Do COBRA obligations exist even if coverage does not end? This seems like a silly question. COBRA, after all, provides continuation under an employer’s plan after a loss of coverage. However, as with most things involving health insurance (think Affordable Care Act), the term “loss of coverage” is more complicated than you may think.
General Rule - COBRA obligations exist when a qualifying event causes a loss of coverage.
The qualifying events are the easy part. There are seven qualifying events: (1) termination of employment, (2) reduction in hours of employment, (3) death of the employee, (4) divorce or legal separation, (5) ceasing to be a dependent, (6) entitlement to Medicare, and (7) employer bankruptcy (this relates to retiree plans only).
So what is a “loss of coverage?” The IRS regulations say that “to lose coverage means to cease to be covered under the same terms and conditions as in effect immediately before the qualifying event.” Treas. Reg. § 54.4980B-4, Q&A-1(c). Thus, “loss of coverage” is broader than simply a loss of coverage. Let’s look at some examples.
Example 1 – A reduction in hours that causes a premium increase.
A recent case looked at former employees who remained covered under the employer’s group health plan during periods of suspension. One employee in the case was suspended without pay on September 16, 2013. The employer keeps suspended employees on the roster making them eligible for group coverage but makes them pay 100% of the premium. In this case, the employee was paying 18.5% of the premium before the suspension.
The employee officially resigned on February 17, 2014 – five months after her suspension. At the time of her resignation, she received a bill for 100 percent of the premium for the five months that she was suspended. The employer argued that the COBRA notice obligations did not arise until she resigned and was no longer eligible for coverage. The employee argued that the COBRA notice obligations arose when she was suspended and required to pay 100 percent of the premium.
The court agreed with the employee and noted that the IRS defines “loss of coverage” broadly including any increase in premium contribution that is the result of a qualifying event. Thus, the employer should have provided COBRA election forms at the time of the suspension. Green v. Baltimore City Board of School Commissioners, 2015 WL 302812 (D. Md., Jan. 22, 2015).
Example 2 – An increase in premiums for spousal coverage following the employee’s retirement.
This example is straight out of the IRS regulations. Suppose an employee and his spouse are both covered under the employer’s group health plan. The employer provides identical coverage for the life of the retiree. The spouse is also allowed to remain on the plan. However, the premium for the spouse’s coverage increases six months after the employee’s retirement.
Just as in Example 1, the premium increase is a “loss of coverage” triggering a COBRA obligation. In this example, the premium did not increase for six months following the qualifying event. However, the regulations provide that COBRA obligations exist if the loss of coverage occurs at any time before the end of the maximum coverage period.
Example 3 – A reduction in benefits following retirement.
Suppose an employer offers group medical coverage to retirees and their spouses. The coverage is identical to that provided pre-retirement except the annual deductible is higher by $500. In the eyes of the IRS, the coverage is not identical. A loss of coverage occurs because the retirees are not covered under the same terms as pre-retirement. Thus, a COBRA obligation exists even though the retirees are still offered coverage under the employer’s group medical plan.
The takeaway is that COBRA obligations may be lurking in unexpected places. Many predict that the Affordable Care Act will cause some employers to reduce employee hours below the full-time employee threshold. The Affordable Care Act is also causing many employers to review and change their group health plans. The current environment is ripe for COBRA uncertainty. You should share this article with your employer clients so they may continue providing accurate COBRA notices on a timely basis.
COBRA CONUNDRUMS is reprinted from the March 2015 issue of Health Insurance Underwriter Magazine featuring our very own Robert Meyers.