12 months of
employer-paid retiree health benefits. At the end of the election
period, D ceases to be a qualified beneficiary and will not have to
be given another opportunity to elect COBRA continuation coverage
(at the end of those 12 months or at any other time). D marries E
during the period of retiree health coverage and, under the terms of
that coverage, E becomes covered under the plan.
(ii) If a divorce from or death of D will result in E's losing
coverage, E will be a qualified beneficiary because E's coverage
under the plan on the day before the qualifying event (that is, the
divorce or death) will have been by reason of D's acceptance of 12
months of employer-paid coverage after the prior qualifying event
(D's retirement) rather than by reason of an election of COBRA
continuation coverage.
Example 5. (i) The facts are the same as in Example 4, except
that, under the terms of the plan, the divorce or death does not
cause E to lose coverage so that E continues to be covered for the
balance of the original 12-month period.
(ii) E does not have to be allowed to elect COBRA continuation
coverage because the loss of coverage at the end of the 12-month
period is not caused by the divorce or death, and thus the divorce
or death does not constitute a qualifying event. See Q&A-1 of
Sec. 54.4980B-4.
Q-2: Who is an employee and who is a covered employee?
A-2: (a)(1) For purposes of Secs. 54.4980B-1 through 54.4980B-8
(except for purposes of Q&A-5 in Sec. 54.4980B-2, relating to the
exception from COBRA for plans maintained by an employer with fewer
than 20 employees), an employee is any individual who is eligible to be
covered under a group health plan by virtue of the performance of
services for the employer maintaining the plan or by virtue of
membership in the employee organization maintaining the plan. Thus, for
purposes of Secs. 54.4980B-1 through 54.4980B-8 (except for purposes of
Q&A-5 in Sec. 54.4980B-2), the following individuals are employees if
their relationship to the employer maintaining the plan makes them
eligible to be covered under the plan--
(i) Self-employed individuals (within the meaning of section
401(c)(1));
(ii) Independent contractors (and their employees and independent
contractors); and
(iii) Directors (in the case of a corporation).
(2) Similarly, whenever reference is made in Secs. 54.4980B-1
through 54.4980B-8 (except in Q&A-5 of Sec. 54.4980B-2) to an
employment relationship (such as by referring to the termination of
employment of an employee or to an employee's being employed by an
employer), the reference includes the relationship of those individuals
who are employees within the meaning of this paragraph (a). See
paragraph (c) in Q&A-5 of Sec. 54.4980B-2 for a narrower meaning of
employee solely for purposes of Q&A-5 of Sec. 54.4980B-2.
(b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, a covered
employee is any individual who is (or was) provided coverage under a
group health plan (other than a plan that is excepted from COBRA on the
date of the qualifying event; see Q&A-4 of Sec. 54.4980B-2) by virtue
of being or having been an employee. For example, a retiree or former
employee who is covered by a group health plan is a covered employee if
the coverage results in whole or in part from her or his previous
employment. An employee (or former employee) who is merely eligible for
coverage under a group health plan is generally not a covered employee
if the employee (or former employee) is not actually covered under the
plan. In general, the reason for the employee's (or former employee's)
lack of actual coverage (such as having declined participation in the
plan or having failed to satisfy the plan's conditions for
participation) is not relevant for this purpose. However, if the
employee (or former employee) is denied or not offered coverage under
circumstances in which the denial or failure to offer constitutes a
violation of applicable law (such as the Americans with Disabilities
Act, 42 U.S.C. 12101 through 12213, the special enrollment rules of
section 9801, or the requirements of section 9802 prohibiting
discrimination in eligibility to enroll in a group health plan based on
health status), then, for purposes of Secs. 54.4980B-1 through
54.4980B-8, the employee (or former employee) will be considered to
have had the coverage that was wrongfully denied or not offered.
Q-3: Who are the similarly situated non-COBRA beneficiaries?
A-3: For purposes of Secs. 54.4980B-1 through 54.4980B-8, similarly
situated non-COBRA beneficiaries means the group of covered employees,
spouses of covered employees, or dependent children of covered
employees receiving coverage under a group health plan maintained by
the employer or employee organization who are receiving that coverage
for a reason other than the rights provided under the COBRA
continuation coverage requirements and who, based on all of the facts
and circumstances, are most similarly situated to the situation of the
qualified beneficiary immediately before the qualifying event.
Sec. 54.4980B-4 Qualifying events.
The determination of what constitutes a qualifying event is
addressed in the following questions and answers:
Q-1: What is a qualifying event?
A-1: (a) A qualifying event is an event that satisfies paragraphs
(b), (c), and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further
explains a reduction of hours of employment, paragraph (f) of this Q&A-
1 describes the treatment of children born to or placed for adoption
with a covered employee during a period of COBRA continuation coverage,
and paragraph (g) of this Q&A-1 contains examples.
(b) An event satisfies this paragraph (b) if the event is any of
the following--
(1) The death of a covered employee;
(2) The termination (other than by reason of the employee's gross
misconduct), or reduction of hours, of a covered employee's employment;
(3) The divorce or legal separation of a covered employee from the
employee's spouse;
(4) A covered employee's becoming entitled to Medicare benefits
under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);
(5) A dependent child's ceasing to be a dependent child of a
covered employee under the generally applicable requirements of the
plan; or
(6) A proceeding in bankruptcy under Title 11 of the United States
Code with respect to an employer from whose employment a covered
employee retired at any time.
(c) An event satisfies this paragraph (c) if, under the terms of
the group health plan, the event causes the covered employee, or the
spouse or a dependent child of the covered employee, to lose coverage
under the plan. For this purpose, to lose coverage means to cease to be
covered under the same terms and conditions as in effect immediately
before the qualifying event. Any increase in the premium or
contribution that must be paid by a covered employee (or the spouse or
dependent child of a covered employee) for coverage under a group
health plan that results from the occurrence of one of the events
listed in paragraph (b) of this Q&A-1 is a loss of coverage. In the
case of an event that is the bankruptcy of the employer, lose coverage
also means any substantial elimination of coverage under the plan,
occurring within 12 months before or after the date the bankruptcy
proceeding commences, for a covered employee who had retired on or
before the date of the substantial elimination of group health plan
coverage or for any spouse, surviving spouse, or dependent child of
such a covered employee if, on the day
[[Page 5179]]
before the bankruptcy qualifying event, the spouse, surviving spouse,
or dependent child is a beneficiary under the plan. For purposes of
this paragraph (c), a loss of coverage need not occur immediately after
the event, so long as the loss of coverage occurs before the end of the
maximum coverage period (see Q&A-1 and Q&A-6 of Sec. 54.4980B-7).
However, if neither the covered employee nor the spouse or a dependent
child of the covered employee loses coverage before the end of what
would be the maximum coverage period, the event does not satisfy this
paragraph (c). If coverage is reduced or eliminated in anticipation of
an event (for example, an employer's eliminating an employee's coverage
in anticipation of the termination of the employee's employment, or an
employee's eliminating the coverage of the employee's spouse in
anticipation of a divorce or legal separation), the reduction or
elimination is disregarded in determining whether the event causes a
loss of coverage.
(d) An event satisfies this paragraph (d) if it occurs while the
plan is subject to COBRA. Thus, an event will not satisfy this
paragraph (d) if it occurs while the plan is excepted from COBRA (see
Q&A-4 of Sec. 54.4980B-2). Even if the plan later becomes subject to
COBRA, it is not required to make COBRA continuation coverage available
to anyone whose coverage ends as a result of an event during a year in
which the plan is excepted from COBRA. For example, if a group health
plan is excepted from COBRA as a small-employer plan during the year
2001 (see Q&A-5 of Sec. 54.4980B-2) and an employee terminates
employment on December 31, 2001, the termination is not a qualifying
event and the plan is not required to permit the employee to elect
COBRA continuation coverage. This is the case even if the plan ceases
to be a small-employer plan as of January 1, 2002. Also, the same
result will follow even if the employee is given three months of
coverage beyond December 31 (that is, through March of 2002), because
there will be no qualifying event as of the termination of coverage in
March. However, if the employee's spouse is initially provided with the
three-month coverage through March 2002, but the spouse divorces the
employee before the end of the three months and loses coverage as a
result of the divorce, the divorce will constitute a qualifying event
during 2002 and so entitle the spouse to elect COBRA continuation
coverage. See Q&A-7 of Sec. 54.4980B-7 regarding the maximum coverage
period in such a case.
