Employee Benefits: COBRA, the Sequel

Employers and their legal advisors have been coping with COBRA's health plan continuation rules since 1985. This year, 12 years after it issued proposed COBRA regulations, the IRS issued final regulations and new proposed regulations that concern matters not addressed in the earlier proposed regulations. In some cases, these regulations should eventually make COBRA compliance simpler. For now, however, employers face the task of learning the new rules and incorporating them into their programs. This article is a summary of the highlights (and lowlights) of the new regulations. As is customary with benefits matters, the regulations themselves are opaque and convoluted. They should be studied carefully before they are applied to a particular program or situation.

Up until now, health FSAs have been subject to COBRA, although many employers are unaware of this. Under the new regulations, most health FSAs will be subject to COBRA notice and election requirements only for the year of the COBRA event. In some cases, COBRA will not apply at all.

What it means: Employers are not totally off the hook for COBRA compliance for their FSAs. Complete exclusion from COBRA is determined on a case by case basis depending on the employee's account balance and claims--administrative difficulties may prevent employers from taking advantage of the complete exclusion.

In Geissal v. Moore Medical Corp., 524 U.S. 74 (1998), the Supreme Court held that COBRA coverage can't be denied to participants who have other group coverage before they make a COBRA election. COBRA coverage may be terminated if a participant enrolls in other group coverage after his or her COBRA election. The new regulations incorporate this rule and extend it to Medicare enrollment.

What it means: Employers who don't currently offer COBRA to these persons will need to change their practices. COBRA notice and election forms should be reviewed for compliance.

The rules for providing COBRA to participants who have alternative coverage from the employer after a COBRA event have been simplified. Now the employer must give a COBRA election to any participant whose alternative coverage is less generous than COBRA coverage. Spouses and dependents who lose alternative coverage during the 18-month COBRA period on account of a COBRA event may elect COBRA coverage for 36 months from that event.

What it means: Coverage is less generous than COBRA if it costs more or if it provides a lower level of benefits or a higher co-pay or deductible. The new rule may require employers to begin sending COBRA elections to former employees receiving retiree coverage, as well as other classifications of employees. The rule for spouses and dependents provides for a longer COBRA coverage period than the period for other multiple COBRA events. This rule will be difficult to administer, as the employer's regular COBRA records would not normally include these individuals.

COBRA does not apply to employers with fewer than 20 employees. Under the new regulations, independent contractors, partners, sole proprietors or leased employees need not be counted in determining the number of employees. The proposed rules permit employers to count part-time employees as fractional.

What it means: More employers will be able to qualify for the small employer exception to COBRA.

The old proposed regulations required that participants be permitted to elect medical "core" health benefits and waive "non-core" benefits like dental and vision even if active employees did not have that choice. The core vs. non-core distinction is eliminated in the new regulations, and participants can be required to take the entire package if they want COBRA coverage.

What it means: Plan administration will be greatly simplified. Election forms may need to be revised.

COBRA participants may make a separate election for each "plan." Under the new regulations, the employer will be able to state in the plan documents which health care arrangements are grouped as one plan and which are separate plans for COBRA purposes. If this is not stated clearly, all arrangements are treated as one plan.

What it means: Employers will no longer need to interpret confusing regulations about how many elections must be offered. The status of plan documents should be reviewed.

COBRA coverage may be terminated for failure to pay the required premium. The new regulations provide an exception if the payment is short by an "insignificant amount." If the insufficiency is insignificant, the employer must either accept the insufficient payment or notify the participant and provide a 30-day grace period for payment.

What it means: The absence of a definition of "insignificant" will lead to confusion and uncertainty. The rule adds one more notification requirement for employers who do not accept insufficient premiums as payment in full. Participants may manipulate the rule to get an extra 30 days to pay the full premium or to get a COBRA "discount."

Under the new regulations an election by the employee or spouse will automatically apply to all family members unless those not wishing coverage personally decline. A participant may not decline coverage on behalf of any other adult participant, such as a spouse or college-age child.

What it means: Election forms and procedures will have to be changed and paperwork will increase. It may be difficult to obtain the necessary waivers from family members.

An employer or other administrator of a health plan is required by the new regulations to answer questions from health care providers about a participant's COBRA status and coverage during the COBRA election period and during the grace period for premium payment.

What it means: In-house human resources or benefits staff may need to be trained in how to respond to providers' inquiries.

The new regulations require a health plan to accept a COBRA election and/or premium payment from a third party on behalf of an eligible COBRA participant.

What it means: This is an opportunity for new employers and health care providers to shift the costs of health care coverage and services to the former employer's plan.

The normal 18-month COBRA period may be extended to 29 months if a participant is disabled. The final regulations add new and complex details to the rules for disability extensions. In general, the new rules expand the opportunity for non-disabled relatives of the disabled person to receive the extension.

What it means: These changes will make COBRA administration for the disability extension period more complex and expensive. Employers should carefully examine their policies and procedures in this area.

New rules provide for default allocations of COBRA duties in stock and asset sales. The parties may alter these rules by contract, but there is residual liability for the party that would be responsible under the default rules if the contracting party fails to honor its contractual promise.

What it means: The default rules may spare the parties and the participants some difficulties in determining rights and duties after a transaction if COBRA was not dealt with in the contract. Most employers, however, will want to consider allocating COBRA responsibilities differently. Buyers and sellers who contract out of the default rules may find themselves liable anyway if the other party does not provide COBRA coverage.

The final regulations are applicable for terminations and other "qualifying events" that occur in the 2000 plan year and thereafter. The proposed rules are not yet effective, but employers may choose to follow them until they are finalized.

A final note: In almost all cases, the employer is the "plan administrator" for COBRA and other ERISA purposes and bears ultimate responsibility for compliance. Carriers and third-party administrators may have limited COBRA liability if they have agreed in writing to assume it. It would be prudent for employers to discuss with their carriers their programs and procedures for complying with COBRA and the new regulations.