Health Benefits
Under (COBRA) - The Consolidated
Omnibus Budget Reconciliation
Act of 1986
DEPARTMENT
OF THE TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
[TD 8812]
RIN 1545-AI93
Continuation Coverage Requirements
Applicable to Group Health Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final rule.
SUMMARY: The Consolidated Omnibus
Budget Reconciliation Act of 1985
(COBRA) added health care continuation
requirements that apply to group
health plans. Coverage required
to be provided under those requirements
is referred to as COBRA continuation
coverage. Proposed regulations
interpreting the COBRA continuation
coverage requirements were published
in the
Federal Register of June 15, 1987
and of January 7, 1998. This document
contains final
regulations based on these two
sets of proposed regulations.
The final regulations also reflect
statutory amendments to the COBRA
continuation coverage requirements
since COBRA was
enacted. A new set of proposed
regulations addressing additional
issues under the COBRA
continuation coverage provisions
is being published elsewhere in
this issue of the Federal
Register. The regulations will
generally affect sponsors of and
participants in group health plans,
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and they provide plan sponsors
and plan administrators with guidance
necessary to comply with
the law.
DATES: Effective Date: These regulations
are effective February 3, 1999.
Applicability Dates: Sections
54.4980B-1 through 54.4980B-8
apply to group health
plans with respect to qualifying
events occurring in plan years
beginning on or after January
1,
2000. See the Effective Date portion
of this preamble and Q&A-2
of §54.4980B-1.
FOR FURTHER INFORMATION CONTACT:
Yurlinda Mathis, 202-622-4695.
This is not a
toll-free number.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information
contained in these final regulations
have been reviewed and
approved by the Office of Management
and Budget in accordance with
the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507) under
control number 1545-1581. Responses
to these collections
of information are mandatory in
some cases and required in order
to obtain a benefit in other
cases. Group health plans are
required to provide certain individuals
a notice of their COBRA
continuation coverage rights when
certain qualifying events occur
and are required to inform
health care providers who contact
the plan to confirm the coverage
of certain individuals of the
individuals’ complete rights
to coverage. To obtain COBRA continuation
coverage or extended
coverage, certain individuals
are required to notify the plan
administrator of certain events
or that
they are electing COBRA continuation
coverage, and plans are required
to notify certain
individuals of insignificant underpayments
if the plan wishes to require
the individuals to pay the
deficiency. This information will
be used to advise employers and
plan administrators of their
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obligation to offer COBRA continuation
coverage, or an extended period
of such coverage; to
advise qualified beneficiaries
of their right to elect COBRA
continuation coverage and of
insignificant errors in payment;
and to inform health care providers
of individuals’ rights to
COBRA continuation coverage.
An agency may not conduct or sponsor,
and a person is not required to
respond to, a
collection of information unless
the collection of information
displays a valid control number.
The estimated average annual burden
per respondent varies from 30
seconds to 330 hours,
depending on individual circumstances,
with an estimated average of 14
minutes.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing
this burden should be sent to
the Internal Revenue Service,
Attn: IRS Reports Clearance
Officer, OP:FS:FP, Washington,
DC 20224, and to the Office of
Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory
Affairs, Washington, DC 20503.
Books or records relating to these
collections of information must
be retained as long as
their contents may become material
in the administration of any internal
revenue law. Generally,
tax returns and tax return information
are confidential, as required
by 26 U.S.C. 6103.
Background
On June 15, 1987, proposed regulations
(EE-143-86) relating to continuation
coverage
requirements applicable to group
health plans were published in
the Federal Register (52 FR
22716). A public hearing was held
on November 4, 1987. Written comments
were also received.
A supplemental set of proposed
regulations (REG-209485-86) was
published in the Federal
Register of January 7, 1998 (63
FR 708). No public hearing was
requested or held after the
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publication of the supplemental
proposed regulations; written
comments were received. After
consideration of these comments,
after review of the reported court
decisions under the parallel
COBRA continuation coverage provisions
of the Employee Retirement Income
Security Act of
1974 (ERISA) and the Public Health
Service Act, and based on the
experience of the IRS in
administering the COBRA continuation
coverage requirements, a portion
of the regulations
proposed by EE-143-86 and REG-209485-86
is adopted as revised by this
Treasury decision.