(e) A reduction of hours of a covered employee's employment occurs
whenever there is a decrease in the hours that a covered employee is
required to work or actually works, but only if the decrease is not
accompanied by an immediate termination of employment. This is true
regardless of whether the covered employee continues to perform
services following the reduction of hours of employment. For example,
an absence from work due to disability, a temporary layoff, or any
other reason is a reduction of hours of a covered employee's employment
if there is not an immediate termination of employment. If a group
health plan measures eligibility for the coverage of employees by the
number of hours worked in a given time period, such as the preceding
month or quarter, and an employee covered under the plan fails to work
the minimum number of hours during that time period, the failure to
work the minimum number of required hours is a reduction of hours of
that covered employee's employment.
(f) The qualifying event of a qualified beneficiary who is a child
born to or placed for adoption with a covered employee during a period
of COBRA continuation coverage is the qualifying event giving rise to
the period of COBRA continuation coverage during which the child is
born or placed for adoption. If a second qualifying event has occurred
before the child is born or placed for adoption (such as the death of
the covered employee), then the second qualifying event also applies to
the newborn or adopted child. See Q&A-6 of Sec. 54.4980B-7.
(g) The rules of this Q&A-1 are illustrated by the following
examples, in each of which the group health plan is subject to COBRA:
Example 1. (i) An employee who is covered by a group health plan
terminates employment (other than by reason of the employee's gross
misconduct) and, beginning with the day after the last day of
employment, is given 3 months of employer-paid coverage under the
same terms and conditions as before that date. At the end of the
three months, the coverage terminates.
(ii) The loss of coverage at the end of the three months results
from the termination of employment and, thus, the termination of
employment is a qualifying event.
Example 2. (i) An employee who is covered by a group health plan
retires (which is a termination of employment other than by reason
of the employee's gross misconduct) and, upon retirement, is
required to pay an increased amount for the same group health
coverage that the employee had before retirement.
(ii) The increase in the premium or contribution required for
coverage is a loss of coverage under paragraph (c) of this Q&A-1
and, thus, the retirement is a qualifying event.
Example 3. (i) An employee and the employee's spouse are covered
under an employer's group health plan. The employee retires and is
given identical coverage for life. However, the plan provides that
the spousal coverage will not be continued beyond six months unless
a higher premium for the spouse is paid to the plan.
(ii) The requirement for the spouse to pay a higher premium at
the end of the six months is a loss of coverage under paragraph (c)
of this Q&A-1. Thus, the retirement is a qualifying event and the
spouse must be given an opportunity to elect COBRA continuation
coverage.
Example 4. (i) F is a covered employee who is married to G, and
both are covered under a group health plan maintained by F's
employer. F and G are divorced. Under the terms of the plan, the
divorce causes G to lose coverage. The divorce is a qualifying
event, and G elects COBRA continuation coverage, remarries during
the period of COBRA continuation coverage, and G's new spouse
becomes covered under the plan. (See Q&A-5 in Sec. 54.4980B-5,
paragraph (c) in Q&A-4 of Sec. 54.4980B-5, section 9801(f)(2), and
Sec. 54.9801-6T(b).) G dies. Under the terms of the plan, the death
causes G's new spouse to lose coverage under the plan.
(ii) G's death is not a qualifying event because G is not a
covered employee.
Example 5. (i) An employer maintains a group health plan for
both active employees and retired employees (and their families).
The coverage for active employees and retired employees is
identical, and the employer does not require retirees to pay more
for coverage than active employees. The plan does not make COBRA
continuation coverage available when an employee retires (and is not
required to because the retired employee has not lost coverage under
the plan). The employer amends the plan to eliminate coverage for
retired employees effective January 1, 2002. On that date, several
retired employees (and their spouses and dependent children) have
been covered under the plan since their retirement for less than the
maximum coverage period that would apply to them in connection with
their retirement.
(ii) The elimination of retiree coverage under these
circumstances is a deferred loss of coverage for those retirees (and
their spouses and dependent children) under paragraph (c) of this
Q&A-1 and, thus, the retirement is a qualifying event. The plan must
make COBRA continuation coverage available to them for the balance
of the maximum coverage period that applies to them in connection
with the retirement.
Q-2: Are the facts surrounding a termination of employment (such as
whether it was voluntary or involuntary) relevant in determining
whether the termination of employment is a qualifying event?
A-2: Apart from facts constituting gross misconduct, the facts
surrounding the termination or reduction of hours are irrelevant in
determining whether a qualifying event has occurred. Thus, it
[[Page 5180]]
does not matter whether the employee voluntarily terminated or was
discharged. For example, a strike or a lockout is a termination or
reduction of hours that constitutes a qualifying event if the strike or
lockout results in a loss of coverage as described in paragraph (c) of
Q&A-1 of this section. Similarly, a layoff that results in such a loss
of coverage is a qualifying event.
Sec. 54.4980B-5 COBRA continuation coverage.
The following questions-and-answers address the requirements for
coverage to constitute COBRA continuation coverage:
Q-1: What is COBRA continuation coverage?
A-1: (a) If a qualifying event occurs, each qualified beneficiary
(other than a qualified beneficiary for whom the qualifying event will
not result in any immediate or deferred loss of coverage) must be
offered an opportunity to elect to receive the group health plan
coverage that is provided to similarly situated nonCOBRA beneficiaries
(ordinarily, the same coverage that the qualified beneficiary had on
the day before the qualifying event). See Q&A-3 of Sec. 54.4980B-3 for
the definition of similarly situated nonCOBRA beneficiaries. This
coverage is COBRA continuation coverage. If coverage under the plan is
modified for similarly situated nonCOBRA beneficiaries, then the
coverage made available to qualified beneficiaries is modified in the
same way. If the continuation coverage offered differs in any way from
the coverage made available to similarly situated nonCOBRA
beneficiaries, the coverage offered does not constitute COBRA
continuation coverage and the group health plan is not in compliance
with COBRA unless other coverage that does constitute COBRA
continuation coverage is also offered. Any elimination or reduction of
coverage in anticipation of an event described in paragraph (b) of Q&A-
1 of Sec. 54.4980B-4 is disregarded for purposes of this Q&A-1 and for
purposes of any other reference in Secs. 54.4980B-1 through 54.4980B-8
to coverage in effect immediately before (or on the day before) a
qualifying event. COBRA continuation coverage must not be conditioned
upon, or discriminate on the basis of lack of, evidence of
insurability.
(b) In the case of a qualified beneficiary who is a child born to
or placed for adoption with a covered employee during a period of COBRA
continuation coverage, the child is generally entitled to elect
immediately to have the same coverage that dependent children of active
employees receive under the benefit packages under which the covered
employee has coverage at the time of the birth or placement for
adoption. Such a child would be entitled to elect coverage different
from that elected by the covered employee during the next available
open enrollment period under the plan. See Q&A-4 of this section.
Q-2: What deductibles apply if COBRA continuation coverage is
elected?
A-2: (a) Qualified beneficiaries electing COBRA continuation
coverage generally are subject to the same deductibles as similarly
situated nonCOBRA beneficiaries. If a qualified beneficiary's COBRA
continuation coverage begins before the end of a period prescribed for
accumulating amounts toward deductibles, the qualified beneficiary must
retain credit for expenses incurred toward those deductibles before the
beginning of COBRA continuation coverage as though the qualifying event
had not occurred. The specific application of this rule depends on the
type of deductible, as set forth in paragraphs (b) through (d) of this
Q&A-2. Special rules are set forth in paragraph (e) of this Q&A-2, and
examples appear in paragraph (f) of this Q&A-2.
(b) If a deductible is computed separately for each individual
receiving coverage under the plan, each individual's remaining
deductible amount (if any) on the date COBRA continuation coverage
begins is equal to that individual's remaining deductible amount
immediately before that date.
