How to Comply with COBRA Without Getting Bit

Transcription

1 How to Comply with COBRA Without Getting Bit Julie Athey Attorney M. LEE SMITH PUBLISHERS LLC Brentwood, Tennessee

2 This special report provides practical information concerning the subject matters covered. It is sold with the understanding that neither the publisher nor the writer is rendering legal advice or other professional service. Some of the information provided in this special report contains a broad overview of federal law. The law changes regularly, and the law may vary from state to state and from one locality to another.you should consult a competent attorney in your state if you are in need of specific legal advice concerning any of the subjects addressed in this special report M. Lee Smith Publishers LLC 5201 Virginia Way P.O. Box 5094 Brentwood,Tennessee ISBN All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means without permission in writing from the publisher. Printed in the United States of America

3 Contents INTRODUCTION BACKGROUND AND BASICS... 3 COBRA Requirements in General... 4 Terminology ARE YOU REQUIRED TO COMPLY WITH COBRA?... 7 Are You a Small Employer?... 7 Churches and Government Employers Business Reorganizations WHAT IS A GROUP HEALTH PLAN? Dental and Vision Benefits Flexible Spending Accounts Health Savings Accounts Health Reimbursement Arrangements Employee Assistance Programs Medical Savings Accounts UNDERSTANDING CONTINUATION COVERAGE Qualified Beneficiaries Qualifying Events iii

4 Bringing Arbitration into Workplace UNDERSTANDING THE NOTICE REQUIREMENTS Methods of Providing Notice to Employees General Notice to New Employees Notices Required After a Qualifying Event UNDERSTANDING ELECTION RIGHTS Coverage During Election Period Effect of Early Waiver Type of Coverage Elected Payment of Premiums CUTTING OFF CONTINUATION COVERAGE Obtaining Other Group Health Insurance Nonpayment of Premiums Termination for Cause UNDERSTANDING COBRA S INTERACTION WITH HIPAA Preexisting Condition Exclusions When an Employee Is Fired UNDERSTANDING COBRA S INTERACTION WITH OTHER LAWS FMLA USERRA State COBRA Laws Medicare NOTES APPENDICES iv Appendix A: Model General Notice Appendix B: Model Election Notice... 52

5 Introduction Of all the federal laws governing the workplace, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is at the top of the list in terms of complexity and confusion. It sounds like such a simple law, and its intent was certainly noble. It s basically a safety net for employees and their families to keep them from having lapses in their health insurance when they re in between jobs or other major events happen in their lives like getting separated or divorced. But what started out as a seemingly simple premise has evolved into a monolithic jumble of statutes, regulations, and regulatory documents. Not to mention the morass of case law interpreting what the law and regulations say and require. Unfortunately, COBRA is one of those acronyms that make most employers eyes glaze over when they hear it. But no matter how much you want to ignore it, it s not going to go away.we re writing this report as a sort of guide through the wilderness for employers. Our mission is to provide you with a plain-english overview of COBRA (as much as that s humanly possible) and a road map to understanding its many complexities. 1 One word of caution: It is impossible to answer every question that may arise about COBRA compliance in a report of this size. In fact, this report really only scratches the surface. For many questions that arise about COBRA, consulting a competent benefits attorney is the only way to be completely sure of compliance. 1

6 Background and Basics 1 COBRA was passed in 1986 in an effort to help employees (and their family members) avoid the loss of their health insurance when they lost their jobs or experienced other events that would otherwise cause them to lose coverage.although the law s requirements continue to be referred to collectively as COBRA, its provisions actually appear in the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). 2 The U.S. Department of Labor (DOL) is responsible for interpreting and administering the COBRA provisions that appear in ERISA, while the Internal Revenue Service (IRS) is responsible for interpreting and enforcing the provisions that appear in the IRC.The two agencies share responsibility for enforcing COBRA.That means there are two sets of regulations interpreting COBRA, one set that s issued by the DOL, and another that s issued Many by the IRS. It can be very confusing trying to figure it all out.we re explaining this now because this report will touch on various principles that apply still need employers generally to ERISA plans, and you need to understand how that law is to get their involved. plan documents Since 1999, the IRS and DOL have been quite busy issuing proposed and procedures and final regulations interpreting the various requirements imposed by up to date. COBRA that appear in ERISA and the Internal Revenue Code.The IRS issued its final COBRA regulations, which generally address the law s continuation coverage requirements, in 2001.The DOL didn t issue its final regulations interpreting COBRA s notice requirements until mid Prior to the final regulations, the agencies went through several different sets of proposed regulations. What this all means is that, in the last five years or so, employers have had to comply with ever-changing requirements under COBRA. Although the regulations appear to have stabilized with the DOL s issuance of final notice regulations in mid-2004, many employers still need to get their plan documents and procedures up to date. For example, the final notice regulations are effective for most plans sometime in calendar year 2005.Whenever mention is made in this report of a regulatory requirement, you can assume that we re referring to the current requirement under the final regulations. We ll point out the most recently added requirements as we go along so that you can make sure your plan is up to date. 3 3