The revisions are summarized in
the explanation below. Also being
published elsewhere in this
issue of the Federal Register
is a new set of proposed regulations,
which addresses additional
issues.
Explanation of Provisions
Overview
The regulations are intended to
provide clear, administrable rules
regarding COBRA
continuation coverage. The regulations
give comprehensive guidance on
many questions under
COBRA, with a view to enhancing
the certainty and reliance available
to all parties – including
employees, qualified beneficiaries,
employers, employee organizations,
and group health plans –
in
determining their COBRA rights
and obligations. The guidance
is designed to further the
protective purposes of COBRA without
undue administrative burdens or
costs on employers,
employee organizations, or group
health plans.
For example, the regulations:
• Prevent group health plans
from terminating COBRA continuation
coverage on the
basis of other coverage that a
qualified beneficiary had prior
to electing COBRA
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continuation coverage, in accordance
with the Supreme Court’s
decision in
Geissal v. Moore Medical Corp.
• Give employers and employee
organizations significant flexibility
in determining,
for purposes of COBRA, the number
of group health plans they maintain.
This
will reduce burdens on employers
and employee organizations by
permitting them
to structure their group health
plans in an efficient and cost-effective
manner and
to satisfy their COBRA obligations
based upon that structure.
• Provide baseline rules
for determining the COBRA liabilities
of buyers and sellers
of corporate stock and corporate
assets and permit buyers and sellers
to reallocate
and carry out those liabilities
by agreement. This will significantly
enhance
employers’ ability to negotiate
and to plan appropriately for
the treatment of
qualified beneficiaries in connection
with mergers and acquisitions,
while
protecting the rights of qualified
beneficiaries affected by the
transactions.
• Limit the application of
COBRA for most health flexible
spending arrangements.
This will ensure that COBRA continuation
coverage under health flexible
spending
arrangements is available in appropriate
cases without requiring continuation
coverage where that would not
serve the statutory purposes.
• Eliminate the requirement
that group health plans offer
qualified beneficiaries the
option to elect only core (health)
coverage under a group health
plan that
otherwise provides both core and
noncore (vision and dental) coverage.
• Give employers, in determining
whether the small-employer plan
exception applies,
the option of counting by pay
period rather than by every business
day, and
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The COBRA continuation coverage
requirements h 1 ave also been
affected by an
amendment made to the definition
of group health plan by the Omnibus
Budget Reconciliation
Act of 1993 (OBRA 1993). OBRA
1993 amended the definition of
group health plan in section
5000(b)(1), which the COBRA continuation
coverage provisions of the Internal
Revenue Code
incorporate by reference.
provide, for that exception, for
the consistent treatment of part-time
employees
through the use of full-time equivalents.
The COBRA continuation coverage
requirements enacted on April
7, 1986 have been
amended by the Omnibus Budget
Reconciliation Act of 1986 (OBRA
1986), the Tax Reform Act
of 1986 (TRA 1986), the Technical
and Miscellaneous Revenue Act
of 1988 (TAMRA), the
Omnibus Budget Reconciliation
Act of 1989 (OBRA 1989), the Omnibus
Budget Reconciliation
Act of 1990 (OBRA 1990), the Small
Business Job Protection Act of
1996 (SBJPA), and the
Health Insurance Portability and
Accountability Act of 1996 (HIPAA).1
These amendments made
numerous clarifications and modifications
to the COBRA continuation coverage
requirements,
moved the requirements from section
162(k) to section 4980B, added
various other features, such
as the disability extension to
the required period of coverage,
and significantly altered the
sanctions imposed on employers
and plans for failing to comply
with the requirements. The
specific changes made by these
amendments are discussed below
in connection with the
provisions of the regulations
that relate to them.
The legislative history of COBRA
provides that the Department of
the Treasury has the
authority to interpret the coverage
and tax sanction provisions of
COBRA and that the
Department of Labor has the authority
to interpret the reporting and
disclosure provisions.
Accordingly, these regulations
apply in interpreting the coverage
provisions of COBRA in Title I
of ERISA, as well as those in
the Internal Revenue Code. With
minor exceptions, the final
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regulations and the new proposed
regulations being published today
do not address the notice
provisions of the COBRA continuation
coverage requirements.