(c) If a deductible is computed on a family basis, the remaining
deductible for the family on the date that COBRA continuation coverage
begins depends on the members of the family electing COBRA continuation
coverage. In computing the family deductible that remains on the date
COBRA continuation coverage begins, only the expenses of those family
members receiving COBRA continuation coverage need be taken into
account. If the qualifying event results in there being more than one
family unit (for example, because of a divorce), the family deductible
may be computed separately for each resulting family unit based on the
members in each unit. These rules apply regardless of whether the plan
provides that the family deductible is an alternative to individual
deductibles or an additional requirement.
(d) Deductibles that are not described in paragraph (b) or (c) of
this Q&A-2 must be treated in a manner consistent with the principles
set forth in those paragraphs.
(e) If a deductible is computed on the basis of a covered
employee's compensation instead of being a fixed dollar amount and the
employee remains employed during the period of COBRA continuation
coverage, the plan is permitted to choose whether to apply the
deductible by treating the employee's compensation as continuing
without change for the duration of the COBRA continuation coverage at
the level that was used to compute the deductible in effect immediately
before the COBRA continuation coverage began, or to apply the
deductible by taking the employee's actual compensation into account.
In applying a deductible that is computed on the basis of the covered
employee's compensation instead of being a fixed dollar amount, for
periods of COBRA continuation coverage in which the employee is not
employed by the employer, the plan is required to compute the
deductible by treating the employee's compensation as continuing
without change for the duration of the COBRA continuation coverage
either at the level that was used to compute the deductible in effect
immediately before the COBRA continuation coverage began or at the
level that was used to compute the deductible in effect immediately
before the employee's employment was terminated.
(f) The rules of this Q&A-2 are illustrated by the following
examples; in each example, deductibles under the plan are determined on
a calendar year basis:
Example 1. (i) A group health plan applies a separate $100
annual deductible to each individual it covers. The plan provides
that the spouse and dependent children of a covered employee will
lose coverage on the last day of the month after the month of the
covered employee's death. A covered employee dies on June 11, 2001.
The spouse and the two dependent children elect COBRA continuation
coverage, which will begin on August 1, 2001. As of July 31, 2001,
the spouse has incurred $80 of covered expenses, the older child has
incurred no covered expenses, and the younger one has incurred $120
of covered expenses (and therefore has already satisfied the
deductible).
(ii) At the beginning of COBRA continuation coverage on August
1, the spouse has a remaining deductible of $20, the older child
still has the full $100 deductible, and the younger one has no
further deductible.
Example 2. (i) A group health plan applies a separate $200
annual deductible to each individual it covers, except that each
family member is treated as having satisfied the individual
deductible once the family has incurred $500 of covered expenses
during the year. The plan provides that upon the divorce of a
covered employee, coverage will
[[Page 5181]]
end immediately for the employee's spouse and any children who do
not remain in the employee's custody. A covered employee with four
dependent children is divorced, the spouse obtains custody of the
two oldest children, and the spouse and those children all elect
COBRA continuation coverage to begin immediately. The family had
accumulated $420 of covered expenses before the divorce, as follows:
$70 by each parent, $200 by the oldest child, $80 by the youngest
child, and none by the other two children.
(ii) The resulting family consisting of the spouse and the two
oldest children accumulated a total of $270 of covered expenses, and
thus the remaining deductible for that family could be as high as
$230 (because the plan would not have to count the incurred expenses
of the covered employee and the youngest child). The remaining
deductible for the resulting family consisting of the covered
employee and the two youngest children is not subject to the rules
of this Q&A-2 because their coverage is not COBRA continuation
coverage.
Example 3. Each year a group health plan pays 70 percent of the
cost of an individual's psychotherapy after that individual's first
three visits during the year. A qualified beneficiary whose election
of COBRA continuation coverage takes effect beginning August 1, 2001
and who has already made two visits as of that date need only pay
for one more visit before the plan must begin to pay 70 percent of
the cost of the remaining visits during 2001.
Example 4. (i) A group health plan has a $250 annual deductible
per covered individual. The plan provides that if the deductible is
not satisfied in a particular year, expenses incurred during October
through December of that year are credited toward satisfaction of
the deductible in the next year. A qualified beneficiary who has
incurred covered expenses of $150 from January through September of
2001 and $40 during October elects COBRA continuation coverage
beginning November 1, 2001.
(ii) The remaining deductible amount for this qualified
beneficiary is $60 at the beginning of the COBRA continuation
coverage. If this individual incurs covered expenses of $50 in
November and December of 2001 combined (so that the $250 deductible
for 2001 is not satisfied), the $90 incurred from October through
December of 2001 are credited toward satisfaction of the deductible
amount for 2002.
Q-3: How do a plan's limits apply to COBRA continuation coverage?
A-3: (a) Limits are treated in the same way as deductibles (see
Q&A-2 of this section).
This rule applies both to limits on plan benefits (such as a
maximum number of hospital days or dollar amount of reimbursable
expenses) and limits on out-of-pocket expenses (such as a limit on
copayments, a limit on deductibles plus copayments, or a catastrophic
limit). This rule applies equally to annual and lifetime limits and
applies equally to limits on specific benefits and limits on benefits
in the aggregate under the plan.
(b) The rule of this Q&A-3 is illustrated by the following
examples; in each example limits are determined on a calendar year
basis:
Example 1. (i) A group health plan pays for a maximum of 150
days of hospital confinement per individual per year. A covered
employee who has had 20 days of hospital confinement as of May 1,
2001 terminates employment and elects COBRA continuation coverage as
of that date.
(ii) During the remainder of the year 2001 the plan need only
pay for a maximum of 130 days of hospital confinement for this
individual.
Example 2. (i) A group health plan reimburses a maximum of
$20,000 of covered expenses per family per year, and the same
$20,000 limit applies to unmarried covered employees. A covered
employee and spouse who have no children divorce on May 1, 2001, and
the spouse elects COBRA continuation coverage as of that date. In
2001, the employee had incurred $5,000 of expenses and the spouse
had incurred $8,000 before May 1.
(ii) The plan can limit its reimbursement of the amount of
expenses incurred by the spouse on and after May 1 for the remainder
of the year to $12,000 ($20,000-$8,000 = $12,000). The remaining
limit for the employee is not subject to the rules of this Q&A-3
because the employee's coverage is not COBRA continuation coverage.
Example 3. (i) A group health plan pays for 80 percent of
covered expenses after satisfaction of a $100-per-individual
deductible, and the plan pays for 100 percent of covered expenses
after a family has incurred out-of-pocket costs of $2,000. The plan
provides that upon the divorce of a covered employee, coverage will
end immediately for the employee's spouse and any children who do
not remain in the employee's custody. An employee and spouse with
three dependent children divorce on June 1, 2001, and one of the
children remains with the employee. The spouse elects COBRA
continuation coverage as of that date for the spouse and the other
two children. During January through May of 2001, the spouse
incurred $600 of covered expenses and each of the two children in
the spouse's custody after the divorce incurred covered expenses of
$1,100. This resulted in total out-of-pocket costs for these three
individuals of $800 ($300 total for the three deductibles, plus $500
for 20 percent of the other $2,500 in incurred expenses [$600 +
$1,100 + $1,100 = $2,800; $2,800-$300 = $2,500]).
(ii) For the remainder of 2001, the resulting family consisting
of the spouse and two children has an out-of-pocket limit of $1,200
($2,000-$800 = $1,200) . The remaining out-of-pocket limit for the
resulting family consisting of the employee and one child is not
subject to the rules of this Q&A-3 because their coverage is not
COBRA continuation coverage.
Q-4: Can a qualified beneficiary who elects COBRA continuation
coverage ever change from the coverage received by that individual
immediately before the qualifying event?
A-4: (a) In general, a qualified beneficiary need only be given an
opportunity to continue the coverage that she or he was receiving
immediately before the qualifying event. This is true regardless of
whether the coverage received by the qualified beneficiary before the
qualifying event ceases to be of value to the qualified beneficiary,
such as in the case of a qualified beneficiary covered under a region-
specific health maintenance organization (HMO) who leaves the HMO's
service region. The only situations in which a qualified beneficiary
must be allowed to change from the coverage received immediately before
the qualifying event are as set forth in paragraphs (b) and (c) of this
Q&A-4 and in Q&A-1 of this section (regarding changes to or elimination
of the coverage provided to similarly situated nonCOBRA beneficiaries).