7 How to Comply with COBRA Without Getting Bit COBRA REQUIREMENTS IN GENERAL In general, COBRA requires most employers that sponsor group health plans to let employees (and their dependents) keep their coverage under those plans, at their own expense, after something happens that would otherwise make them lose coverage. So, for example, if you have an employee that gets divorced, COBRA gives her husband the option of staying on your health plan for up to 36 months. The law also requires employers to comply with several notice requirements to inform employees and their dependents of their rights to continued health coverage under COBRA. Separate notices must be given to employees (and their spouses) when they first start participating in your plan and to employees and dependents after they experience an event that would cause them to lose coverage under your plan. Of course, there are some qualifying events that you may not know about unless an employee or other qualified beneficiary tells you such as divorce or a child s loss of dependent status.when those types of qualifying events occur, the beneficiary must follow certain notice procedures so that you can fulfill your COBRA obligations in a timely manner. See Section 5 Understanding the Notice Requirements. If a plan does not comply with COBRA, the IRC imposes an excise tax on the employer maintaining the plan (or on the plan itself). ERISA, on the other hand, gives certain parties including qualified beneficiaries and the DOL the right to file a lawsuit to redress the noncompliance. An employer that fails to comply with COBRA s requirements may be subject to a penalty of up to $110 for each day of noncompliance. Or worse, if the violation causes an individual to be without health coverage and the individual sues the employer, a court could find the employer liable for the individual s medical expenses. And some courts have even required employers to pay attorneys fees and other costs associated with the litigation. TERMINOLOGY 4 Before you can even begin to understand and comply with COBRA, you must have a good working knowledge of the terminology.to start you out, here are some of the key terms you need to know to follow along in any discussion of COBRA s requirements. Of course, the legal definition of each of these terms is far more complicated than the explanation we ve provided here.there s plenty of time to go into those definitions in painful detail later on in this report. A covered employer is one that is required to comply with COBRA generally, employers that have at least 20 employees and sponsor a group health plan for their employees. Continuation coverage is the group health plan coverage that COBRA requires most employers to allow qualified beneficiaries

8 Background and Basics to maintain for a limited period of time (usually 18 or 36 months) after they would otherwise become ineligible for it (this is sometimes referred to as COBRA coverage in this report). A covered employee is an employee who qualifies for COBRA coverage. A qualified beneficiary is anyone (generally, employees and their dependents) who qualifies for continuation coverage under COBRA. A qualifying event is an event that triggers the right to COBRA continuation coverage. Putting all these terms together, COBRA requires (among other things) covered employers to offer continuation coverage to covered employees and other qualified beneficiaries upon the occurrence of a qualifying event. There, now isn t that simple? 5