Organization
The final regulations being published
today follow the structure of
the 1987 proposed
regulations, with related questions-and-answers
grouped into topics. Each topic
is now in a
separate section, and sections
have been added to the new proposed
regulations being published
today for (1) business reorganizations
and employer withdrawals from
multiemployer plans and
(2) the interaction of the Family
and Medical Leave Act of 1993
(FMLA) and COBRA. The
substance of the 1998 proposed
regulations has been integrated
into the questions-and-answers
of
the 1987 proposed regulations.
The ordering of some of the questions-and-answers
has changed,
and all of the questions-and-answers
relating to the original statutory
effective date have been
deleted. In addition, in a few
cases, the content of two separate
questions-and-answers in the
1987 proposed regulations has
been combined into a single question-and-answer;
in other cases
the content of a single question-and-answer
has been expanded to two or more
questions-andanswers.
These changes have resulted in
the renumbering of the questions-and-answers.
The new
proposed regulations being published
today are designed to fill gaps
designated in the final
regulations as reserved.
Effective Date
The 1987 proposed regulations
provide that they will be effective
upon publication as final
regulations. Some commenters suggested
that the final regulations should
have a delayed
effective date. The final regulations
follow this suggestion; they apply
with respect to qualifying
events occurring in plan years
beginning on or after January
1, 2000. For any period before
the
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effective date of the final regulations,
the plan and the employer must
operate in good faith
compliance with a reasonable interpretation
of the requirements in section
4980B. For the period
before the effective date of the
final regulations, the IRS will
consider compliance with the
proposed regulations in §1.162-26
(the 1987 proposed regulations)
and §54.4980B-1 (the 1998
proposed regulations) to constitute
good faith compliance with a reasonable
interpretation of the
statutory requirements for the
topics that those proposed regulations
address, except to the extent
inconsistent with a statutory
amendment adopted after the dates
the proposed regulations were
issued, during the period the
amendment is effective, or with
a decision of the United States
Supreme Court released after the
proposed regulations were issued,
during the period after the
decision is released. For any
period beginning on or after the
effective date of the final regulations
with respect to topics not addressed
in the final regulations, such
as how to calculate the
applicable premium, the plan and
the employer must operate in good
faith compliance with a
reasonable interpretation of the
requirements in section 4980B.
Compliance with the new proposed
regulations will constitute good
faith compliance with
a reasonable interpretation of
the statutory requirements addressed
in the new proposed
regulations until the new proposed
regulations are finalized. In
addition, actions inconsistent
with
the terms of the new proposed
regulations will not necessarily
constitute a lack of good faith
compliance with a reasonable interpretation
of the statutory requirements
addressed in the new
proposed regulations; whether
there has been good faith compliance
with a reasonable
interpretation of the statutory
requirements will depend on all
the facts and circumstances of
each
case.
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The IRS will not assess the excise
tax with respect to a plan that
operates in good faith
compliance with a reasonable interpretation
of the statutory requirements,
as described in the
preceding two paragraphs. Note,
however, that in the case of lawsuits
brought by qualified
beneficiaries to enforce their
COBRA continuation coverage rights
under ERISA or the Public
Health Service Act, the courts
generally have not applied any
good faith compliance standard.
Plans That Must Comply
The final regulations provide
rules regarding which group health
plans are subject to
COBRA. These rules are generally
similar to those set forth in
the 1987 proposed regulations.
However, the rules for determining,
for purposes of the COBRA continuation
coverage
requirements, the number of group
health plans maintained by an
employer have been deleted, and
the new proposed regulations set
forth substantially different
rules, which provide that employers
and employee organizations generally
have broad discretion to determine
the number of group
health plans that they maintain.
Other significant changes to the
1987 proposed regulations on
this point (some of which are
set forth in the 1998 proposed
regulations) include exceptions
for
long-term care services and medical
savings accounts and new rules
regarding the small-employer
plan exception.
As in the 1987 proposed regulations,
the final regulations provide
that, in general, all
group health plans are subject
to the COBRA continuation coverage
requirements. However,
small-employer plans (discussed
below), church plans (within the
meaning of section 414(e)), and
governmental plans (within the
meaning of section 414(d)) are
not subject to COBRA. (The final
regulations refer to these as
plans excepted from COBRA.) Plans
excepted from COBRA are
generally not subject to the COBRA
continuation coverage requirements
or the COBRA excise
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tax, although group health plans
maintained by state or local governments
are subject to parallel
continuation coverage requirements
in the Public Health Service Act
(which is administered by the
Department of Health and Human
Services). Also, the Federal Employees
Health Benefit
Program is subject to generally
similar, although not parallel,
temporary continuation of coverage
provisions under the Federal Employees
Health Benefits Amendments Act
of 1988.