(b) If a qualified beneficiary participates in a region-specific
benefit package (such as an HMO or an on-site clinic) that will not
service her or his health needs in the area to which she or he is
relocating (regardless of the reason for the relocation), the qualified
beneficiary must be given an opportunity to elect alternative coverage
that the employer or employee organization makes available to active
employees. If the employer or employee organization makes group health
plan coverage available to similarly situated nonCOBRA beneficiaries
that can be extended in the area to which the qualified beneficiary is
relocating, then that coverage is the alternative coverage that must be
made available to the relocating qualified beneficiary. If the employer
or employee organization does not make group health plan coverage
available to similarly situated nonCOBRA beneficiaries that can be
extended in the area to which the qualified beneficiary is relocating
but makes coverage available to other employees that can be extended in
that area, then the coverage made available to those other employees
must be made available to the relocating qualified beneficiary.
However, the employer or employee organization is not required to make
any other coverage available to the relocating qualified beneficiary if
the only coverage the employer or employee organization makes available
to active employees is not available in the area to which the qualified
beneficiary relocates (because all such coverage is region-specific and
does not service individuals in that area).
(c) If an employer or employee organization makes an open
enrollment period available to similarly situated active employees with
respect to whom a qualifying event has not occurred, the same open
enrollment period rights
[[Page 5182]]
must be made available to each qualified beneficiary receiving COBRA
continuation coverage. An open enrollment period means a period during
which an employee covered under a plan can choose to be covered under
another group health plan or under another benefit package within the
same plan, or to add or eliminate coverage of family members.
(d) The rules of this Q&A-4 are illustrated by the following
examples:
Example 1. (i) E is an employee who works for an employer that
maintains several group health plans. Under the terms of the plans,
if an employee chooses to cover any family members under a plan, all
family members must be covered by the same plan and that plan must
be the same as the plan covering the employee. Immediately before
E's termination of employment (for reasons other than gross
misconduct), E is covered along with E's spouse and children by a
plan. The coverage under that plan will end as a result of the
termination of employment.
(ii) Upon E's termination of employment, each of the four family
members is a qualified beneficiary. Even though the employer
maintains various other plans and options, it is not necessary for
the qualified beneficiaries to be allowed to switch to a new plan
when E terminates employment.
(iii) COBRA continuation coverage is elected for each of the
four family members. Three months after E's termination of
employment there is an open enrollment period during which similarly
situated active employees are offered an opportunity to choose to be
covered under a new plan or to add or eliminate family coverage.
(iv) During the open enrollment period, each of the four
qualified beneficiaries must be offered the opportunity to switch to
another plan (as though each qualified beneficiary were an
individual employee). For example, each member of E's family could
choose coverage under a separate plan, even though the family
members of employed individuals could not choose coverage under
separate plans. Of course, if each family member chooses COBRA
continuation coverage under a separate plan, the plan can require
payment for each family member that is based on the applicable
premium for individual coverage under that separate plan. See Q&A-1
of Sec. 54.4980B-8.
Example 2. (i) The facts are the same as in Example 1, except
that E's family members are not covered under E's group health plan
when E terminates employment.
(ii) Although the family members do not have to be given an
opportunity to elect COBRA continuation coverage, E must be allowed
to add them to E's COBRA continuation coverage during the open
enrollment period. This is true even though the family members are
not, and cannot become, qualified beneficiaries (see Q&A-1 of
Sec. 54.4980B-3).
Q-5: Aside from open enrollment periods, can a qualified
beneficiary who has elected COBRA continuation coverage choose to cover
individuals (such as newborn children, adopted children, or new
spouses) who join the qualified beneficiary's family on or after the
date of the qualifying event?
A-5: (a) Yes. Under section 9801 and Sec. 54.9801-6T, employees
eligible to participate in a group health plan (whether or not
participating), as well as former employees participating in a plan
(referred to in those rules as participants), are entitled to special
enrollment rights for certain family members upon the loss of other
group health plan coverage or upon the acquisition by the employee or
participant of a new spouse or of a new dependent through birth,
adoption, or placement for adoption, if certain requirements are
satisfied. Employees not participating in the plan also can obtain
rights for self-enrollment under those rules. Once a qualified
beneficiary is receiving COBRA continuation coverage (that is, has
timely elected and made timely payment for COBRA continuation
coverage), the qualified beneficiary has the same right to enroll
family members under those special enrollment rules as if the qualified
beneficiary were an employee or participant within the meaning of those
rules. However, neither a qualified beneficiary who is not receiving
COBRA continuation coverage nor a former qualified beneficiary has any
special enrollment rights under those rules.
(b) In addition to the special enrollment rights described in
paragraph (a) of this Q&A-5, if the plan covering the qualified
beneficiary provides that new family members of active employees can
become covered (either automatically or upon an appropriate election)
before the next open enrollment period, then the same right must be
extended to the new family members of a qualified beneficiary.
(c) If the addition of a new family member will result in a higher
applicable premium (for example, if the qualified beneficiary was
previously receiving COBRA continuation coverage as an individual, or
if the applicable premium for family coverage depends on family size),
the plan can require the payment of a correspondingly higher amount for
the COBRA continuation coverage. See Q&A-1 of Sec. 54.4980B-8.
(d) The right to add new family members under this Q&A-5 is in
addition to the rights that newborn and adopted children of covered
employees may have as qualified beneficiaries; see Q&A-1 in
Sec. 54.4980B-3.
Sec. 54.4980B-6 Electing COBRA continuation coverage.
The following questions-and-answers address the manner in which
COBRA continuation coverage is elected:
Q-1: What is the election period and how long must it last?
A-1: (a) A group health plan can condition the availability of
COBRA continuation coverage upon the timely election of such coverage.
An election of COBRA continuation coverage is a timely election if it
is made during the election period. The election period must begin not
later than the date the qualified beneficiary would lose coverage on
account of the qualifying event. (See paragraph (c) of Q&A-1 of
Sec. 54.4980B-4 for the meaning of lose coverage.) The election period
must not end before the date that is 60 days after the later of--
(1) The date the qualified beneficiary would lose coverage on
account of the qualifying event; or
(2) The date notice is provided to the qualified beneficiary of her
or his right to elect COBRA continuation coverage.
(b) An election is considered to be made on the date it is sent to
the plan administrator.
(c) The rules of this Q&A-1 are illustrated by the following
example:
Example. (i) An unmarried employee without children who is
receiving employer-paid coverage under a group health plan
voluntarily terminates employment on June 1, 2001. The employee is
not disabled at the time of the termination of employment nor at any
time thereafter, and the plan does not provide for the extension of
the required periods (as is permitted under section 4980B(f)(8)).
(ii) Case 1: If the plan provides that the employer-paid
coverage ends immediately upon the termination of employment, the
election period must begin not later than June 1, 2001, and must not
end earlier than July 31, 2001. If notice of the right to elect
COBRA continuation coverage is not provided to the employee until
June 15, 2001, the election period must not end earlier than August
14, 2001.
(iii) Case 2: If the plan provides that the employer-paid
coverage does not end until 6 months after the termination of
employment, the employee does not lose coverage until December 1,
2001. The election period can therefore begin as late as December 1,
2001, and must not end before January 30, 2002.
(iv) Case 3: If employer-paid coverage for 6 months after the
termination of employment is offered only to those qualified
beneficiaries who waive COBRA continuation coverage, the employee
loses coverage on June 1, 2001, so the election period is the same
as in Case 1. The difference between Case 2 and Case 3 is that in
Case 2 the employee can receive 6 months of employer-paid coverage
and then elect to pay for up to an additional 12 months of COBRA
continuation coverage, while in Case
[[Page 5183]]
3 the employee must choose between 6 months of employer-paid
coverage and paying for up to 18 months of COBRA continuation
coverage. In all three cases, COBRA continuation coverage need not
be provided for more than 18 months after the termination of
employment, and in certain circumstances might be provided for a
shorter period (see Q&A-1 of Sec. 54.4980B-7).