9 How to Comply with COBRA Without Getting Bit APPENDIX B: MODEL ELECTION NOTICE MODEL COBRA CONTINUATION COVERAGE ELECTION NOTICE (For use by single-employer group health plans) [Enter date of notice] Dear: [Identify the qualified beneficiary(ies), by name or status] This notice contains important information about your right to continue your health care coverage in the [enter name of group health plan] (the Plan). Please read the information contained in this notice very carefully. To elect COBRA continuation coverage, follow the instructions on the next page to complete the enclosed Election Form and submit it to us. If you do not elect COBRA continuation coverage, your coverage under the Plan will end on [enter date] due to [check appropriate box]: End of employment Death of employee Entitlement to Medicare Reduction in hours of employment Divorce or legal separation Loss of dependent child status Each person ( qualified beneficiary ) in the category(ies) checked below is entitled to elect COBRA continuation coverage, which will continue group health care coverage under the Plan for up to months [enter 18 or 36, as appropriate and check appropriate box or boxes; names may be added]: Employee or former employee Spouse or former spouse Dependent child(ren) covered under the Plan on the day before the event that caused the loss of coverage Child who is losing coverage under the Plan because he or she is no longer a dependent under the Plan If elected, COBRA continuation coverage will begin on [enter date] and can last until [enter date]. [Add, if appropriate: You may elect any of the following options for COBRA continuation coverage: [list available coverage options]. COBRA continuation coverage will cost: [enter amount each qualified beneficiary will be required to pay for each option per month of coverage and any other permitted coverage periods.] You do not have to send any payment with the Election Form. Important additional information about payment for COBRA continuation coverage is included in the pages following the Election Form. If you have any questions about this notice or your rights to COBRA continuation coverage, you should contact [enter name of party responsible for COBRA administration for the Plan, with telephone number and address]. 52

10 Appendices COBRA CONTINUATION COVERAGE ELECTION FORM INSTRUCTIONS: To elect COBRA continuation coverage, complete this Election Form and return it to us. Under federal law, you must have 60 days after the date of this notice to decide whether you want to elect COBRA continuation coverage under the Plan. Send completed Election Form to: [Enter Name and Address] This Election Form must be completed and returned by mail [or describe other means of submission and due date]. If mailed, it must be postmarked no later than [enter date]. If you do not submit a completed Election Form by the due date shown above, you will lose your right to elect COBRA continuation coverage. If you reject COBRA continuation coverage before the due date, you may change your mind as long as you furnish a completed Election Form before the due date. However, if you change your mind after first rejecting COBRA continuation coverage, your COBRA continuation coverage will begin on the date you furnish the completed Election Form. Read the important information about your rights included in the pages after the Election Form. I (We) elect COBRA continuation coverage in the [enter name of plan] (the Plan) as indicated below: Name Date of Birth Relationship to Employee SSN (or other identifier) a. [Add if appropriate: Coverage option elected: ] b. [Add if appropriate: Coverage option elected: ] c. [Add if appropriate: Coverage option elected: ] Signature Print Name Print Address Date Relationship to individual(s) listed above Telephone number IMPORTANT INFORMATION ABOUT YOUR COBRA CONTINUATION COVERAGE RIGHTS What is continuation coverage? Federal law requires that most group health plans (including this Plan) give employees and their families the opportunity to continue their health care coverage when there is a qualifying event that would result in a loss of coverage under an 53