The final regulations define group
health plan in a manner generally
similar to that in the
1987 proposed regulations. However,
certain changes in terminology
have been made to reflect
the statutory cross-reference
to section 5000(b)(1) set forth
in section 4980B(g)(2) (such as
the
use of the term health care and
the definition of employee). Additionally,
the final regulations, in
accordance with section 4980B(g)(2),
provide that a plan is not a group
health plan if
substantially all the coverage
provided under the plan is for
qualified long-term care services
(as
defined in section 7702B(c)).
The final regulations allow plans
to use any reasonable method in
determining whether a plan satisfies
this exception. The final regulations
also provide, in
accordance with section 106(b)(5),
that amounts contributed by an
employer to a medical savings
account (as defined in section
220(d)) are not considered part
of a group health plan for purposes
of COBRA (although a high-deductible
health plan will not fail to be
a group health plan simply
because it covers a holder of
a medical savings account).
Under the final regulations, a
group health plan is a plan maintained
by an employer or
employee organization to provide
health care to individuals who
have an employment-related
connection to the employer or
employee organization or to the
families of such individuals.
In
accordance with section 5000(b)(1),
these individuals include employees,
former employees, the
employer, and others associated
or formerly associated with the
employer or employee
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organization in a business relationship.
The final regulations generally
refer to all individuals
covered under a plan by virtue
of the performance of services
or by virtue of membership in
an
employee organization as employees.
(As discussed below, the term
employee has a narrower
meaning for purposes of the small-employer
plan exception.) The final regulations
use the term
employer to refer to a person
for whom an individual performs
services. Pursuant to section
414(t), the term employer also
includes, with respect to such
a person, any member of a group
described in section 414(b), (c),
(m), or (o) that includes the
person (a controlled group) as
well
as any successor of the person
or of a member of the controlled
group.
Under the final regulations, as
under the 1987 proposed regulations,
a plan generally is
considered to provide health care
whether it does so directly or
through insurance,
reimbursement, or other means
and whether it does so through
an on-site facility or a cafeteria
or
other flexible benefit arrangement.
Insurance includes group insurance
policies and one or more
individual policies under an arrangement
maintained by the employer or
employee organization to
provide health care to two or
more employees. Under the final
regulations, as under the 1987
proposed regulations, in the case
of a cafeteria plan or other flexible
benefit arrangement, the
COBRA continuation coverage requirements
apply only to the health care
benefits under the
cafeteria plan or other flexible
benefit arrangement that an employee
has actually chosen to
receive.
Many commenters on the 1987 proposed
regulations requested clarification
of the
application of COBRA to health
care benefits provided under flexible
spending arrangements
(health FSAs). Some commentators
argued that health FSAs should
not be subject to COBRA.
Health FSAs satisfy the definition
of group health plan in section
5000(b)(1) and, accordingly, are
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Under HIPAA, a qualified beneficiary
who maintains coverage 2 after
termination of
employment under a group health
plan that is subject to HIPAA
can avoid a break in coverage
and thereby avoid becoming subject
to a preexisting condition exclusion
upon later becoming
covered by another group health
plan.
3 The IRS and Treasury, together
with the U.S. Department of Labor
and the U.S.
Department of Health and Human
Services, have issued a notice
(62 FR 67688) holding that a
generally subject to the COBRA
continuation coverage requirements.
However, COBRA is
intended to ensure that a qualified
beneficiary has guaranteed access
to coverage under a group
health plan and that the cost
of that coverage is no greater
than 102 percent of the applicable
premium.
The IRS and Treasury believe that
the purposes of COBRA are not
furthered by requiring
an employer to offer COBRA for
a plan year if the amount that
the employer could require to
be
paid for the COBRA coverage for
the plan year would exceed the
maximum benefit that the
qualified beneficiary could receive
under the FSA for that plan year
and if the qualified beneficiary
could not avoid a break in coverage,
for purposes of the HIPAA portability
provisions2, by
electing COBRA coverage under
the FSA. Accordingly, the new
proposed regulations contain a
rule limiting the application
of the COBRA continuation coverage
requirements in the case of
health FSAs.
