COBRA Continuation Rate Structure Clarified

Rules for continuation coverage under group medical plans through the provisions of COBRA require an employer to offer continuation coverage to employees and/or their beneficiaries when certain events occur. Those events include:

  • Termination of employment
  • Death
  • Divorce
  • Falling below the number of hours which would entitle someone to coverage
  • Attaining an age when one can no longer be covered as a dependent child, and
  • A family member's loss of coverage when a participant becomes entitled to Medicare coverage.
In all of these circumstances, the plan offering COBRA continuation coverage is entitled to charge 102% of the premium cost, with the additional 2% being intended to reimburse the employer for the expenses of administrating COBRA.

The IRS has recently clarified the amount of premium which a group health plan may charge in certain COBRA continuation situations.1 Stressing that the applicable premium is "the cost to the plan for that period of the coverage for similarly situated beneficiaries with respect to whom a qualifying event has not occurred", the IRS takes the position that whenever one person elects COBRA continuation coverage, the appropriate level of premium is 102% of the single rate. If two or more people are covered for COBRA continuation coverage, the applicable rate is 102% of the family rate. Rationale for this position is that, had there not been a qualifying event, the employee and spouse would have belonged to the category of beneficiaries consisting of an employee and one or more family members (a spouse or one or more dependent children) all of whom are covered as a family. This same interpretation would extend to any two or more individuals electing continuation coverage as a result of the same qualifying event. That is, it could apply to continuation coverage elected by the employee and a dependent child or by the spouse and a dependent child.

When one individual elects COBRA continuation coverage, the IRS finds that it is not a reasonable interpretation of COBRA to require a spouse electing continuation coverage to be charged the family rate. When one qualified beneficiary (whether an employee, a spouse or a dependent child) elects continuation coverage, that individual is similarly situated to the "employee only category of beneficiaries". Thus, the applicable premium is the individual rate plus 2%. If the plan operates in good faith compliance with this interpretation, the Rev. Rul. holds that a plan will not fail to meet the COBRA continuation coverage requirements by charging 102% of the individual rate for singles electing coverage and 102% of the family rate for two or more people electing coverage.

It should be noted that this Rev. Rul. does not link together a participant continuing under active coverage and a spouse or dependent electing continuation coverage. That is, in the case of divorce, where continuation coverage is elected by a spouse and dependent child, COBRA requirements are satisfied if the family rate is charged to the spouse and dependent child, even though a single rate might be charged to the continuing plan participant.

It should be noted that the Minnesota Department of Health (which regulates health maintenance organizations) has taken a different view of this situation.2 The Department takes the position that when a group policy or contract has a family rate which applies regardless of the number of dependents, the ex-spouse cannot be required to pay an extra premium to continue coverage. Only if a separate premium is charged for each additional dependent can a second premium be charged to the ex-spouse. Thus, for example, if a husband and wife were covered as a family and were subsequently divorced, with the spouse electing continuation coverage, the same level of premium should be maintained, that is, the cost of family coverage. The ex-spouse should pay no additional premium. The Bulletin makes no reference to COBRA coverage.

The Interpretative Bulletin was issued before Rev. Rul. 96-8. What appears to be inconsistent treatment under federal and state law should be resolved through state action. Problematic under Minnesota's interpretation is the status of a divorced spouse under the family coverage the employee maintains, if the employee experiences a COBRA qualifying event. Since the ex-spouse is not a dependent, COBRA continuation coverage would not appear to be available to the ex-spouse. Also, if the employee remarries, maintaining family coverage, are both divorced spouse and the new spouse under the same family coverage? The state has taken the position that it is only at that point that a single COBRA premium can be charged for the divorced spouse.

Self-insured medical plans are subject to federal COBRA law. They are not, however, subject to Minnesota continuation laws. Fully insured plans as well as health maintenance organizations and health service organizations are subject to Minnesota law.

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