Y2K Benefit Changes Require Employers to Revise Their COBRA Forms and Procedures

For more than a decade employers have wrestled with administration of COBRA healthcare continuation rules. Under COBRA, most private employers must offer employees and dependents who lose health coverage due to certain qualifying events the right to purchase continuation coverage at their own expense. IRS recently issued revised COBRA regulations applicable to health plan years beginning on and after January 1, 2000. The new millennium ushered in required changes in the standard COBRA forms and procedures employers have been using for over a decade.

Some elements of the new regulations make COBRA easier for employers to administer. For example, the new regulations eliminate the requirement to offer “core” medical coverage as a separate election under COBRA, if core and non-core coverage (such as vision or dental care) are bundled as a single option to active employees. The new regulations also sharply reduce the circumstances under which continuation must be offered for uninsured health expenses under so-called “flexible spending account” cafeteria plans. Finally, the regulations make clear that a COBRA payment need not be made by the participant himself or herself, and can be made on the participant’s behalf by anyone, even a new employer. Paying a new employee’s COBRA premiums to continue for a time coverage afforded at a prior employer may even become a popular new-hire benefit.

However, some elements of the new regulations are more troubling for employers. The regulations now provide that, if a COBRA premium payment is short by an “insignificant amount,” then the employer cannot reject the premium. Instead, the employer is required to either treat the short payment as satisfaction in full or provide the participant at least 30 days to make up the difference. Additionally, an employer is now required to offer a COBRA participant moving out of an HMO geographic service area the right to transfer to any other plan of the employer that would offer coverage in the participant’s new geographic location, even if the employer does not otherwise allow mid-year changes in coverage and does not have any employees in that new geographic location.

The new regulations also provide elaborate rules dealing with COBRA rights upon purchase or sale of a business. These rules make important distinctions between stock sales and asset sales, and whether the entire company or only a division is sold. For example, where a company sells substantially all of its assets, in general the seller and not the buyer is responsible for providing COBRA benefits to the seller’s former employees. However, a buyer may find to its surprise that it will nevertheless be responsible for providing COBRA coverage to the seller’s former employees (persons the buyer never employed), if the seller ceases to offer coverage within 18 months after the asset sale. Companies considering the purchase or sale of a business must be certain to check these new COBRA regulations as an essential part of their due diligence.

These new regulations, combined with thirteen years of court cases and statutory changes, make it essential for all benefits managers to review their existing COBRA forms and procedures. In particular, any manager who is using COBRA notice forms that are more than a year old, even those based on a model previously issued by the IRS, may be unpleasantly surprised to find that those forms are now seriously out of date. Updating COBRA forms and procedures under the new regulations can be done easily through a benefits audit. Such an audit should be on every benefit manager’s “to do” list for the new millennium. The costs of doing nothing (i.e., direct uninsured liability for payment of medical expenses) can be substantial.