October 5, 1994
Name
Address
City/State/Zip
Ref: COBRA Health Care Continuation Requirements
Dear :
I am writing pursuant to our conversation of last week in which you requested that I supply you with information concerning the health care continuation requirements under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) that apply to employers sponsoring employee health plans.
1. Introduction
Federal tax law contains certain provisions designed to induce employers to provide coverage under fringe benefit plans to their employees. The COBRA health care continuation provisions are one such set of rules. COBRA generally applies to plan years beginning on or after July 1, 1986.
2. Coverage Requirements
a. Covered Individuals
COBRA requires that a "qualified beneficiary" covered under an employer's group health plan who experiences a "qualifying event" (which ordinarily would terminate coverage) be allowed to elect to continue that health coverage for up to 18 or 36 months (depending on the type of qualifying event involved).
Qualified beneficiaries are employees, their spouses, and their dependents who are covered under the employer's plan. Qualified beneficiaries must be covered by a health plan on the day before the qualifying event, either as an employee or as an employee's spouse or dependent. For this purpose, the term "employee" includes former employees (for example, retirees) as well as sole proprietors, partners, directors and independent contractors, if they were covered under a plan that also covers employees, but does not include non-resident aliens with no U.S.-source income.
A qualifying event is any one of the following events which would cause the individual to lose coverage under the employer's plan:
(1) the death of the employee;
(2) the termination of the employee's employment (other than for gross misconduct) or a reduction in the employee's hours;
(3) the divorce or legal separation of the employee from his spouse;
(4) the employee's entitlement to Medicare; and
(5) a dependent child ceasing to be a dependent under the plan.
b. Covered Plans
A "group health plan" under COBRA is an employee welfare benefit plan providing medical care to participants and beneficiaries directly or through insurance, reimbursement or otherwise. Dental and vision plans are included. A group health plan includes any plan maintained by an employer to provide medical care to employees, former employees and/or their families. This includes individual as well as group health insurance policies (if there are two or more employees) and employee-pay-all plans if coverage under the plan would not be available at the same cost to an employee if he were not employed by the employer.
Generally, group health plans of employers that normally employ fewer than 20 employees, and plans maintained by churches, the federal government, the District of Columbia, and any territory or possession of the United States are exempt from COBRA. Plans established and maintained by state and local governments that receive funds under the Public Health Services Act must comply with the continuation provisions, although there is no specific penalty for failure to comply.
c. Length of Continuation Coverage
Where the event ending coverage is termination of employment or a reduction in hours, group health care coverage must be made available to continue for at least 18 months after the termination or reduction in hours. For the other qualifying events, coverage must continue for at least 36 months.
If a second qualifying event occurs during the first 18 months after the initial event, continuation coverage must be available for up to 36 months from the first qualifying event. The 18- or 36-month period runs from the date of the qualifying event even if coverage does not terminate until a later date (for example, because the employer extends coverage for some other reason).
Coverage may be stopped, however, if any of the following interceding events occurs:
Ä the employer ceases to provide any group health coverage to its employees,
Ä premiums required under the plan are not paid in a timely manner, or
Ä the qualified beneficiary becomes covered under any other group health plan.
d. Type of Coverage That Must Be Provided
The continuation coverage must consist of the same coverage that is provided under the health plan to other similarly situated employees and beneficiaries who have not incurred a qualifying event. If coverage under the plan is modified for any group of similarly situated employees and beneficiaries, it must also be modified for those receiving continuation coverage. COBRA requires that a qualified beneficiary be given the right to elect to buy the same coverage that he had immediately before the qualifying event. If a similarly situated active employee's coverage is modified, that change must be passed through to the COBRA continuees. Further, if the active employees' plan is "changed or eliminated" the COBRA continuees may opt into any other health plan the employer maintains.
Qualified beneficiaries may choose either core-only, or core-plus-noncore coverage. If non-core coverage is no more than 5% of the total cost, however, the plan need not separately break out the noncore benefits. ("Noncore" refers to dental and vision plans that do not require the services of a licensed physician).
e. Applicable Premium
The applicable premium is equal to the cost to the plan for a determination period for similarly situated beneficiaries with respect to whom a qualifying event has not occurred (without regard to whether such costs are paid by the employer or employee). The employer does not have to pay the costs of the continuation coverage, however; it may require the employee or beneficiary to pay the premium. Such individuals, however, may not be charged in excess of 102% of the cost to the plan for coverage of similarly situated employees or beneficiaries who have not incurred a qualifying event. If the plan elects to pass on the premium charge to the employee or beneficiary, the premium may be paid in monthly installments. The premium must be determined for a 12-month period before the beginning of the coverage period. Plan deductibles and out-of-pocket limits are continued after the qualifying event for the entire period of continuation coverage.
The first premiums are not due until 45 days after the COBRA election, but those eligible to elect continuation coverage must be given a grace period for payment of premiums equal to 30 days or, if longer, the period allowed for active employees of the employer to pay any premiums to the coverage provider.
3. Notice and Election Requirements
a. Notice Requirement
The plan must provide written notice to each employee, covered spouse, and dependent child of their right to elect continuation coverage. The notice must be given at the time coverage under the plan begins or when COBRA took effect for those who were already covered by a plan when COBRA became law. Generally, the employer must also notify the plan administrator (if it is not the administrator) of the occurrence of any event that would require the extended coverage. Specifically, the employer must notify the administrator if the qualifying event is death, termination, reduction in hours, or entitlement to Medicare. The employee must notify the administrator if the event is separation, divorce or a dependent child ceasing to be dependent. The employer has 30 days from the date the event occurred to notify the administrator. Where the employee must notify, he has 60 days from the date of the event. After being advised of a qualifying event, the administrator has 14 days to notify qualified beneficiaries of their rights to continuation coverage and to provide them with an opportunity to elect such coverage.
b. Election Period Requirement
The COBRA election period may begin at any time, but it must last for at least 60 days after the date the qualified beneficiary would lose coverage absent a COBRA election. Plans do not have to pay claims for services furnished during the election period before the qualified beneficiary has elected continuation coverage and paid the premium for it, but they must retroactively reimburse such claims if the individual ultimately makes the election and pays the premium. While a parent may elect COBRA on behalf of the family, each qualified beneficiary may independently elect it if the employee or the spouse rejects coverage for himself. This also means that each qualified beneficiary may independently elect core or core-and-noncore benefits.
If COBRA coverage lapses at the end of the 18- or 36-month period, the beneficiary must be given the same right to convert the group coverage to an individual policy that is available under the plan without regard to COBRA. The qualified beneficiary must be given the right to elect conversion to an individual plan during the 180-day period ending on the expiration date of continuation coverage.
4. Sanctions
The sanction imposed upon employers that fail to comply with COBRA is an excise tax that takes into account the number of individuals for whom there has been a failure, the amount of time the failure existed, the employer's knowledge of the failure, and whether a correction was made. The excise tax generally is imposed at a rate of $100 per day per qualified beneficiary during the noncompliance period, with a maximum of $200 per day imposed for a family. For unintentional failures, the employer's excise tax liability may not exceed the lesser of 10% of the total amount the employer paid during the preceding year for group health plans or $500,000. Higher penalties apply where the failure to comply is discovered after the employer has been notified that its income tax return for the year in question is under examination. No tax is imposed, however, where the employer can show the IRS that it failed to detect the violation after exercising due diligence.
I hope the foregoing has been helpful in giving you an overview of the COBRA health care rules. If you have any questions or wish to discuss any of the matters raised in this letter, please give me a call.
Sincerely,
This next is Tax Management Inc's disclaimer on their example:
Copr. 1995 Tax Management Inc.