Questions regarding COBRA eligibility are common when one spouse loses his or her job (and thus medical coverage under the former employer's medical plan) while continuing to be covered as a dependent under the medical plan of the employed spouse's employer. Does such a former employee have a right to elect COBRA coverage, or was COBRA enacted solely to protect people who would otherwise have no medical coverage. COBRA itself provides that continuation coverage may cease when the former employee first becomes covered, after the date of his or her continuation election, under another group health plan which does not contain any preexisting condition exclusion or limitation with respect to the former employee's preexisting conditions.
The IRS' proposed regulations indicate that the timing of when other medical coverage first becomes available to the former employee is irrelevant. Rather, in the above scenarios, the proposed regulations provide that COBRA coverage may cease on the first day after the former employee elects COBRA coverage. Thus, in all circumstances, the former employee will be entitled to coverage during the period between his or her loss of coverage under the ex-employer's plan and the date he or she files a COBRA election. This is true despite the fact that the former employee already has separate medical coverage as a dependent. Some employers have interpreted the proposed regulations and the statutory language to immediately cut off the former employee's right to COBRA coverage because the former employee is already covered under another group health plan with no preexisting condition exclusion as to that person.
The courts have had a difficult time addressing this issue. Some have held that timing is everything; that only coverage acquired by the former employee after termination of employment can eliminate his or her right to COBRA coverage. Others have adopted the rule that timing is irrelevant; the preexisting family coverage immediately eliminates the former employee's COBRA rights. Still other courts have come out somewhere in the middle, holding that the former employee has no right to COBRA coverage unless there is a "significant gap" between the coverage under the ex-employer's plan and that being provided to the former employee under the plan covering the employed spouse. Of course, what is "significant" is in the eye of the beholder (here the court).
The U.S. Supreme Court heard oral arguments on April 29 in an appeal from a case, Geissal v. Moore Medical Corp., 114 F.3d 1458, (8th Cir. 1997) cert. granted, 522 U.S. __ (1998) decided on the significant gap theory. The federal government filed a brief in this case, taking the position that existing coverage was irrelevant and that the significant gap rule was impossible to enforce because it is so subjective. We expect that the Supreme Court will clarify when COBRA rights terminate in this situation sometime during 1998.
NEWSFLASH . . .
COBRA CASE DECIDED!!!
At press time, the United States Supreme Court issued its decision in Geissal, holding that an employer may not deny COBRA continuation coverage to an otherwise qualified beneficiary who is covered under another group health plan at the time he makes his COBRA election. The Supreme Court rejected the "significant gap" approach stating that it "is plagued with difficulties...beginning with the sheer absence of any statutory support for it." We will have more information regarding this major decision in our next Newsletter.
IRS Issues Defined Benefit Pension Plan Distribution Regulations
In April, the IRS issued final and temporary regulations addressing the interest rate and mortality assumptions to be used in the calculation of lump sum distributions from defined benefit pension plans. The regulations address changes made by the Retirement Protection Act of 1994 ("RPA"). RPA, which was part of the GATT legislation, amended Section 417(e)(3) of the Code which sets forth rules to be used when determining the present value of an employee's benefit under a qualified defined benefit pension plan for purposes of (a) the applicable consent rules and (b) calculating the amount of a lump sum distribution. Section 417(e)(3) is also relevant to determine if a former participant has a benefit in excess of the statutory threshold ($5,000) for involuntarily cashing out that former participant. The final and temporary regulations went into effect April 3, 1998; however most plans may delay the effective date of the RPA until the first plan year beginning after December 31, 1998. The two basic changes of the proposed regulations are that (a) plans with non-calendar plan years now have the option to alter the interest rate on a calendar year basis, rather than on a plan year basis and (b) plans may choose an applicable interest rate that is a multiple-month average of 30-year Treasury rates.