Q-2: Is a covered employee or qualified beneficiary responsible for
informing the plan administrator of the occurrence of a qualifying
event?
A-2: (a) In general, the employer or plan administrator must
determine when a qualifying event has occurred. However, each covered
employee or qualified beneficiary is responsible for notifying the plan
administrator of the occurrence of a qualifying event that is either a
dependent child's ceasing to be a dependent child under the generally
applicable requirements of the plan or a divorce or legal separation of
a covered employee. The group health plan is not required to offer the
qualified beneficiary an opportunity to elect COBRA continuation
coverage if the notice is not provided to the plan administrator within
60 days after the later of--
(1) The date of the qualifying event; or
(2) The date the qualified beneficiary would lose coverage on
account of the qualifying event.
(b) For purposes of this Q&A-2, if more than one qualified
beneficiary would lose coverage on account of a divorce or legal
separation of a covered employee, a timely notice of the divorce or
legal separation that is provided by the covered employee or any one of
those qualified beneficiaries will be sufficient to preserve the
election rights of all of the qualified beneficiaries.
Q-3: During the election period and before the qualified
beneficiary has made an election, must coverage be provided?
A-3: (a) In general, each qualified beneficiary has until 60 days
after the later of the date the qualifying event would cause her or him
to lose coverage or the date notice is provided to the qualified
beneficiary of her or his right to elect COBRA continuation coverage to
decide whether to elect COBRA continuation coverage. If the election is
made during that period, coverage must be provided from the date that
coverage would otherwise have been lost (but see Q&A-4 of this
section). This can be accomplished as described in paragraph (b) or (c)
of this Q&A-3.
(b) In the case of an indemnity or reimbursement arrangement, the
employer or employee organization can provide for plan coverage during
the election period or, if the plan allows retroactive reinstatement,
the employer or employee organization can terminate the coverage of the
qualified beneficiary and reinstate her or him when the election is
made. Claims incurred by a qualified beneficiary during the election
period do not have to be paid before the election (and, if applicable,
payment for the coverage) is made. If a provider of health care (such
as a physician, hospital, or pharmacy) contacts the plan to confirm
coverage of a qualified beneficiary during the election period, the
plan must give a complete response to the health care provider about
the qualified beneficiary's COBRA continuation coverage rights during
the election period. For example, if the plan provides coverage during
the election period but cancels coverage retroactively if COBRA
continuation coverage is not elected, then the plan must inform a
provider that a qualified beneficiary for whom coverage has not been
elected is covered but that the coverage is subject to retroactive
termination. Similarly, if the plan cancels coverage but then
retroactively reinstates it once COBRA continuation coverage is
elected, then the plan must inform the provider that the qualified
beneficiary currently does not have coverage but will have coverage
retroactively to the date coverage was lost if COBRA continuation
coverage is elected. (See paragraph (c) of Q&A-5 in Sec. 54.4980B-8 for
similar rules that a plan must follow in confirming coverage during a
period when the plan has not received payment but that is still within
the grace period for a qualified beneficiary for whom COBRA
continuation coverage has been elected.)
(c)(1) In the case of a group health plan that provides health
services (such as a health maintenance organization or a walk-in
clinic), the plan can require with respect to a qualified beneficiary
who has not elected and paid for COBRA continuation coverage that the
qualified beneficiary choose between--
(i) Electing and paying for the coverage; or
(ii) Paying the reasonable and customary charge for the plan's
services, but only if a qualified beneficiary who chooses to pay for
the services will be reimbursed for that payment within 30 days after
the election of COBRA continuation coverage (and, if applicable, the
payment of any balance due for the coverage).
(2) In the alternative, the plan can provide continued coverage and
treat the qualified beneficiary's use of the facility as a constructive
election. In such a case, the qualified beneficiary is obligated to pay
any applicable charge for the coverage, but only if the qualified
beneficiary is informed that use of the facility will be a constructive
election before using the facility.
Q-4: Is a waiver before the end of the election period effective to
end a qualified beneficiary's election rights?
A-4: If, during the election period, a qualified beneficiary waives
COBRA continuation coverage, the waiver can be revoked at any time
before the end of the election period. Revocation of the waiver is an
election of COBRA continuation coverage. However, if a waiver of COBRA
continuation coverage is later revoked, coverage need not be provided
retroactively (that is, from the date of the loss of coverage until the
waiver is revoked). Waivers and revocations of waivers are considered
made on the date they are sent to the employer, employee organization,
or plan administrator, as applicable.
Q-5: Can an employer or employee organization withhold money or
other benefits owed to a qualified beneficiary until the qualified
beneficiary either waives COBRA continuation coverage, elects and pays
for such coverage, or allows the election period to expire?
A-5: No. An employer, and an employee organization, must not
withhold anything to which a qualified beneficiary is otherwise
entitled (by operation of law or other agreement) in order to compel
payment for COBRA continuation coverage or to coerce the qualified
beneficiary to give up rights to COBRA continuation coverage (including
the right to use the full election period to decide whether to elect
such coverage). Such a withholding constitutes a failure to comply with
the COBRA continuation coverage requirements. Furthermore, any
purported waiver obtained by means of such a withholding is invalid.
Q-6: Can each qualified beneficiary make an independent election
under COBRA?
A-6: Yes. Each qualified beneficiary (including a child who is born
to or placed for adoption with a covered employee during a period of
COBRA continuation coverage) must be offered the opportunity to make an
independent election to receive COBRA continuation coverage. If the
plan allows similarly situated active employees with respect to whom a
qualifying event has not occurred to choose among several options
during an open enrollment period (for example, to switch to another
group health plan or to another benefit package under the same group
health plan), then each qualified beneficiary must also be offered an
independent election to choose during an open enrollment period among
the
[[Page 5184]]
options made available to similarly situated active employees with
respect to whom a qualifying event has not occurred. If a qualified
beneficiary who is either a covered employee or the spouse of a covered
employee elects COBRA continuation coverage and the election does not
specify whether the election is for self-only coverage, the election is
deemed to include an election of COBRA continuation coverage on behalf
of all other qualified beneficiaries with respect to that qualifying
event. An election on behalf of a minor child can be made by the
child's parent or legal guardian. An election on behalf of a qualified
beneficiary who is incapacitated or dies can be made by the legal
representative of the qualified beneficiary or the qualified
beneficiary's estate, as determined under applicable state law, or by
the spouse of the qualified beneficiary. (See also Q&A-5 of
Sec. 54.4980B-7 relating to the independent right of each qualified
beneficiary with respect to the same qualifying event to receive COBRA
continuation coverage during the disability extension.) The rules of
this Q&A-6 are illustrated by the following examples; in each example
each group health plan is subject to COBRA:
Example 1. (i) Employee H and H 's spouse are covered under a
group health plan immediately before H 's termination of employment
(for reasons other than gross misconduct). Coverage under the plan
will end as a result of the termination of employment.
(ii) Upon H 's termination of employment, both H and H 's spouse
are qualified beneficiaries and each must be allowed to elect COBRA
continuation coverage. Thus, H might elect COBRA continuation
coverage while the spouse declines to elect such coverage, or H
might elect COBRA continuation coverage for both of them. In
contrast, H cannot decline COBRA continuation coverage on behalf of
H 's spouse. Thus, if H does not elect COBRA continuation coverage
on behalf of the spouse, the spouse must still be allowed to elect
COBRA continuation coverage.
Example 2. (i) An employer maintains a group health plan under
which all employees receive employer-paid coverage. Employees can
arrange to cover their families by paying an additional amount. The
employer also maintains a cafeteria plan, under which one of the
options is to pay part or all of the employee share of the cost for
family coverage under the group health plan. Thus, an employee might
pay for family coverage under the group health plan partly with
before-tax dollars and partly with after-tax dollars.
(ii) If an employee's family is receiving coverage under the
group health plan when a qualifying event occurs, each of the
qualified beneficiaries must be offered an opportunity to elect
COBRA continuation coverage, regardless of how that qualified
beneficiary's coverage was paid for before the qualifying event.
