The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires that most employers extend group health plan privileges to employees who would otherwise lose coverage.
All employers who maintain a group health plan are subject to COBRA rules unless either:
COBRA covers only group healthcare plans, including the following:
Disability income plans and life insurance plans are not included. However, individual health insurance policies (such as voluntary cancer policies) can be subject to COBRA if:
COBRA rights must be offered for each separate plan sponsored by the same employer.
Any employee who is covered by a group health plan on the day before a qualifying event (explained in the following section) is a qualified beneficiary covered by COBRA, unless that employee was terminated for gross misconduct.
Qualified beneficiaries also include the employee’s dependent children and spouse if they are covered under the plan on the day before a qualifying event, unless the covered employee was terminated for gross misconduct. Children born or adopted during a COBRA continuation period are also qualified beneficiaries.
Qualifying events under COBRA are certain events that would otherwise cause a loss of coverage under the health plan. A qualifying event occurs when a covered employee, his or her spouse or dependent children lose coverage under the plan because:
If an employer offers retiree medical benefits under its group health plan, the employer’s filing for bankruptcy is also a qualifying event with respect to affected retiree participants and their dependents.
These are qualifying events only if the event causes a covered employee or his or her covered dependents to lose coverage under the health plan. A loss of coverage includes an increase in the premiums or contributions required to be paid by the employee or his or her dependents.
Note: A plan with more than 20 participants cannot terminate an active employee’s coverage because he becomes entitled to Medicare, so for most plans an employee’s entitlement to Medicare is not a qualifying event.
The COBRA continuation coverage period generally starts on the day after the date of the qualifying event even if coverage is actually lost at a later date. Alternatively, a health plan may specifically provide that the continuation coverage period will begin as of the date of the loss of coverage. The qualifying event also triggers a duty on the part of both the employer and plan administrator to notify the qualified beneficiary that COBRA continuation coverage privileges are available. The qualified beneficiary has a 60-day election period (measured from either the date on which the plan administrator provides the COBRA election notice or the date on which coverage is actually lost, whichever is later) to elect COBRA continuation coverage (see page 355, Notice requirements for further details).
A leave approved under the Family and Medical Leave Act (FMLA) does not count as a qualifying event because the employer is required to allow the employee (and dependents) to continue health coverage during the leave. However, a qualifying event occurs on the last day of the FMLA leave if the employee:
The notice requirements for the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the length of the COBRA period run from the occurrence of a qualifying event. When the employee has been out of work on FMLA leave, the qualifying event occurs on the last day of the FMLA leave.
The qualifying event occurs on this last day of leave even if the employee allowed insurance coverage to lapse or declined to continue insurance coverage during the FMLA leave. Although the employer generally may require reimbursement of any health plan premiums paid by the employer on the employee’s behalf during the FMLA leave, the employer may not condition the right to COBRA coverage upon his or her reimbursement of these premiums. In other words, COBRA coverage may attach even when the employee has not paid health plan premiums. The date of the qualifying event will not be adjusted by any state or local law that may require coverage for a longer period than that required by the FMLA.
The maximum coverage periods under COBRA are:
However, a special rule applies to most healthcare flexible spending account plans. These plans are generally required to offer COBRA coverage only until the end of the plan year in which the qualifying event occurs. Also, an initial 18-month coverage period can be extended (for the employee’s dependents) for 18 more months if the employee dies or divorces during the first 18-month period. Special rules also extend the period of coverage for dependents of employees who terminate employment (or suffer a reduction in hours of employment below the level required for coverage) within 18 months after becoming entitled to Medicare.
The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, includes a number of provisions designed to assist workers impacted by the COVID-19 pandemic. Among them is a new COBRA premium subsidy that pays for 100% of the applicable COBRA premium for eligible individuals with respect to coverage periods beginning April 1, 2021, and ending September 30, 2021. In order to comply with the law, employers face a number of challenges and additional administrative responsibilities, including:
The premium subsidy generally applies with respect to group health plans that are subject to the Employee Retirement Income Security Act (ERISA), Internal Revenue Code (Code) or the Public Health Service Act (PHSA), but does not apply to coverage under a health flexible spending arrangement (FSA) provided pursuant to a cafeteria plan. In addition, plans not subject to ERISA, the Code or the PHSA, but subject to state law that provides comparable continuation coverage (e.g., New York’s mini-COBRA law) are also covered by ARPA.
Individuals entitled to the premium subsidy are referred to as assistance eligible individuals (AEIs). In order to be an AEI, an individual must have been eligible for COBRA due to the covered employee’s involuntary termination of employment or reduction of hours, and the individual must elect COBRA. Qualified beneficiaries who are eligible for COBRA due to a voluntary termination of employment are not eligible for the premium subsidy (nor are individuals terminated for gross misconduct or whose qualifying event is anything other than involuntary termination of employment or a reduction in hours, such as children entitled to COBRA due to aging off coverage). An AEI must have been eligible for COBRA coverage during the period beginning on April 1, 2021, and ending September 30, 2021.
