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IRS Issues COBRA Continuation Rules

February 26, 1999
Long awaited final rules on COBRA continuation coverage have been released by the IRS. The regulations are based primarily on the 1987 proposed regulations addressing COBRA continuation coverage requirements in general, as well as on the 1998 proposed regulations, which covered COBRA compliance issues after the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The final rules also reflect court decisions and statutory amendments to COBRA since its enactment in 1985.

Clarification is the intent, question and answer the format.
The new final and proposed regulations are intended to clarify many of COBRA's administrative rules and to enhance reliance on them. It should be noted, however, that while comprehensive, the regulations do not touch upon the COBRA notice requirements. The regulations are presented in the same question-and-answer format of the 1987 proposed regulations, which have been reorganized, renumbered and modified to reflect substantive changes. Key changes and clarifications are highlighted below.

Which plans must comply?
Of particular interest to employers will be the rules, final and proposed, impacting which plans must comply with COBRA. Under 1987 proposed regulations, a group health plan (other than a multiemployer plan) was a small employer plan exempt from COBRA's requirements if it normally employed fewer than 20 employees on at least 50% of its typical working days during that calendar year. The final regulations substitute the term "working days" with "business days" to allow the employer the option of counting by pay period rather than by every business day.

Also for purposes of qualifying for the small-employer exception, the newly proposed regulations allow employers to count each part-time employee as a fraction of a full-time employee. That fraction is equal to the number of hours that the part-time employee works divided by the number of hours that an employee must work to be considered full-time.

Application to Flexible Spending Arrangements?
The proposed regulations generally limit the application of COBRA to health flexible spending arrangements (FSAs) 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.

Number of plans maintained.
The proposed regulations also would give an employer the option to determine the number of health plans it maintains by either aggregating benefits into a single group plan or disaggregating them into separate group health plans. Plan documents would determine the status of benefits as part of a single or separate plan.

Qualified beneficiaries clarified.
The final regulations adopt the Supreme Court's decision in Geissal v. Moore Medical Corporation and eliminate the rule in the 1987 proposed regulations that an individual is not a qualified beneficiary if the individual was entitled to Medicare benefits on the date before the qualifying event. The regulations also add a rule that if an individual is wrongfully denied coverage under a group health plan and experiences an event that would otherwise have been a qualifying event, the plan must consider the individual as a qualified beneficiary.

New qualifying events.
Reflecting amendments to COBRA under OBRA 1986, an employer bankruptcy is a COBRA qualifying event under the final regulations. Also, the final regulations clarify that an increase in an employee premium or contribution due to a qualifying event constitutes a "loss of coverage'" that triggers the right to COBRA.

Scope of coverage provided.
The final regulations eliminate the requirement that group health plans offer qualified beneficiaries the option to elect only core health coverage under a plan that otherwise provides both core and non-core coverage. However, the IRS invites comments on its decision to not include such a requirement.

Also, employers must now provide COBRA to qualified beneficiaries who move outside the plan region if the employer would be able to provide coverage to the qualified beneficiary under one of its existing plans. Under the 1987 proposed regulations, an employer maintaining region-specific plans had to offer COBRA to a qualified beneficiary moving outside of the region only if the employer had other employees in the area to which the employee was moving.

Coverage duration clarified.
The final regulations clarify that employers may discontinue COBRA coverage when a qualified beneficiary becomes entitled to either Part A or Part B of Medicare, assuming that the entitlement arises after COBRA was elected. Also, termination of employment following a reduction of hours does not constitute a secondary qualifying event that would expand the maximum coverage period.

Allowable premium increases.
The final regulations revise the 1987 proposed regulations, which did not permit an increase in the applicable premium during the 12-month determination period, by allowing increases in three situations. Thus, a plan is permitted:

  1. 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,
  2. to allow a plan that is requiring payment of less than the maximum allowable amount to increase the amount required to be paid during the 12-month determination period, and
  3. to permit an increase if a qualified beneficiary changes to more expensive coverage.

Regarding premiums for non-disabled qualified beneficiaries who are entitled to the disability extension, employers may charge 150% of the applicable COBRA premium if the disabled individual is part of the coverage group, but only 102% if non-disabled qualified beneficiaries only are in the coverage group.

Regs effective January 1, 2000.
The final regulations 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. Further, proposed regulations issued on June 15, 1987, and January 7, 1998, may be relied upon until the final regulations become effective.

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