COBRA

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The Consolidated Omnibus Budget Reconciliation Act of 1985

The Consolidated Omnibus Budget Reconciliation Act of 1985 added provisions to ERISA, the Code, and the Public Health Service Act (PHSA) that required employers to offer continuing health coverage to individuals who experience "qualifying events." The time period over which health coverage must be offered varies depending on the qualifying event. Employees who elect COBRA continuation coverage may be charged for the cost of the premiums; however, the maximum permitted charge is determined by a statutory formula that often underestimates the real cost.

Scope

COBRA applies to all employers that maintain or contribute to a group health plan unless the employer falls within certain narrow exemptions. A plan does not need to be an ERISA plan to be subject to COBRA. Also, cafeteria plan options can constitute group health plans for COBRA purposes if they offer benefits related to medical care (e.g., a health FSA).

MSAs and Long-term care plans are not subject to COBRA.

Governmental employers (unless subject through the PHSA) are exempt from COBRA, as are churches, church-controlled organizations, and small employers. An employer is a small employer if it (and all members of its controlled group) normally employs less than 20 individuals.

Small Employer Exemption

The small employer exemption applies to employers that employ less than 20 individuals for 50 percent or more of business days (measured as of the last year).

Note that the measuring standard is "employed." Part-time employees and other employees must be counted, even if not eligibile for health coverage. Employees includes any employees in related entities within the employer's controlled group as well. Independent contracts, directors, and other non-employees are not counted.

State Laws

Even if it is exempt from COBRA, a employer's health plan may be subject to COBRA-like state laws if it is fully insured. These laws are sometimes called "mini COBRAs."

Qualified Beneficiaries

Only "qualified beneficiaries" who experience a qualifying event are required to be offered COBRA coverage. Qualified beneficiaries typically include covered employees, and their covered spouses and dependents. Retirees and their spouses and dependents can be qualified beneficiaries in bankruptcy.

Qualifying Events

"Qualifying events" are events that cause an individual to lose group health coverage. The type of qualifying event determines who the qualified beneficiaries are for that event and the period of time that a plan must offer continuation coverage. COBRA establishes only the minimum requirements for continuation coverage. A plan may always choose to provide longer periods of continuation coverage.

The following are qualifying events for a covered employee if they cause the covered employee to lose coverage:

  • Termination of the covered employee's employment for any reason other than "gross misconduct"; or
  • Reduction in the covered employee's hours of employment.

The following are qualifying events for a spouse and dependent child of a covered employee if they cause the spouse or dependent child to lose coverage:

  • Termination of the covered employee's employment for any reason other than "gross misconduct";
  • Reduction in hours worked by the covered employee;
  • Covered employee becomes entitled to Medicare;
  • Divorce or legal separation of the spouse from the covered employee; or
  • Death of the covered employee.

In addition to the above, the following is a qualifying event for a dependent child of a covered employee if it causes the child to lose coverage:

  • Loss of "dependent child" status under the plan rules.

COBRA Notices

General Notices

An employer must provide each employee and covered spouse with a notice of their continuation coverage rights within 90 days of the commencement of coverage (or, if earlier, by the date on which the employee, spouse, or qualified beneficiary is entitled to receive a COBRA election notice). A single notice may be furnished to an employee and spouse if they are known to reside at the same address (and the spouse's coverage does not begin before the employee's coverage).

General notices may be included in Summary Plan Descriptions if the distribution of the SPDs meets the requirements above. The DOL has created a Model General Notice.

Election Notices

Plan administrators must provide a qualified beneficiary with notice if he or she experiences a qualifying event. The notice must be provided within 14 days of the date on which the plan administrator is notified by the employer or the qualified beneficiary that a qualifying event has occured. Employers, in turn, have 30 days to notify the plan administrator of the following qualifying events:

  • Termination of employment or reduction in hours leading to noncoverage;
  • Employee's death;
  • Employee's eligibility for Medicare (if its leads to noncoverage); and
  • Employer's bankruptcy, if such bankruptcy will cause any substantial coverage loss within one year of the bankruptcy filing (before or after).

Thus, for employer-reported events, the plan administrator may have up to 44 days to send an election notice.

Election notices to minors may be sent to the employee or his or her spouse if they reside with their children. Employers usually send COBRA election notices through a verifiable mailing (e.g., certified US mail) because COBRA election notices are a frequent subject of litigation.

Non-English Notices

There is no direct guidance on whether non-English speakers must be provided COBRA notices in their native language. However, DOL regulations regarding SPDs suggest that such notices may be required. State laws may also mandate such notices.