If an individual whose COBRA qualifying event was either an involuntary termination of employment or reduction of hours either has not elected COBRA, or previously elected COBRA and discontinued COBRA coverage before April 1, 2021, the individual may elect COBRA continuation coverage pursuant to a special “second-chance” election right. If elected, the subsidized coverage will commence April 1, 2021.
This rule differs from the normal COBRA rules that require the coverage to be effective as of the date of the original qualifying event.
This special election period begins on April 1, 2021, and ends 60 days after notice of the election period is provided. Plan administrators must provide this notice within 60 days of April 1, 2021.
Importantly, if COBRA is elected pursuant to this special election period, it does not extend the duration of the applicable COBRA period. That period continues to run from the date that would have applied if the individual had initially elected COBRA or, in the case of an individual who discontinued coverage, from the original COBRA commencement date.
A qualified beneficiary whose COBRA period would have normally run during the 18-month period commencing July 1, 2020, and ending December 31, 2021, does not have his or her maximum period extended to 18 months following the April 1, 2021, effective date applicable under the special election rules – the end date for the COBRA period would continue to be December 31, 2021.
Duration of premium subsidy
The premium subsidy is available with respect to any premium owed for a period of COBRA coverage beginning on April 1, 2021, and ending on September 30, 2021. If an AEI has already paid the applicable premium for the month of April 2021, the AEI is entitled to a refund of the premium paid. The refund is due within 60 days of the date of payment.
Premium subsidies do not apply with respect to an AEI for months of coverage beginning on or after the first date an AEI is eligible for coverage under another group health plan (other than coverage for excepted benefits, a health care flexible spending account, or a qualified small employer health plan) or Medicare. Premium subsidies are also not available for any period following the maximum period of continuation coverage required under COBRA for the AEI.
An AEI is required to notify the plan administrator of the group health plan if he or she is eligible for other disqualifying coverage and is subject to monetary penalties for failing to do so.
Alternate plan coverage enrollment option
A group health plan, may, but is not required to, permit an AEI to elect a different coverage option than the one the qualified beneficiary is enrolled in at the time of the qualifying event. Under normally applicable COBRA rules, a qualified beneficiary may only elect the coverage that is in effect immediately preceding the qualifying event, subject to the right to change coverage during open enrollment or in connection with a HIPAA special enrollment right. Under ARPA, the employer can permit an AEI to change his or her coverage option if:
The election to change to an alternate coverage option must be made within 90 days of the date the AEI is notified of the alternative plan coverage enrollment option.
For individuals who first become entitled to elect COBRA coverage between April 1, 2021, and September 30, 2021, the plan administrator must provide a written notification regarding the availability of the COBRA premium subsidy and the option to enroll in an alternative plan coverage option, if permitted by the employer.
This notice requirement may be satisfied by amending the employer’s current COBRA notice or by supplementing the current notice with a separate notice. It is important to note that this notice requirement applies with respect to all COBRA election notices provided to qualified beneficiaries who become entitled to elect COBRA between April 1, 2021, and September 30, 2021, and not just for those individuals whose COBRA qualifying event is an involuntary termination of employment or reduction in hours.
Notice of the premium subsidy also must be provided to AEIs who became entitled to elect COBRA before April 1, 2021, and to individuals who did not have a COBRA election in effect on April 1, 2021, but who would be an AEI if they had elected COBRA, or who previously elected COBRA and discontinued coverage before April 1, 2021.
This notice must be provided within 60 days of April 1, 2021, and must include the same information as specified in the question above that applies to individuals who become entitled to elect COBRA between April 1, 2021, and September 30, 2021.
Plan administrators must inform AEIs when the premium subsidy will end. This notice must be provided no more than 45 days, and no less than 15 days, prior to the premium subsidy expiration date. The notice must include, in prominent language, a statement that premium assistance will end soon and the exact expiration date. It also must include a statement that the individual may be eligible for unsubsidized COBRA or coverage through another group health plan. This notice is not required if the premium subsidy is ending because of an individual’s eligibility for coverage under another group health plan or Medicare.
Most employers will be reimbursed for the premium subsidy by a new tax credit that applies against the employer’s share of the Medicare hospital insurance tax. The credit is a dollar-for-dollar reimbursement of the COBRA premiums for AEIs that were waived pursuant to the ARPA subsidy. To the extent that the credit amount exceeds the employer’s Medicare hospital insurance payroll tax, the excess amount may be claimed as a tax credit. ARPA also includes a provision indicating the credit may be advanced, pursuant to forms and instructions to be developed by the IRS.