Sec. 54.4980B-7 Duration of COBRA continuation coverage.
The following questions-and-answers address the duration of COBRA
continuation coverage:
Q-1: How long must COBRA continuation coverage be made available to
a qualified beneficiary?
A-1: (a) Except for an interruption of coverage in connection with
a waiver, as described in Q&A-4 of Sec. 54.4980B-6, COBRA continuation
coverage that has been elected for a qualified beneficiary must extend
for at least the period beginning on the date of the qualifying event
and ending not before the earliest of the following dates--
(1) The last day of the maximum required period under section
4980B(f)(2)(B)(i) (the maximum coverage period) and, if applicable,
section 4980B(f)(8) (relating to the optional extension of required
periods in a case where coverage is lost after the date of, instead of
on the date of, the qualifying event);
(2) The first day for which timely payment is not made to the plan
with respect to the qualified beneficiary (see Q&A-5 in Sec. 54.4980B-
8);
(3) The date upon which the employer or employee organization
ceases to provide any group health plan (including successor plans) to
any employee;
(4) The date, after the date of the election, upon which the
qualified beneficiary first becomes covered under any other group
health plan, as described in Q&A-2 of this section; and
(5) The date, after the date of the election, upon which the
qualified beneficiary first becomes entitled to Medicare benefits, as
described in Q&A-3 of this section.
(b) However, a group health plan can terminate for cause the
coverage of a qualified beneficiary receiving COBRA continuation
coverage on the same basis that the plan terminates for cause the
coverage of similarly situated nonCOBRA beneficiaries. For example, if
a group health plan terminates the coverage of active employees for the
submission of a fraudulent claim, then the coverage of a qualified
beneficiary can also be terminated for the submission of a fraudulent
claim. Notwithstanding the preceding two sentences, the coverage of a
qualified beneficiary can be terminated for failure to make timely
payment to the plan only if payment is not timely under the rules of
Q&A-5 in Sec. 54.4980B-8.
(c) In the case of an individual who is not a qualified beneficiary
and who is receiving coverage under a group health plan solely because
of the individual's relationship to a qualified beneficiary, if the
plan's obligation to make COBRA continuation coverage available to the
qualified beneficiary ceases under this section, the plan is not
obligated to make coverage available to the individual who is not a
qualified beneficiary.
Q-2: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to coverage under another group health plan?
A-2: (a) If a qualified beneficiary first becomes covered under
another group health plan (including for this purpose any group health
plan of a governmental employer or employee organization) after the
date on which COBRA continuation coverage is elected for the qualified
beneficiary and the other coverage satisfies the requirements of
paragraphs (b), (c), and (d) of this Q&A-2, then the plan may terminate
the qualified beneficiary's COBRA continuation coverage upon the date
on which the qualified beneficiary first becomes covered under the
other group health plan (even if the other coverage is less valuable to
the qualified beneficiary). By contrast, if a qualified beneficiary
first becomes covered under another group health plan on or before the
date on which COBRA continuation coverage is elected, then the other
coverage cannot be a basis for terminating the qualified beneficiary's
COBRA continuation coverage.
(b) The requirement of this paragraph (b) is satisfied if the
qualified beneficiary is actually covered, rather than merely eligible
to be covered, under the other group health plan.
(c) The requirement of this paragraph (c) is satisfied if the other
group health plan is a plan that is not maintained by the employer or
employee organization that maintains the plan under which COBRA
continuation coverage must otherwise be made available.
(d) The requirement of this paragraph (d) is satisfied if the other
group health plan does not contain any exclusion or limitation with
respect to any preexisting condition of the qualified beneficiary
(other than such an exclusion or limitation that does not apply to, or
is satisfied by, the qualified beneficiary by reason of the provisions
in section 9801 (relating to limitations on preexisting condition
exclusion periods in group health plans)).
(e) The rules of this Q&A-2 are illustrated by the following
examples:
Example 1. (i) Employer X maintains a group health plan subject
to COBRA. C is an employee covered under the plan. C is also covered
under a group health plan
[[Page 5185]]
maintained by Employer Y, the employer of C 's spouse. C terminates
employment (for reasons other than gross misconduct), and the
termination of employment causes C to lose coverage under X 's plan
(and, thus, is a qualifying event). C elects to receive COBRA
continuation coverage under X 's plan.
(ii) Under these facts, X 's plan cannot terminate C 's COBRA
continuation coverage on the basis of C 's coverage under Y 's plan.
Example 2. (i) Employer W maintains a group health plan subject
to COBRA. D is an employee covered under the plan. D terminates
employment (for reasons other than gross misconduct), and the
termination of employment causes D to lose coverage under W 's plan
(and, thus, is a qualifying event). D elects to receive COBRA
continuation coverage under W 's plan. Later D becomes employed by
Employer V and is covered under V 's group health plan. D 's
coverage under V 's plan is not subject to any exclusion or
limitation with respect to any preexisting condition of D.
(ii) Under these facts, W can terminate D 's COBRA continuation
coverage on the date D becomes covered under V 's plan.
Example 3. (i) The facts are the same as in Example 2, except
that D becomes employed by V and becomes covered under V 's group
health plan before D elects COBRA continuation coverage under W 's
plan.
(ii) Because the termination of employment is a qualifying
event, D must be offered COBRA continuation coverage under W 's
plan, and W is not permitted to terminate D 's COBRA continuation
coverage on account of D 's coverage under V 's plan because D first
became covered under V 's plan before COBRA continuation coverage
was elected for D.
Q-3: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to the qualified beneficiary's entitlement to
Medicare benefits?
A-3: (a) If a qualified beneficiary first becomes entitled to
Medicare benefits under Title XVIII of the Social Security Act (42
U.S.C. 1395-1395ggg) after the date on which COBRA continuation
coverage is elected for the qualified beneficiary, then the plan may
terminate the qualified beneficiary's COBRA continuation coverage upon
the date on which the qualified beneficiary becomes so entitled. By
contrast, if a qualified beneficiary first becomes entitled to Medicare
benefits on or before the date that COBRA continuation coverage is
elected, then the qualified beneficiary's entitlement to Medicare
benefits cannot be a basis for terminating the qualified beneficiary's
COBRA continuation coverage.
(b) A qualified beneficiary becomes entitled to Medicare benefits
upon the effective date of enrollment in either part A or B, whichever
occurs earlier. Thus, merely being eligible to enroll in Medicare does
not constitute being entitled to Medicare benefits.
Q-4: [Reserved]
A-4: [Reserved]
Q-5: How does a qualified beneficiary become entitled to a
disability extension?
A-5: (a) A qualified beneficiary becomes entitled to a disability
extension if the requirements of paragraphs (b), (c), and (d) of this
Q&A-5 are satisfied with respect to the qualified beneficiary. If the
disability extension applies with respect to a qualifying event, it
applies with respect to each qualified beneficiary entitled to COBRA
continuation coverage because of that qualifying event. Thus, for
example, the 29-month maximum coverage period applies to each qualified
beneficiary who is not disabled as well as to the qualified beneficiary
who is disabled, and it applies independently with respect to each of
the qualified beneficiaries. See Q&A-1 in Sec. 54.4980B-8, which
permits a plan to require payment of an increased amount during the
disability extension.
(b) The requirement of this paragraph (b) is satisfied if a
qualifying event occurs that is a termination, or reduction of hours,
of a covered employee's employment.
(c) The requirement of this paragraph (c) is satisfied if an
individual (whether or not the covered employee) who is a qualified
beneficiary in connection with the qualifying event described in
paragraph (b) of this Q&A-5 is determined under Title II or XVI of the
Social Security Act (42 U.S.C. 401-433 or 1381-1385) to have been
disabled at any time during the first 60 days of COBRA continuation
coverage. For this purpose, the period of the first 60 days of COBRA
continuation coverage is measured from the date of the qualifying event
described in paragraph (b) of this Q&A-5 (except that if a loss of
coverage would occur at a later date in the absence of an election for
COBRA continuation coverage and if the plan provides for the extension
of the required periods in accordance with section 4980B(f)(8), then
the period of the first 60 days of COBRA continuation coverage is
measured from the date on which the coverage would be lost). However,
in the case of a qualified beneficiary who is a child born to or placed
for adoption with a covered employee during a period of COBRA
continuation coverage, the period of the first 60 days of COBRA
continuation coverage is measured from the date of birth or placement
for adoption. For purposes of this paragraph (c), an individual is
determined to be disabled within the first 60 days of COBRA
continuation coverage if the individual has been determined under Title
II or XVI of the Social Security Act to have been disabled before the
first day of COBRA continuation coverage and has not been determined to
be no longer disabled at any time between the date of that disability
determination and the first day of COBRA continuation coverage.
