California Enacts Cal-COBRA for Small Employers
Effective January 1, 1998, small employers in California that provide health insurance coverage to their employees under an insured plan will be required to provide continuation group health coverage, essentially identical to that required under the federal COBRA continuation of health coverage law. According to a staff member on the California Legislative Health Committee, small employers, if any, that self-insure their employees for health benefits, would not be subject to Cal-COBRA. For this purpose, a small employer is one that employed between 2 and 19 employees on at least 50% of its working days in the prior calendar year.
Prior to January 1, 1999, notice of such continuation coverage must be provided to all eligible employees who experience a qualifying event. Effective January 1, 1999, the required notice must be contained in each plan's evidence of coverage. Generally, the insurance companies are required to meet the Cal-COBRA notice and administrative requirements. However, the insurance companies may contract with the employers to provide such services.
Unlike federal COBRA, which allows 102% of the applicable premium to be charged to COBRA beneficiaries during the 18 or 36, as applicable, months of continuation coverage, under Cal-COBRA, the charge for the 18 or 36 months of continuation coverage may be 110% of the applicable premium. Both federal COBRA and Cal-COBRA allow 150% of the premium to be charged to those persons who qualify for the disability extension of up to an additional 11 months (following the 18-month period of coverage).
Cal-COBRA is designed to cover only those persons who are not eligible to elect federal COBRA continuation coverage because they work for a small employer. Other exclusions from Cal-COBRA coverage, as well as the circumstances under which Cal-COBRA continuation coverage may be terminated, are generally the same as the federal COBRA requirements. According to the Legislative Counsel's Digest, violation of the Cal-COBRA requirements is a criminal offense.
HIPAA Requires SPD Changes in Early 1998
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") requires that Summary Plan Descriptions ("SPDs") for group health plans be revised to include specific language with respect to (i) identifying health insurance issuers who are responsible, either wholly or in part, for the financing or administration of a group health plan, (ii) new language describing a plan participant's ERISA rights, and (iii) language relating to maternity and newborn infant coverage.
These changes are required to be made to SPDs no later than 60 days following the first day of the first plan year that begins after June 30, 1997. For calendar year plans, the deadline for making these SPD changes is March 1, 1998, the 60th day of 1998.
Plan sponsors should discuss these required changes with the health insurance company or consultant that prepares the SPD for the plan sponsor's group health plan.
Information Requirements Under California Law for Deferred Compensation Plans
A California statute effective January 1, 1997 requires public and private employers that sponsor deferred compensation plans to provide information to employees regarding the risk of participating in the plan, the employer's financial status and investment results. The information is required to be provided both before the employee enrolls in the plan and quarterly thereafter while the employee is participating in the plan. Only deferred compensation plans in which the employer manages investments are subject to this law. Deferred compensation plans in which employees direct investments through a financial institution are not subject to this law.
We believe that this statute will be preempted by ERISA (i.e., will be unenforceable) for private employers who sponsor qualified retirement plans and non-qualified deferred compensation plans, such as "top-hat" plans. However, the statute could be read to apply to bonus or long term incentive compensation plans that have some element of income deferral, but are not subject to ERISA, as the term "deferred compensation plans" is not defined in the statute. We discussed the definition of "deferred compensation plans" with a staff member of the California Legislature Labor Committee, who confirmed that the legislative record does not define "deferred compensation plan," and who suggested, based upon the record, that a broad definition may have been intended. Although the statutory language is not clear, our view is that the statute should apply only to "top hat" nonqualified deferred compensation plans, qualified retirement plans and 403(b) plans which have employee deferrals. However, for a private employer, the statute, in most cases, would be preempted by ERISA with respect to such plans.
The statute also applies to public (governmental) employers that sponsor deferred compensation plans. Because governmental employer plans generally are not subject to ERISA, the statute would not be subject to ERISA preemption with respect to such plans and would be enforceable.
New Temporary and Proposed Regulations for Cafeteria Plans Clarify Family Status Changes
In November, 1997, the IRS issued proposed and temporary regulations which address certain family status changes under cafeteria plans, also referred to as Section 125 plans or flex plans.
The proposed regulations provide expanded guidance on what events are family status changes for health and accident plans and life insurance plans. Family status changes for other benefit forms are not addressed in the proposed regulations.
The change of status events for health plans include HIPAA special enrollment rights, marital status changes, changes in the number of dependents, changes in employment status, changes in work schedule, a dependent satisfying or ceasing to satisfy eligibility requirements, changes in residence and work-site changes. The regulations also provide a number of helpful examples that clarify the status changes and which cafeteria plan election changes could be made in response to a specific family status change.
The temporary regulations are effective for plan years beginning after December 31, 1998, but may be relied on for periods prior to that date.