The tax credit is available only to the person to whom premiums are payable. For most large plans, this means the employer. For fully insured small plans subject to state continuation laws and not federal COBRA, the tax credit is available to the insurer of the group health plan. For multiemployer plans, the person to whom the premium is payable is the plan. Employers requesting the credit may not also claim a credit on the same amount that is taken into account as qualified wages under the CARES Act or as a qualified health expense under the Families First Coronavirus Response Act or paid family leave acts under Sections 3131 and 3132 of the Internal Revenue Code.
Tax impact on assistance eligible individuals
A premium subsidy provided to an AEI is not considered taxable income.
The premium subsidy requirements require plan administrators to develop a compliance plan for satisfying its requirements. That compliance plan should involve identifying potential AEIs whose qualifying event date occurred in the past, but whose COBRA coverage period could include the April 1, 2021, through September 30, 2021, premium subsidy period (i.e., individuals who previously were eligible for COBRA by virtue of an involuntary termination of employment or reduction of hours and who either didn’t elect COBRA coverage initially or who dropped COBRA coverage prior to April 1, 2021).
Generally, qualified beneficiaries must pay the entire cost of COBRA coverage. The premium charged may not exceed 102% of the cost (including both the employee and employer-paid portions) attributable to similarly situated active employees. For the additional 11 months of extended COBRA coverage due to a disability determined by the Social Security Administration, the premium charged may not exceed 150% of the total premium paid with respect to an active employee.
The qualified beneficiary must pay the initial COBRA premium within 45 days of making the COBRA election. The initial premium paid must include the amount necessary for coverage retroactive to the date of the qualifying event. From that point forward, each premium must be paid according to the payment schedule required by the health plan and within the grace period (which must be at least 30 days from the due date) allowed for receipt of premiums.
The period for COBRA coverage will end automatically if any one of the following are true:
Under COBRA, four written notices are required to be provided by the plan administrator:
A “general notice” of COBRA rights and obligations must be sent to employees and their covered spouses within 90 days of the beginning of health plan coverage for the employee or his or her spouse.
A “continuation coverage election notice” must be given to each employee or beneficiary by the plan administrator within 14 days after the plan administrator receives notice from the employer of the occurrence of a qualifying event. (The employer must notify the plan administrator within 30 days of the qualifying event). It is important to note that each qualified beneficiary has a separate election right and the notices must be sent so that they reach each qualified beneficiary. A notice sent to the employee or employee’s spouse is sufficient notice for dependent children residing with the individual to whom such notice was sent.
A notice of “unavailability of COBRA coverage” must be provided by the plan administrator within 14 days of receipt of a request for COBRA coverage from an individual, if the plan administrator determines that the individual is not eligible for coverage (for instance, a request for COBRA coverage at the time FMLA leave begins).
As soon as practicable after a plan administrator determines that COBRA coverage is being terminated before the end of the maximum coverage period, a notice of “termination of continuation coverage” must be provided to each qualified beneficiary explaining why the coverage is being terminated (for instance, failure to pay premiums).
In general, all required notices must be sent by first class, certified or registered U.S. mail, addressed to the employee and spouse (if both are covered under the health plan) at the last known home address. Plans must keep complete and accurate records of all notices required by COBRA.
In addition to the notices that must be provided by the plan administrator, covered employees, covered dependents and qualified beneficiaries must also notify the plan administrator of certain events, such as divorce, legal separation, a child ceasing to be a dependent, the occurrence of a second qualifying event or a determination of disability by the Social Security Administration or the end of such disability. The plan must establish reasonable procedures to be followed by individuals when notifying the plan administrator of such events.
The Department of Labor, on behalf of participants, may assess a fine of up to $110 per day for a COBRA notice violation, accruing until the notice is issued. Each notice failure carries its own fine, so fines can become significant. Additionally, an excise tax may be assessed by the Internal Revenue Service against an employer for failure to comply with any of COBRA’s provisions. The excise tax is equal to $100 per day per covered beneficiary. The Internal Revenue Service (IRS) is given the authority to waive the excise tax if the failure to comply is due to “reasonable” cause.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) requires a group health plan to continue health insurance coverage under the plan for employees serving in the uniformed services who will lose coverage as a result of active military service. USERRA also permits such an employee to elect coverage for his or her dependents if the employee’s dependents will lose coverage under a group health plan as a result of the employee’s active duty service. If an employee is serving in the uniformed services for no more than 30 days, coverage shall continue as if he were in active service with the employer.
If the absence is for a period longer than 31 days or more, the employee has the right to continue coverage for up to 24 months or until the date after the employee is required to, but fails to, apply for a return to active employment as required under USERRA (if earlier). As a plan design feature, many plans provide that continuation coverage under USERRA and COBRA run at the same time. In other words, the two periods will not provide coverage back-to-back, but instead will overlap.
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