Guidance

The DOL has created a Model Election Notice.

See also the following regulations:

Premiums

Computing the Applicable Premium

Plans may charge up to 102 percent of the "applicable premium." For insured plans, the applicable premium is the actual total cost of premiums to similarly situated individuals. The premium must be fixed for a 12-month period called the determination period. The determination period is a plan-wide period -- usually an insured plan's rating year is also used as its determination period.

Self-insured plans may compute applicable premiums based on actual costs in the prior 12-month determination period. As with insured plans, the applicable premium must be fixed during each 12-month determination period. However, when computing the applicable premium for a new 12-month determination period, the costs from the prior period can be adjusted upward for inflation. (Unfortunately, the regulations specify GNP inflation, not health care cost inflation, so the resulting premium is usually too low.)

Plan sponsors frequently face a challenge in setting applicable premiums when they make major changes to the plan. Premiums generally cannot be changed during a determination period, and determination periods are fixed once set -- there is no procedure in the regulations for adjusting a determination period, even if (say) a plan switches to a new insurance carrier mid-year. Premiums may only be increased during a determination period if:

  • The plan charged less than 102 percent of the applicable premium;
  • An individual changes his or her coverage election.

Payment Timing

COBRA payments are initially due within 45 days from when coverage is first elected. Later payments are due within 30 days of each new period. (Plans must offer monthly payment schedules, and thus the period is usually monthly.) Beneficiaries who do not timely pay premiums can be terminated; however, the significant litigation risk necessitates caution in such situations.

Tip for plan administrators: Retain the envelopes in which COBRA premium payments arrive until they are determined to be timely. The envelopes in which untimely payments arrive can be preserved as evidence if COBRA coverage is terminated due to delinquent premium payments.

Subsidy

The American Recovery and Reinvesment Act of 2009 (ARRA) created a subsidy for COBRA premium payments. The subsidy is effective February 17, 2009.

Eligibility

Only beneficiaries who are eligible for COBRA continuation coverage (or a similar state right) because they (or an employee under whose plan they were covered) were involuntarily terminated may receive the subsidy.

Amount

The subsidy works by deeming a beneficiary to have paid the full COBRA amount for paying only 35 percent of their contribution. (Employer COBRA contributions are not entitled to the subsidy.)

Period of Eligibility

The subsidy ends after nine months or when a beneficiary becomes eligible for other group health insurance coverage.

New Election Period

Those who rejected COBRA coverage on or after September 2009 must be given another chance to enroll in COBRA if they are eligible for the subsidy. This period lasts for 60 days after receiving the notice.

Notice

Those with COBRA rights must be informed of the subsidy provisions.

Payment Mechanism

Employers must continue to make the payments necessary for insurance under COBRA. They receive the subsidy through an offset on payroll tax payments. Insurers receive the subsidy directly.

Recapture

The subsidy is phased out through income tax recapture provisions on individuals making $125,000 or more per year.

Appeals

To appeal a COBRA subsidy denial, individuals should follow the instructions on the DOL Web site at [1].

Guidance

See the DOL COBRA subsidy pages for detailed information, including model notices.

See also Notice 2009-27.

Extension of Subsidy

Public Law 111-118 extended the subsidy eligibility period to include those involuntarily terminated through February 28, 2010. The subsidy may now last up to 15 months. For individuals who have already reached the end of their earlier nine-month subsidy, a special transition period applies.

See the DOL FAQ on COBRA subsidy extension.

On March 2, 2010, the Temporary Extension Act of 2010 extended the involuntary termination period through March 31, 2010. An involuntary termination of employment that occurs on or after March 2, 2010 but by March 31, 2010 and follows a qualifying event that was a reduction of hours that occurred at any time from September 1, 2008 through March 31, 2010 is also a qualifying event.

See HR 4691 for details.

Duration of Coverage

Generally, the maximum coverage period is 18 months. The following events, however, permit up to 36 months of coverage:

  • Employee's divorce;
  • Employee's death;
  • Employee's entitlement to Medicare; and
  • A child's loss of dependent status.

Generally, if an individual experiences a qualifying event, and is determined by the Social Security Administration to be disabled before or within 60 days after the date of the qualifying event, the maximum coverage period is 29 months. (This extension also applies to a spouse or dependent who loses coverage because of an employee's disability.)

An employee (and his or her dependents) who loses coverage because of military service also has the right to elect COBRA coverage. The maximum period for this event is 24 months.

Penalties

The DOL has the authority to fine the plan administrator for COBRA violations. The IRS also has the authority to impose excise taxes on the employer.

Direct Links to DOL Guidance

Other Guidance

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