Final and prop. COBRA regs.

A mere 12 years after the first proposed Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) health care continuation regulations under Sec. 4980B were released, the IRS has issued final regulations and additional proposed regulations. In the Service's defense, this has been one of the few times the IRS could catch up the regulations to Congress's frequent changes to the COBRA statute. (Because the Department of Labor has authority over the notice and disclosure portions of COBRA, the new IRS regulations do not address these issues.) The new regulations restate the proposed regulations in many cases and add clarifying examples.

Final Regs. Changes

COBRA required even if prior coverage under another plan. The regulations recognize the language of the statute, after clarification by the U.S. Supreme Court in Geissal v. Moore Medical Corporation, to specifically state that the fact a qualified beneficiary had coverage under another plan while working for the employer will not permit that employer to deny COBRA coverage. The fact that an individual was entitled to Medicare before the qualifying event will also not disqualify that individual for COBRA coverage.

No obligation to offer "core" coverage separately. The final regulations do not require the plan sponsor to offer "core coverage" and "noncore coverage," such as dental and vision coverage, separately.

Loss of coverage. Loss of coverage means coverage under the same terms and conditions. If the qualifying event results in an increase in premiums or contributions by the employee, the individual is entitled to COBRA coverage. (This provision is likely to be used relatively infrequently, given that the increase in coverage cost even under a reduction in hours, etc., is unlikely to be as high as the COBRA premiums.)

Medicare "entitled." Medicare "entitled" means actually enrolled in Medicare, not merely eligible for Medicare. Assuming the individual was not enrolled in Medicare prior to the qualifying event, enrollment in either Medicare Part A or B will be sufficient to terminate COBRA coverage for such individual. (Given that enrollment in Medicare Part A is automatic when one applies for Social Security at age 65 or older, most 65 year-olds who begin receiving Social Security after the qualifying event can have COBRA coverage terminated.)

Plan year. The plan year is the year designated in the plan document. If there is no year designated, the plan year is the deductible/limit year used. If the plan does not impose deductibles or limits on an annual basis, the policy year is used. If that is unavailable, the employer tax year and, in any other case, the calendar year is used.

Small employer exemption. For purposes of determining whether an employer employs fewer than 20 employees (and hence is exempt from COBRA requirements), only common-law employees are counted. Thus, self-employed individuals, directors and independent contractors are disregarded.

Note: Such individuals are entitled to COBRA coverage if they work for an employer otherwise subject to COBRA.

In counting employees, employers have the option of counting by the pay period rather than every business day.

COBRA/USERA. Under the Uniformed Services Employment and Reemployment Act (USERA), members of the military reserve are entitled to 18 months of health care continuation from their employers when called to active duty. The final regulations clarify that the COBRA and USERA coverage periods run concurrently, not consecutively.

Proposed Regs.

Limits on application to health care spending accounts. The proposed regulations limit a COBRA qualified beneficiary's right to continue participation in health flexible spending accounts (FSAs). Generally, if the amount an individual would have to pay a plan sponsor for an FSA would exceed the benefit that could be expected from the account, the qualified beneficiary will not be eligible for continuation of the FSA. However, if the beneficiary's participation in the FSA would avoid a break in coverage under the Health Insurance Portability and Accountability Act of 1996, the beneficiary would be eligible to continue FSA coverage.

Number of plans offered. In determining what is a "plan" for COBRA purposes, the instruments governing the plans will control. In other words, if the plan sponsor has called it a separate plan in plan documents, it is a separate plan for COBRA purposes. If the documents are unclear, all health plans (except long-term care plans) offered by a single entity (determined without regard to the controlled group) will be treated as a single plan. A multiemployer plan and a non-multiemployer plan are always separate plans.

Liability of buyers and sellers. The proposed regulations would clarify that, in corporate transactions, the agreement of the buyer and seller will control. If there is no such agreement stated, the COBRA liabilities generally remain with the seller, regardless of whether the sale is of assets or stock. If the responsible party under the contract defaults on COBRA coverage, the responsible party as designated under the regulations (usually the seller) will be liable.

Small employer exemption. Part-time employees would be counted as fractional employees in determining the 20-employee threshold. Hence, two individuals ordinarily working 20 hours per week together count as one employee.

Effective Dates

The final regulations are effective for COBRA "qualifying events" occurring in plan years beginning after 1999. For periods prior to that time, plans and employers must operate in good-faith compliance with a reasonable interpretation of the requirements under Sec. 4980B; compliance with the proposed regulations will be considered good faith. The Service will not assess penalties when there has been such compliance, but also warns that, in suits brought by beneficiaries to enforce COBRA rights, the courts generally have not applied the reasonable good-faith compliance standard.

FROM MARTHA PRIDDY PATTERSON, J.D., WASHINGTON, DC