Under this rule, if the health
FSA satisfies two conditions,
the health FSA need not make
COBRA continuation coverage available
to a qualified beneficiary for
any plan year after the plan
year in which the qualifying event
occurs. The first condition that
the health FSA must satisfy for
this exception to apply is that
the health FSA is not subject
to the HIPAA portability provisions
in
sections 9801 though 9833 because
the benefits provided under the
health FSA are excepted
benefits. (See sections 9831 and
9832.)3 The second condition is
that, in the plan year in which
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health FSA is exempt from HIPAA
because the benefits provided
under it are excepted benefits
under sections 9831 and 9832 if
the employer also provides another
group health plan, the
benefits under the other plan
are not limited to excepted benefits,
and the maximum
reimbursement under the health
FSA is not greater than two times
the employee’s salary reduction
election (or if greater, the employee’s
salary reduction election plus
five hundred dollars).
the qualifying event of a qualified
beneficiary occurs, the maximum
amount that the health FSA
could require to be paid for a
full plan year of COBRA continuation
coverage equals or exceeds
the maximum benefit available
under the health FSA for the year.
It is contemplated that this
second condition will be satisfied
in most cases.
Moreover, if a third condition
is satisfied, the health FSA need
not make COBRA
continuation coverage available
with respect to a qualified beneficiary
at all. This third condition
is satisfied if, as of the date
of the qualifying event, the maximum
benefit available to the qualified
beneficiary under the health FSA
for the remainder of the plan
year is not more than the maximum
amount that the plan could require
as payment for the remainder of
that year to maintain coverage
under the health FSA.
A plan is maintained by an employer
or employee organization even
if the employer or
employee organization does not
directly or indirectly contribute
to it if coverage under the plan
would not be available to an individual
at the same cost if the individual
did not have an
employment-related connection
to the employer or employee organization.
The final regulations,
for purposes of the definition
of a group health plan, use the
term health care instead of the
term
medical care (which was used in
the 1987 proposed regulations).
This change reflects the change
in the definition of group health
plan made by OBRA 1989. However,
the final regulations
provide that health care has the
same meaning as the term medical
care under section 213(d).
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Like the 1987 proposed regulations,
the final regulations set forth
a summary of items that do and
do not constitute health care.
The final regulations, generally
following the 1987 proposed regulations,
set forth rules
for determining whether a group
health plan is a small-employer
plan. In general, a group health
plan other than a multiemployer
plan is a small-employer plan
if it is maintained for a calendar
year by an employer that normally
employed fewer than 20 employees
during the preceding
calendar year, and a group health
plan that is a multiemployer plan
is a small-employer plan if each
of the employers contributing
to the plan for a calendar year
normally employed fewer than 20
employees during the preceding
calendar year. Whether the plan
is a multiemployer plan or not,
the term employer includes all
members of a controlled group.
An example in the final regulations
clarifies that the controlled
group includes foreign members,
and thus a U.S. subsidiary with
fewer
than 20 employees is subject to
COBRA if the controlled group
has 20 or more employees worldwide.
The final regulations set forth
additional rules for the application
of the small-employer
plan exception to multiemployer
plans, and the new proposed regulations
contain the same
definition of multiemployer plan
that is in section 414(f).
Under the final regulations, an
employer is considered to have
normally employed fewer
than 20 employees during a particular
calendar year if it had fewer
than 20 employees on at least
50 percent of its typical business
days during that year. This rule
differs from the rule in the 1987
proposed regulations in two ways.
First, the 1987 proposed regulations
use the term working
days, whereas the final regulations
use the statutory term typical
business days.
The second difference relates
to the term employee. Under the
1987 proposed
regulations, self-employed individuals
and independent contractors are
counted as employees for
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purposes of the small-employer
plan exception if they are covered
under a plan of the employer.
Commenters argued that only common
law employees should be counted
for this purpose. Unlike
the definition of covered employee
(amended by OBRA 1989 to make
clear that individuals who
are not common law employees but
who are covered under the group
health plan of an employer
or employee organization by virtue
of the performance of services
are still considered covered
employees) and the definition
of group health plan (amended
by OBRA 1993 to make clear that
a
health plan covering individuals
who are not common law employees
of the employer or employee
organization, and who are not
family members of common law employees,
is still a group health
plan)the reference to employees
for purposes of the small-employer
plan exception have not been
amended to include individuals
who are not common law employees.