(d) The requirement of this paragraph (d) is satisfied if any of
the qualified beneficiaries affected by the qualifying event described
in paragraph (b) of this Q&A-5 provides notice to the plan
administrator of the disability determination on a date that is both
within 60 days after the date the determination is issued and before
the end of the original 18-month maximum coverage period that applies
to the qualifying event.
Q-6: Under what circumstances can the maximum coverage period be
expanded?
A-6: (a) The maximum coverage period can be expanded if the
requirements of Q&A-5 of this section (relating to the disability
extension) or paragraph (b) of this Q&A-6 are satisfied.
(b) The requirements of this paragraph (b) are satisfied if a
qualifying event that gives rise to an 18-month maximum coverage period
(or a 29-month maximum coverage period in the case of a disability
extension) is followed, within that 18-month period (or within that 29-
month period, in the case of a disability extension), by a second
qualifying event (for example, a death or a divorce) that gives rise to
a 36-month maximum coverage period. (Thus, a termination of employment
following a qualifying event that is a reduction of hours of employment
cannot be a second qualifying event that expands the maximum coverage
period; the bankruptcy of the employer also cannot be a second
qualifying event that expands the maximum coverage period.) In such a
case, the original 18-month period (or 29-month period, in the case of
a disability extension) is expanded to 36 months, but only for those
individuals who were qualified beneficiaries under the group health
plan in connection with the first qualifying event and who are still
qualified beneficiaries at the time of the second qualifying event. No
qualifying event (other than a qualifying event that is the bankruptcy
of the employer) can give rise to a maximum coverage period that ends
more than 36 months after the date of the first qualifying event (or
more than 36 months after the date of the loss of coverage, in the case
of a plan that provides for the extension of the required periods). For
example, if an
[[Page 5186]]
employee covered by a group health plan that is subject to COBRA
terminates employment (for reasons other than gross misconduct) on
December 31, 2000, the termination is a qualifying event giving rise to
a maximum coverage period that extends for 18 months to June 30, 2002.
If the employee dies after the employee and the employee's spouse and
dependent children have elected COBRA continuation coverage and on or
before June 30, 2002, the spouse and dependent children (except anyone
among them whose COBRA continuation coverage had already ended for some
other reason) will be able to receive COBRA continuation coverage
through December 31, 2003.
Q-7: If health coverage is provided to a qualified beneficiary
after a qualifying event without regard to COBRA continuation coverage
(for example, as a result of state or local law, the Uniformed Services
Employment and Reemployment Rights Act of 1994 (38 U.S.C. 4315),
industry practice, a collective bargaining agreement, severance
agreement, or plan procedure), will such alternative coverage extend
the maximum coverage period?
A-7: (a) No. The end of the maximum coverage period is measured
solely as described in Q&A-1 and Q&A-6 of this section, which is
generally from the date of the qualifying event.
(b) If the alternative coverage does not satisfy all the
requirements for COBRA continuation coverage, or if the amount that the
group health plan requires to be paid for the alternative coverage is
greater than the amount required to be paid by similarly situated
nonCOBRA beneficiaries for the coverage that the qualified beneficiary
can elect to receive as COBRA continuation coverage, the plan covering
the qualified beneficiary immediately before the qualifying event must
offer the qualified beneficiary receiving the alternative coverage the
opportunity to elect COBRA continuation coverage. See Q&A-1 of
Sec. 54.4980B-6.
(c) If an individual rejects COBRA continuation coverage in favor
of alternative coverage, then, at the expiration of the alternative
coverage period, the individual need not be offered a COBRA election.
However, if the individual receiving alternative coverage is a covered
employee and the spouse or a dependent child of the individual would
lose that alternative coverage as a result of a qualifying event (such
as the death of the covered employee), the spouse or dependent child
must be given an opportunity to elect to continue that alternative
coverage, with a maximum coverage period of 36 months measured from the
date of that qualifying event.
Q-8: Must a qualified beneficiary be given the right to enroll in a
conversion health plan at the end of the maximum coverage period for
COBRA continuation coverage?
A-8: If a qualified beneficiary's COBRA continuation coverage under
a group health plan ends as a result of the expiration of the maximum
coverage period, the group health plan must, during the 180-day period
that ends on that expiration date, provide the qualified beneficiary
the option of enrolling under a conversion health plan if such an
option is otherwise generally available to similarly situated nonCOBRA
beneficiaries under the group health plan. If such a conversion option
is not otherwise generally available, it need not be made available to
qualified beneficiaries.
Sec. 54.4980B-8 Paying for COBRA continuation coverage.
The following questions-and-answers address paying for COBRA
continuation coverage:
Q-1: Can a group health plan require payment for COBRA continuation
coverage?
A-1: (a) Yes. For any period of COBRA continuation coverage, a
group health plan can require the payment of an amount that does not
exceed 102 percent of the applicable premium for that period. (See
paragraph (b) of this Q&A-1 for a rule permitting a plan to require
payment of an increased amount due to the disability extension.) The
applicable premium is defined in section 4980B(f)(4). A group health
plan can terminate a qualified beneficiary's COBRA continuation
coverage as of the first day of any period for which timely payment is
not made to the plan with respect to that qualified beneficiary (see
Q&A-1 of Sec. 54.4980B-7). For the meaning of timely payment, see Q&A-5
of this section.
(b) A group health plan is permitted to require the payment of an
amount that does not exceed 150 percent of the applicable premium for
any period of COBRA continuation coverage covering a disabled qualified
beneficiary (for example, whether single or family coverage) if the
coverage would not be required to be made available in the absence of a
disability extension. (See Q&A-5 of Sec. 54.4980B-7 for rules to
determine whether a qualified beneficiary is entitled to a disability
extension.) A plan is not permitted to require the payment of an amount
that exceeds 102 percent of the applicable premium for any period of
COBRA continuation coverage to which a qualified beneficiary is
entitled without regard to the disability extension. Thus, if a
qualified beneficiary entitled to a disability extension experiences a
second qualifying event within the original 18-month maximum coverage
period, then the plan is not permitted to require the payment of an
amount that exceeds 102 percent of the applicable premium for any
period of COBRA continuation coverage. By contrast, if a qualified
beneficiary entitled to a disability extension experiences a second
qualifying event after the end of the original 18-month maximum
coverage period, then the plan may require the payment of an amount
that is up to 150 percent of the applicable premium for the remainder
of the period of COBRA continuation coverage (that is, from the
beginning of the 19th month through the end of the 36th month) as long
as the disabled qualified beneficiary is included in that coverage. The
rules of this paragraph (b) are illustrated by the following examples;
in each example the group health plan is subject to COBRA:
Example 1. (i) An employer maintains a group health plan. The
plan determines the cost of covering individuals under the plan by
reference to two categories, individual coverage and family
coverage, and the applicable premium is determined for those two
categories. An employee and members of the employee's family are
covered under the plan. The employee experiences a qualifying event
that is the termination of the employee's employment. The employee's
family qualifies for the disability extension because of the
disability of the employee's spouse. (Timely notice of the
disability is provided to the plan administrator.) Timely payment of
the amount required by the plan for COBRA continuation coverage for
the family (which does not exceed 102 percent of the cost of family
coverage under the plan) was made to the plan with respect to the
employee's family for the first 18 months of COBRA continuation
coverage, and the disabled spouse and the rest of the family
continue to receive COBRA continuation coverage through the 29th
month.
