Wondering how employers can best offer retiree health benefits? To shed some light on this complex topic, we’re looking at the case of Tom and Nancy. In retirement, Tom plans to golf nine holes a day and spend his evenings listening to live bands on the beach. Nancy has a love of travel and spicy food. Her plans include driving an RV across the country.
Before they embark on these exciting adventures, Tom and Nancy must first consider their health insurance options. One option that must be offered to both Tom and Nancy is COBRA. Below, we will look at how Tom and Nancy’s respective employers handle COBRA when employees retire. As you will see, small differences lead to extremely different outcomes.
COBRA = Triggering Event + Loss of Coverage
The basic premise of COBRA is easy. When one of seven triggering events causes a loss of group health coverage, plans subject to COBRA must offer the continuation of group health coverage for a specified amount of time.
Often, when valued employees retire, companies offer a retiree medical plan or extended coverage on the active plan for a limited amount of time. The retiree has obviously experienced a triggering event – the loss of employment. However, under these circumstances where extended or retiree coverage is provided, it would appear that the retiree has not experienced a loss of coverage.
So, what happens when the triggering event occurs but coverage is not immediately lost? Does COBRA lie in wait ready to strike? Stay tuned as we explore that question …
Tom’s Company Offers COBRA or Retiree Medical
Tom’s company sponsors a medical plan for active employees. Tom’s company also sponsors a separate retiree medical plan. When Tom retired, his company offered him the option of 18 months of COBRA under the active plan or 12 months of employer paid coverage under the retiree plan. However, to receive the paid retiree coverage, Tom and his wife must waive COBRA.
Tom and his wife decline COBRA under the active plan, enroll in the retiree plan and begin their retirement. The IRS regulations make it clear that at the end of the 12 months of retiree coverage, neither Tom nor his wife must be offered COBRA continuation of the retiree coverage. In this case, the company’s obligation ends after 12 months.
Unfortunately, 10 months into his retirement, Tom gets a little too close to a rather large alligator on the golf course while chasing a stray ball. Following Tom’s untimely death, his wife calls the company to inquire about her health insurance. The company informs Tom’s widow that her coverage under the retiree plan will be lost due to Tom’s death.
Tom’s wife has now experienced a COBRA qualifying event. The company must offer her 36 months of COBRA under the retiree plan. The 36-month period runs from the date of Tom’s death. The company can charge her up to 102 percent of the premium.
This additional COBRA obligation could have been avoided if the company had structured the alternate retiree coverage to extend to Tom’s wife for the entire 12-month period regardless of possible termination events such as death or divorce. In that case, Tom’s death would not have caused a loss of coverage so there would not have been an additional COBRA obligation. The company’s obligation would have been providing coverage lasting 12 months rather than 46 months (10 months of retiree coverage plus 36 months of COBRA following Tom’s death).
Nancy’s Company Offers Extended Coverage
Nancy is a very valuable executive. Upon her retirement, her company offers to extend the same coverage that she and her husband had under the active employee plan and continue making the same employer contribution. Her company extends her coverage for 12 months and pays 100 percent of her premium. Unlike Tom, Nancy’s company does not require her to waive COBRA at the time of her retirement.
Nancy will lose retiree coverage before the end of the maximum COBRA period – COBRA is required for 18 months and she is only provided with 12 months of extended coverage. Because Nancy was not required to waive COBRA, she will experience a deferred loss of coverage at the end of her 12 months of extended active coverage. Nancy’s company must offer her and her husband an additional six months of COBRA coverage.
How can a deferred loss of coverage cause major problems? Many companies that offer retiree coverage for a period that is less than the maximum COBRA period, but do not require a waiver of COBRA upon retirement, fail to realize that they are required to offer COBRA at the end of the retiree coverage. Most of the time, retirees do not realize they are entitled to COBRA or do not desire to enroll in COBRA.
However, consider a retiree who fails to obtain other coverage and experiences a heart attack requiring expensive surgery and rehabilitation three months after the expiration of retiree coverage. The retiree will be scrambling to find coverage wherever possible. If the company failed to send a COBRA election notice upon expiration of the retiree coverage, the 60-day election period has not yet begun and the retiree can demand COBRA retroactive to the end of the retiree coverage. The company is now on the hook for all claims related to the heart attack. Even more frightening, the insurance company may refuse to pay the claims if the employer’s mistake caused the extended COBRA election period. The employer may be left paying the claims out of its own pocket.
Retiree Best Practices
The interaction between retiree medical plans, severance agreements and COBRA is a complicated subject. This article barely scrapes the surface. First and foremost, you should work with experienced benefits counsel to review your policies and procedures. Next, remember that COBRA waivers at the time of retirement are a very smart investment. Finally, defining the term of retiree coverage and preventing a loss of coverage during that defined term can significantly limit your COBRA obligation.
This article was reprinted from the June 2017 issue of Health Insurance Underwriter Magazine featuring our very own Robert Meyers.