Consequently, under the
final regulations, only common
law employees are taken into account
for purposes of the smallemployer
plan exception; self-employed
individuals, independent contractors,
and directors are
not counted.
Although a small-employer plan
is generally excepted from COBRA,
a plan that is not a
small-employer plan for a period
remains subject to COBRA for qualifying
events that occurred
during that period, even if it
subsequently becomes a small-employer
plan.
In determining whether a plan
is eligible for the small-employer
plan exception, part-time
employees, as well as full-time
employees, must be taken into
account. Several commenters on
the 1987 proposed regulations
requested clarification of how
to count part-time employees for
the
small-employer plan exception,
and the new proposed regulations
provide guidance on this issue.
Under the new proposed regulations,
instead of each part-time employee
counting as a full
employee, each part-time employee
counts as a fraction of an employee,
with the fraction equal to
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an employer or employee organization
maintains. Under these rules,
the employer or employee
organization is generally permitted
to establish the separate identity
and number of group health
plans under which it provides
health care benefits to employees.
Thus, if an employer or
employee organization provides
a variety of health care benefits
to employees, it generally may
aggregate the benefits into a
single group health plan or disaggregate
benefits into separate group
health plans. The status of health
care benefits as part of a single
group health plan or as separate
plans is determined by reference
to the instruments governing those
arrangements. If it is not
clear from the instruments governing
an arrangement or arrangements
to provide health care
benefits whether the benefits
are provided under one plan or
more than one plan, or if there
are no
instruments governing the arrangement
or arrangements, all such health
care benefits (other than
those for qualified long-term
care services) provided by a single
entity (determined without regard
to the controlled group) constitute
a single group health plan.
Under the new proposed regulations,
a multiemployer plan and a plan
other than a
multiemployer plan are always
separate plans. In addition, any
treatment of health care benefits
as
constituting separate group health
plans will be disregarded if a
principal purpose of the treatment
is to evade any requirement of
law. Of course, an employer’s
flexibility to treat benefits
as part of
separate plans may be limited
by the operation of other laws,
such as the prohibition in section
9802 on conditioning eligibility
to enroll in a group health plan
on the basis of any health factor
of
an individual.
The final regulations modify the
rules set forth in the 1987 proposed
regulations for
determining the plan year of a
group health plan under COBRA.
These modifications are made to
be consistent with the rules in
the temporary regulations under
HIPAA. The definition of plan
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In this regard, the U.S. Department
of Labor 4 has advised the IRS
and Treasury that to
the extent a plan fiduciary subjects
a plan to liability for the COBRA
excise tax on account of her
or his imprudent actions, the
plan fiduciary may be held personally
liable under Title I of ERISA
for the amount of the tax.
year is important in applying,
for example, the effective date
provisions under the final regulations
and the rules for health FSAs
under the new proposed regulations.
Under the final regulations,
the plan year is the year designated
as such in the plan documents.
If the plan documents do not
designate a plan year (or if there
are no plan documents), the plan
year is the deductible/limit year
used by the plan. If the plan
does not impose deductibles or
limits on an annual basis, the
plan
year is the policy year. If the
plan does not impose deductibles
or limits on an annual basis and
the plan is not insured (or the
insurance policy is not renewed
annually), the plan year is the
taxable year of the employer.
In any other case, the plan year
is the calendar year.
The final regulations reflect
the statutory provisions that
provide for the imposition of
an
excise tax in the event of a failure
by a group health plan to comply
with the COBRA continuation
coverage requirements of section
4980B(f). In the case of a multiemployer
plan, the excise tax is
imposed on the plan4; in the case
of any other plan, the excise
tax is imposed on the employer
maintaining the plan. In certain
circumstances, the excise tax
can be imposed on other persons
involved with the provision of
benefits under the plan, such
as an insurer providing benefits
under
the plan or a third party administrator
administering claims under the
plan. Separate, non-tax
remedies may be available in the
case of a plan that fails to comply
with the COBRA continuation
coverage requirements in ERISA.