11 How to Comply with COBRA Without Getting Bit employer s plan. Depending on the type of qualifying event, qualified beneficiaries can include the employee (or retired employee) covered under the group health plan, the covered employee s spouse, and the dependent children of the covered employee. Continuation coverage is the same coverage that the Plan gives to other participants or beneficiaries under the Plan who are not receiving continuation coverage. Each qualified beneficiary who elects continuation coverage will have the same rights under the Plan as other participants or beneficiaries covered under the Plan, including [add if applicable: open enrollment and] special enrollment rights. 54 How long will continuation coverage last? In the case of a loss of coverage due to end of employment or reduction in hours of employment, coverage generally may be continued only for up to a total of 18 months. In the case of losses of coverage due to an employee s death, divorce or legal separation, the employee s becoming entitled to Medicare benefits or a dependent child ceasing to be a dependent under the terms of the plan, coverage may be continued for up to a total of 36 months.when the qualifying event is the end of employment or reduction of the employee s hours of employment, and the employee became entitled to Medicare benefits less than 18 months before the qualifying event, COBRA continuation coverage for qualified beneficiaries other than the employee lasts until 36 months after the date of Medicare entitlement.this notice shows the maximum period of continuation coverage available to the qualified beneficiaries. Continuation coverage will be terminated before the end of the maximum period if: any required premium is not paid in full on time, a qualified beneficiary becomes covered, after electing continuation coverage, under another group health plan that does not impose any pre-existing condition exclusion for a pre-existing condition of the qualified beneficiary, a qualified beneficiary becomes entitled to Medicare benefits (under Part A, Part B, or both) after electing continuation coverage, or the employer ceases to provide any group health plan for its employees. Continuation coverage may also be terminated for any reason the Plan would terminate coverage of a participant or beneficiary not receiving continuation coverage (such as fraud). [If the maximum period shown on page 1 of this notice is less than 36 months, add the following three paragraphs:] How can you extend the length of COBRA continuation coverage? If you elect continuation coverage, an extension of the maximum period of coverage may be available if a qualified beneficiary is disabled or a second qualifying event occurs.you must notify [enter name of party responsible for COBRA administration] of a disability or a second qualifying event in order to extend the period of continuation coverage. Failure to provide notice of a disability or second qualifying event may affect the right to extend the period of continuation coverage. Disability An 11-month extension of coverage may be available if any of the qualified beneficiaries is determined by the Social Security Administration (SSA) to be disabled.the disability has to have started at some time before the 60th day of COBRA continuation coverage and must last at least until the end of the 18-month period of continuation coverage. [Describe Plan provisions for requiring notice of disability determination, including time frames and procedures.] Each qualified beneficiary who has elected continuation coverage will be entitled to the 11-month disability extension if one of them qualifies. If the qualified beneficiary is determined by SSA to no longer be disabled, you must notify the Plan of that fact within 30 days after SSA s determination. Second Qualifying Event An 18-month extension of coverage will be available to spouses and dependent children who elect continuation coverage if a second qualifying event occurs during the first 18 months of continuation coverage.the maximum amount of

12 continuation coverage available when a second qualifying event occurs is 36 months. Such second qualifying events may include the death of a covered employee, divorce or separation from the covered employee, the covered employee s becoming entitled to Medicare benefits (under Part A, Part B, or both), or a dependent child s ceasing to be eligible for coverage as a dependent under the Plan.These events can be a second qualifying event only if they would have caused the qualified beneficiary to lose coverage under the Plan if the first qualifying event had not occurred.you must notify the Plan within 60 days after a second qualifying event occurs if you want to extend your continuation coverage. How can you elect COBRA continuation coverage? To elect continuation coverage, you must complete the Election Form and furnish it according to the directions on the form. Each qualified beneficiary has a separate right to elect continuation coverage. For example, the employee s spouse may elect continuation coverage even if the employee does not. Continuation coverage may be elected for only one, several, or for all dependent children who are qualified beneficiaries. A parent may elect to continue coverage on behalf of any dependent children.the employee or the employee s spouse can elect continuation coverage on behalf of all of the qualified beneficiaries. In considering whether to elect continuation coverage, you should take into account that a failure to continue your group health coverage will affect your future rights under federal law. First, you can lose the right to avoid having pre-existing condition exclusions applied to you by other group health plans if you have more than a 63- day gap in health coverage, and election of continuation coverage may help you not have such a gap. Second, you will lose the guaranteed right to purchase individual health insurance policies that do not impose such pre-existing condition exclusions if you do not get continuation coverage for the maximum time available to you. Finally, you should take into account that you have special enrollment rights under federal law.you have the right to request special enrollment in another group health plan for which you are otherwise eligible (such as a plan sponsored by your spouse s employer) within 30 days after your group health coverage ends because of the qualifying event listed above. You will also have the same special enrollment right at the end of continuation coverage if you get continuation coverage for the maximum time available to you. How much does COBRA continuation coverage cost? Generally, each qualified beneficiary may be required to pay the entire cost of continuation coverage.the amount a qualified beneficiary may be required to pay may not exceed 102 percent (or, in the case of an extension of continuation coverage due to a disability, 150 percent) of the cost to the group health plan (including both employer and employee contributions) for coverage of a similarly situated plan participant or beneficiary who is not receiving continuation coverage.the required payment for each continuation coverage period for each option is described in this notice. [If employees might be eligible for trade adjustment assistance, the following information may be added: The Trade Act of 2002 created a new tax credit for certain individuals who become eligible for trade adjustment assistance and for certain retired employees who are receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC) (eligible individuals). Under the new tax provisions, eligible individuals can either take a tax credit or get advance payment of 65% of premiums paid for qualified health insurance, including continuation coverage. If you have questions about these new tax provisions, you may call the Health Coverage Tax Credit Customer Contact Center toll-free at TTD/TTY callers may call toll-free at More information about the Trade Act is also available at When and how must payment for COBRA continuation coverage be made? Appendices First payment for continuation coverage If you elect continuation coverage, you do not have to send any payment with the Election Form. However, you must make your first payment for continuation coverage not later than 45 days after the date of your election. (This is the date the Elec- 55