(ii) Under these facts, the plan may require payment of up to
150 percent of the applicable premium for family coverage in order
for the family to receive COBRA continuation coverage from the 19th
month through the 29th month. If the plan determined the cost of
coverage by reference to three categories (such as employee,
employee-plus-one-dependent, employee-plus-two-or-more-dependents)
or more than three categories, instead of two categories, the plan
could still require, from the 19th month through the 29th month of
COBRA continuation coverage, the payment of 150 percent of the cost
of coverage for the category of coverage that included the disabled
spouse.
Example 2. (i) The facts are the same as in Example 1, except
that only the covered
[[Page 5187]]
employee elects and pays for the first 18 months of COBRA
continuation coverage.
(ii) Even though the employee's disabled spouse does not elect
or pay for COBRA continuation coverage, the employee satisfies the
requirements for the disability extension to apply with respect to
the employee's qualifying event. Under these facts, the plan may not
require the payment of more than 102 percent of the applicable
premium for individual coverage for the entire period of the
employee's COBRA continuation coverage, including the period from
the 19th month through the 29th month. If COBRA continuation
coverage had been elected and paid for with respect to other
nondisabled members of the employee's family, then the plan could
not require the payment of more than 102 percent of the applicable
premium for family coverage (or for any other appropriate category
of coverage that might apply to that group of qualified
beneficiaries under the plan, such as employee-plus-one-dependent or
employee-plus-two-or-more-dependents) for those family members to
continue their coverage from the 19th month through the 29th month.
(c) A group health plan does not fail to comply with section
9802(b) and Sec. 54.9802-1T(b) (which generally prohibit an individual
from being charged, on the basis of health status, a higher premium
than that charged for similarly situated individuals enrolled in the
plan) with respect to a qualified beneficiary entitled to the
disability extension merely because the plan requires payment of an
amount permitted under paragraph (b) of this Q&A-1.
Q-2: When is the applicable premium determined and when can a group
health plan increase the amount it requires to be paid for COBRA
continuation coverage?
A-2: (a) The applicable premium for each determination period must
be computed and fixed by a group health plan before the determination
period begins. A determination period is any 12-month period selected
by the plan, but it must be applied consistently from year to year. The
determination period is a single period for any benefit package. Thus,
each qualified beneficiary does not have a separate determination
period beginning on the date (or anniversaries of the date) that COBRA
continuation coverage begins for that qualified beneficiary.
(b) During a determination period, a plan can increase the amount
it requires to be paid for a qualified beneficiary's COBRA continuation
coverage only in the following three cases:
(1) The plan has previously charged less than the maximum amount
permitted under Q&A-1 of this section and the increased amount required
to be paid does not exceed the maximum amount permitted under Q&A-1 of
this section;
(2) The increase occurs during the disability extension and the
increased amount required to be paid does not exceed the maximum amount
permitted under paragraph (b) of Q&A-1 of this section; or
(3) A qualified beneficiary changes the coverage being received
(see paragraph (c) of this Q&A-2 for rules on how the amount the plan
requires to be paid may or must change when a qualified beneficiary
changes the coverage being received).
(c) If a plan allows similarly situated active employees who have
not experienced a qualifying event to change the coverage they are
receiving, then the plan must also allow each qualified beneficiary to
change the coverage being received on the same terms as the similarly
situated active employees. (See Q&A-4 in Sec. 54.4980B-5.) If a
qualified beneficiary changes coverage from one benefit package (or a
group of benefit packages) to another benefit package (or another group
of benefit packages), or adds or eliminates coverage for family
members, then the following rules apply. If the change in coverage is
to a benefit package, group of benefit packages, or coverage unit (such
as family coverage, self-plus-one-dependent, or self-plus-two-or-more-
dependents) for which the applicable premium is higher, then the plan
may increase the amount that it requires to be paid for COBRA
continuation coverage to an amount that does not exceed the amount
permitted under Q&A-1 of this section as applied to the new coverage.
If the change in coverage is to a benefit package, group of benefit
packages, or coverage unit (such as individual or self-plus-one-
dependent) for which the applicable premium is lower, then the plan
cannot require the payment of an amount that exceeds the amount
permitted under Q&A-1 of this section as applied to the new coverage.
Q-3: Must a plan allow payment for COBRA continuation coverage to
be made in monthly installments?
A-3: Yes. A group health plan must allow payment for COBRA
continuation coverage to be made in monthly installments. A group
health plan is permitted to also allow the alternative of payment for
COBRA continuation coverage being made at other intervals (for example,
weekly, quarterly, or semiannually).
Q-4: Is a plan required to allow a qualified beneficiary to choose
to have the first payment for COBRA continuation coverage applied
prospectively only?
A-4: No. A plan is permitted to apply the first payment for COBRA
continuation coverage to the period of coverage beginning immediately
after the date on which coverage under the plan would have been lost on
account of the qualifying event. Of course, if the group health plan
allows a qualified beneficiary to waive COBRA continuation coverage for
any period before electing to receive COBRA continuation coverage, the
first payment is not applied to the period of the waiver.
Q-5: What is timely payment for COBRA continuation coverage?
A-5: (a) Except as provided in this paragraph (a) or in paragraph
(b) or (d) of this Q&A-5, timely payment for a period of COBRA
continuation coverage under a group health plan means payment that is
made to the plan by the date that is 30 days after the first day of
that period. Payment that is made to the plan by a later date is also
considered timely payment if either--
(1) Under the terms of the plan, covered employees or qualified
beneficiaries are allowed until that later date to pay for their
coverage for the period; or
(2) Under the terms of an arrangement between the employer or
employee organization and an insurance company, health maintenance
organization, or other entity that provides plan benefits on the
employer's or employee organization's behalf, the employer or employee
organization is allowed until that later date to pay for coverage of
similarly situated nonCOBRA beneficiaries for the period.
(b) Notwithstanding paragraph (a) of this Q&A-5, a plan cannot
require payment for any period of COBRA continuation coverage for a
qualified beneficiary earlier than 45 days after the date on which the
election of COBRA continuation coverage is made for that qualified
beneficiary.
(c) If, after COBRA continuation coverage has been elected for a
qualified beneficiary, a provider of health care (such as a physician,
hospital, or pharmacy) contacts the plan to confirm coverage of a
qualified beneficiary for a period for which the plan has not yet
received payment, the plan must give a complete response to the health
care provider about the qualified beneficiary's COBRA continuation
coverage rights, if any, described in paragraphs (a), (b), and (d) of
this Q&A-5. For example, if the plan provides coverage during the 30-
and 45-day grace periods described in paragraphs (a) and (b) of this
Q&A-5 but cancels coverage retroactively if payment is not made by the
end of the applicable grace
[[Page 5188]]
period, then the plan must inform a provider with respect to a
qualified beneficiary for whom payment has not been received that the
qualified beneficiary is covered but that the coverage is subject to
retroactive termination if timely payment is not made. Similarly, if
the plan cancels coverage if it has not received payment by the first
day of a period of coverage but retroactively reinstates coverage if
payment is made by the end of the grace period for that period of
coverage, then the plan must inform the provider that the qualified
beneficiary currently does not have coverage but will have coverage
retroactively to the first date of the period if timely payment is
made. (See paragraph (b) of Q&A-3 in Sec. 54.4980B-6 for similar rules
that the plan must follow in confirming coverage during the election
period.)
(d) If timely payment is made to the plan in an amount that is not
significantly less than the amount the plan requires to be paid for a
period of coverage, then the amount paid is deemed to satisfy the
plan's requirement for the amount that must be paid, unless the plan
notifies the qualified beneficiary of the amount of the deficiency and
grants a reasonable period of time for payment of the deficiency to be
made. For this purpose, as a safe harbor, 30 days after the date the
notice is provided is deemed to be a reasonable period of time.
(e) Payment is considered made on the date on which it is sent to
the plan.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 4. In Sec. 602.101, paragraph (c) is amended by adding entries
in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
Current OMB
CFR part or section where identified and described control No.
* * * * *
54.4980B-6................................................. 1545-1581
54.4980B-7................................................. 1545-1581
54.4980B-8................................................. 1545-1581
* * * * *
Approved: December 28, 1998.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Donald C. Lubick,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 99-1520 Filed 2-2-99; 8:45 am]
BILLING CODE 4830-01-P