Qualified Beneficiaries
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The rules in the final regulations
for determining who is a qualified
beneficiary generally
follow those set forth in the
1987 proposed regulations, as
well as those set forth in the
1998
proposed regulations regarding
the status of newborn and adopted
children as qualified
beneficiaries. However, certain
provisions have been added to
the final regulations to reflect
the
special statutory rules that apply
in the case of bankruptcy of the
employer as a qualifying event.
Modifications have also been made
to reflect the decision of the
Supreme Court in Geissal v.
Moore Medical Corp., 118 S. Ct.
1869 (1998), which held that an
individual
covered under another group health
plan at the time she or he elects
COBRA continuation
coverage cannot be denied COBRA
continuation coverage on the basis
of that other coverage.
Under the final regulations, a
qualified beneficiary is, in general:
(1) any individual who,
on the day before a qualifying
event, is covered under a group
health plan either as a covered
employee, the spouse of a covered
employee, or the dependent child
of a covered employee; or
(2) any child born to or placed
for adoption with a covered employee
during a period of COBRA
continuation coverage. (The final
regulations retain the definitions
of the terms placement for
adoption and being placed for
adoption that were in the 1998
proposed regulations.) For a
qualifying event that is the bankruptcy
of the employer, any covered employee
who retired on or
before the date of any substantial
elimination of group health plan
coverage is a qualified
beneficiary; the spouse, surviving
spouse, or dependent child of
the retired covered employee is
also a qualified beneficiary if
the spouse, surviving spouse,
or dependent child was a beneficiary
under the plan on the day before
the bankruptcy qualifying event.
The final regulations add a
provision clarifying that if an
individual is denied coverage
under a group health plan in violation
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of applicable law (including HIPAA)
and experiences an event that
would be a qualifying event if
the coverage had not been wrongfully
denied, the individual is considered
a qualified beneficiary.
A covered employee can be a qualified
beneficiary only in connection
with a qualifying
event that is the termination
(or reduction of hours) of the
covered employee’s employment
or the
employer’s bankruptcy. As
under the 1987 proposed regulations,
the final regulations provide
that a covered employee is not
a qualified beneficiary if her
or his status as a covered employee
is
attributable to certain periods
in which she or he was a nonresident
alien (in which case the
covered employee’s spouse
and dependent children are also
not qualified beneficiaries).
Although
a child born to or placed for
adoption with a covered employee
during a period of COBRA
continuation coverage is a qualified
beneficiary, a child born to or
placed for adoption with a
qualified beneficiary other than
the covered employee after a qualifying
event, or a person who
becomes the spouse of a qualified
beneficiary (regardless of whether
the qualified beneficiary is
the covered employee) after a
qualifying event is not a qualified
beneficiary. The final regulations
retain the rule of the 1987 proposed
regulations under which an individual
is not a qualified
beneficiary if, on the day before
the qualifying event, the individual
is covered under the group
health plan solely because of
another individual’s election
of COBRA continuation coverage.
However, consistent with Geissal,
the final regulations eliminate
the rule in the 1987 proposed
regulations that an individual
is not a qualified beneficiary
if, on the day before the qualifying
event, the individual was entitled
to Medicare benefits.
An individual ceases to be a qualified
beneficiary if she or he does
not elect COBRA
continuation coverage by the end
of the election period (discussed
below). The final regulations
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clarify that an individual who
elects COBRA continuation coverage
ceases to be a qualified
beneficiary once the plan’s
obligation to provide COBRA continuation
coverage has ended.
The term covered employee is defined
in the final regulations in a
manner substantially the
same as in the 1987 proposed regulations.
Although some commenters on the
1987 proposed
regulations objected to the inclusion
in this definition of individuals
other than common law
employees, the statutory definition
was amended by OBRA 1989 to include
such individuals.
Under the final regulations, a
covered employee generally includes
any individual who is or has
been provided coverage under a
group health plan (other than
one excepted from COBRA as of
the date of what would otherwise
be a qualifying event) because
of her or his present or past
performance of services for the
employer maintaining the group
health plan (or by reason of
membership in the employee organization
maintaining the plan). Thus, retirees
and former
employees covered by a group health
plan are covered employees if
the coverage is provided in
whole or in part because of the
previous employment. Any individual
who performs services for
the employer maintaining the plan
or who is a member of the employee
organization maintaining
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The rules regarding qualifying
events under the final regulations
generally are the same as
those in the 1987 proposed regulations.