13 How to Comply with COBRA Without Getting Bit tion Notice is post-marked, if mailed.) If you do not make your first payment for continuation coverage in full not later than 45 days after the date of your election, you will lose all continuation coverage rights under the Plan.You are responsible for making sure that the amount of your first payment is correct.you may contact [enter appropriate contact information, e.g., the Plan Administrator or other party responsible for COBRA administration under the Plan] to confirm the correct amount of your first payment. Periodic payments for continuation coverage After you make your first payment for continuation coverage, you will be required to make periodic payments for each subsequent coverage period.the amount due for each coverage period for each qualified beneficiary is shown in this notice.the periodic payments can be made on a monthly basis. Under the Plan, each of these periodic payments for continuation coverage is due on the [enter due day for each monthly payment] for that coverage period. [If Plan offers other payment schedules, enter with appropriate dates:you may instead make payments for continuation coverage for the following coverage periods, due on the following dates:]. If you make a periodic payment on or before the first day of the coverage period to which it applies, your coverage under the Plan will continue for that coverage period without any break.the Plan [select one: will or will not] send periodic notices of payments due for these coverage periods. Grace periods for periodic payments Although periodic payments are due on the dates shown above,you will be given a grace period of 30 days after the first day of the coverage period [or enter longer period permitted by Plan] to make each periodic payment.your continuation coverage will be provided for each coverage period as long as payment for that coverage period is made before the end of the grace period for that payment. [If Plan suspends coverage during grace period for nonpayment, enter and modify as necessary: However, if you pay a periodic payment later than the first day of the coverage period to which it applies, but before the end of the grace period for the coverage period,your coverage under the Plan will be suspended as of the first day of the coverage period and then retroactively reinstated (going back to the first day of the coverage period) when the periodic payment is received.this means that any claim you submit for benefits while your coverage is suspended may be denied and may have to be resubmitted once your coverage is reinstated.] If you fail to make a periodic payment before the end of the grace period for that coverage period, you will lose all rights to continuation coverage under the Plan. Your first payment and all periodic payments for continuation coverage should be sent to: [enter appropriate payment address] For more information This notice does not fully describe continuation coverage or other rights under the Plan. More information about continuation coverage and your rights under the Plan is available in your summary plan description or from the Plan Administrator. If you have any questions concerning the information in this notice, your rights to coverage, or if you want a copy of your summary plan description, you should contact [enter name of party responsible for COBRA administration for the Plan, with telephone number and address]. For more information about your rights under ERISA, including COBRA, the Health Insurance Portability and Accountability Act (HIPAA), and other laws affecting group health plans, contact the U.S. Department of Labor s Employee Benefits Security Administration (EBSA) in your area or visit the EBSA website at (Addresses and phone numbers of Regional and District EBSA Offices are available through EBSA s website.) 56 Keep Your Plan Informed of Address Changes In order to protect your and your family s rights, you should keep the Plan Administrator informed of any changes in your address and the addresses of family members.you should also keep a copy, for your records, of any notices you send to the Plan Administrator.

14 About the Author Employment law attorney Julie Athey has written numerous publications for Human Resources professionals, including Overtime Revisited: The DOL s Final Regulations and How to Fire Employees Without Getting Burned. She graduated with honors from the University of Tulsa College of Law, where she was an editor of the Energy Law Journal. She also obtained her undergraduate degree in English, cum laude, from the University of Tulsa. Her excellent legal and editorial skills have made her one of the most popular authors of M. Lee Smith Publishers LLC resources. 57

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