Under the final regulations, a
qualifying event is any of a
set of specified events that occurs
while a group health plan is subject
to COBRA and that causes
a covered employee (or the spouse
or dependent child of the covered
employee) to lose coverage
under the plan. These specified
events are: the death of a covered
employee; the termination
(other than by reason of gross
misconduct), or reduction of hours,
of a covered employee’s
employment; the divorce or legal
separation of a covered employee
from the covered employee’s
spouse; a covered employee’s
becoming entitled to Medicare
benefits under Title XVIII of
the
Social Security Act; a dependent
child’s ceasing to be a dependent
child of the covered employee
under the plan; and a proceeding
in bankruptcy under Title 11 of
the United States Code with
respect to an employer from whose
employment a covered employee
retired at any time. The
addition of employer bankruptcy
as a qualifying event reflects
the amendments made to COBRA
by OBRA 1986.
The reasons for which an employee
has a termination of employment
or a reduction of
hours of employment generally
are not relevant in determining
whether the termination or
reduction of hours is a qualifying
event. Thus, a voluntary termination,
a strike, a lockout, a
layoff, or an involuntary discharge
each may constitute a qualifying
event. However, if an
employee is discharged for gross
misconduct, the termination of
employment does not constitute
a qualifying event. The final
regulations clarify that a reduction
of hours of a covered employee’s
employment includes any decrease
in the number of hours that a
covered employee works or is
required to work that does not
constitute a termination of employment.
Thus, if a covered
employee takes a leave of absence,
is laid off, or otherwise performs
no hours of work during a
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period, the covered employee has
experienced a reduction in hours
that, if the other applicable
requirements are satisfied, constitutes
a qualifying event. (But see Notice
94-103 (1994-2 C.B.
569) and the new proposed regulations,
described below, for special rules
regarding FMLA
leave.) A covered employee’s
loss of coverage by reason of
a failure to work the minimum
number of hours required for coverage
constitutes a reduction of hours
of employment.
Under the final regulations, to
lose coverage means to cease to
be covered under the same
terms and conditions as in effect
immediately before the event.
The final regulations clarify
that a
loss of coverage includes an increase
in an employee premium or contribution
resulting from one
of the events described above.
The loss of coverage need not
be concurrent with the event;
it is
enough that the loss of coverage
occur at any time before the end
of the maximum coverage
period (described below). For
employer bankruptcies, the term
to lose coverage also includes
a
substantial elimination of coverage
that occurs within 12 months before
or after the date on which
the bankruptcy proceeding begins.
Under the final regulations, as
under the 1987 proposed regulations,
reductions or
eliminations in coverage in anticipation
of an event are disregarded in
determining whether the
event results in a loss of coverage.
Although several commenters objected
to this rule, the final
regulations retain the provision
in order to protect qualified
beneficiaries from being deprived
of
their COBRA rights because an
employer or employee organization
transposes a loss or reduction
of coverage to a time before the
qualifying event. This rule also
applies in cases where a covered
employee discontinues the coverage
of a spouse in anticipation of
a divorce or legal separation.
In such a case, upon receiving
notice of the divorce or legal
separation, a plan is required
to make
- 24 -
- 25 -
employees” is still used
because in those contexts –
such as the right to make an independent
election for COBRA continuation
coverage – qualified beneficiaries
who are spouses and
dependent children of covered
employees are entitled to the
rights that employees have (and
in
those contexts, spouses and dependent
children who are not qualified
beneficiaries typically do
not have the rights that employees
have).
The 1987 proposed regulations
address in a separate question-and-answer
the type of
coverage that must be made available
to qualified beneficiaries if
a change is made in the coverage
provided to similarly situated
nonCOBRA beneficiaries. The final
regulations include this rule
in
the question-and-answer that defines
COBRA continuation coverage. In
doing so, the final
regulations delete several specific
requirements in the 1987 proposed
regulations. For example, if
coverage for the similarly situated
nonCOBRA beneficiaries is changed
or eliminated, the 1987
proposed regulations require that
qualified beneficiaries be permitted
to elect coverage under any
remaining plan made available
to the similarly situated active
employees. Many commenters
objecte
