The Consolidated Omnibus Budget Reconciliation Act (COBRA), first enacted in 1985 and revised in 1999, is a federal law that requires most employers to provide continuing health insurance coverage to employees and their dependents who are no longer eligible for the company's health insurance program. Employees can lose eligibility for coverage by terminating their employment, reducing their working hours, becoming eligible for Medicare, or in a number of other ways. Under the terms of COBRA, all businesses that employ more than 20 people and offer a group health insurance plan must give employees the option of continuing coverage at their own expense for a limited period of time when they lose eligibility for company-provided benefits. In addition, 44 states have their own laws regarding continuation coverage, some of which apply to smaller businesses and to benefits in addition to health insurance.
COBRA and similar health insurance continuation laws affect small businesses in two ways. First, many entrepreneurs start their own businesses after leaving their jobs with larger companies. These entrepreneurs may wish to take advantage of continuation coverage for themselves and their dependents until they are able to arrange their own health insurance plans. Second, many small business owners must comply with COBRA or other applicable state laws and offer continuation coverage to their employees. Although workers must pay the actual cost of the insurance themselves, the administration of COBRA can be time-consuming and expensive for businesses. There are severe financial penalties for noncompliance, including a fine of $100 per day for failure to notify an employee of his or her COBRA rights, or even the revocation of a company's tax deduction for its group health insurance plan. Employers can also be held liable for damages, including workers' medical costs and legal fees. As a result, many companies outsource the activities associated with COBRA compliance to experienced independent administrators and management programs. For a business with 50 employees, such services are estimated to cost around $1,000 per year.
COBRA applies to nearly all businesses that have more than 20 employees and offer a group health care plan. The only exceptions are churches, church-related tax-exempt organizations, and some federal employees. Companies that are subject to COBRA are required to offer continuation coverage to all "qualified beneficiaries," a category which includes employees, spouses, dependents, and retirees who were covered under the company's group health insurance plan up until they lost eligibility for coverage through a "qualifying event." Companies are not required to offer COBRA benefits to those employees who were not eligible for or declined to participate in the group health plan, or who were eligible for Medicare benefits.
The qualifying events that activate COBRA provisions include a voluntary or involuntary termination of employment, a reduction in hours from full to part-time, a failure to return to work after taking family or medical leave, a call for active military duty, or the bankruptcy of the business. An employee's spouse or dependents can qualify for COBRA benefits—provided they were covered by the company's group health plan—upon the employee's death, the couple's separation or divorce, or a dependent's change in eligibility status (i.e., a child reaches an age at which he or she no longer qualifies for coverage under the employee's insurance). The company may deny COBRA coverage to an employee who was involuntarily terminated from employment due to willful, job-related misconduct. But since these cases often end up in federal court, the company should weigh the expense of court costs against the expense of providing continuation coverage.
When a qualifying event occurs and COBRA is triggered, the company is required to offer a qualified beneficiary the option to continue coverage under all health care plans, medical spending accounts, dental, vision, and hearing plans, prescription drug programs, substance abuse plans, and mental health programs that are offered to regular employees. However, the company is not required to offer continuation coverage for life insurance, disability insurance, retirement plans, or vacation plans. Under normal circumstances, COBRA coverage lasts a maximum of eighteen months. This time limit is extended to twenty-nine months for dependents, or in cases where the employee becomes disabled. If the employee qualifies for COBRA for a reason other than termination of employment or reduction of hours, or experiences a second qualifying event during the regular COBRA coverage period, then the time limit may be extended to thirty-six months.
The employee pays 100 percent of the costs of health insurance coverage under COBRA, plus a 2 percent surcharge to help the employer cover administrative expenses. The employer is entitled to terminate coverage if payments are late, but must allow a 30-day grace period. This time lag may pose a problem for some small businesses, since most insurance companies require payment for COBRA coverage in advance.
Another component of COBRA involves communication with affected employees. A company is required to explain the right to continue benefits to the each employee when they first join the company group health insurance plan, and again when a qualifying event occurs. When an employee qualifies for COBRA, the company has 30 days [changed to 90 days in 2004, see below] to notify the insurance company of that person's eligibility, and the insurance company then has 14 days to provide the employee with information regarding the costs and benefits of their health care continuation coverage. The employee has 60 days to decide whether he or she wants to continue coverage. If so, the coverage is retroactive to the time of the qualifying event so that no lapses occur.
THE 1999 REVISION OF COBRA REGULATIONS
On February 3, 1999, the Internal Revenue Service (IRS) issued a set of revised and updated guidelines for the administration of COBRA. These new regulations took effect on January 1, 2000, meaning that they applied to all qualifying events occurring on or after that date. Although the new guidelines themselves required some interpretation, many tax and human resources professionals claimed that the rules would ultimately clarify and simplify several aspects of COBRA administration for businesses. Some of the major changes to COBRA are outlined below:
- The new regulations specifically address how COBRA applies to employers and employees when a company is involved in a merger or acquisition. The two companies involved in the transaction are allowed to determine who is responsible for the seller's COBRA liability by contract. If no other arrangements are made, the buyer will assume liability for COBRA coverage if it also assumes the acquisition's health care plan. If the seller terminates all of its health care plans prior to the date of the sale, however, the buyer may avoid COBRA liability.
- The new guidelines prevent employers from terminating a qualified employee's COBRA benefits because of other health care coverage the employee had before electing COBRA. However, the employer can terminate COBRA coverage early if the employee fails to pay premiums on time or becomes covered under another group health care plan or Medicare, or if the employer terminates all of its group health care plans.
- The IRS rules give employers more flexibility in determining how many health care plans they offer under COBRA. Previously, each separate benefit plan (i.e., dental, eye care, or prescription drug benefits) had to be offered separately to employees eligible for COBRA. Under the new guidelines, employers can combine all of their health care benefits into one group plan and offer employees an all-or-nothing package of benefits under COBRA. This provision was expected to greatly simplify COBRA administration for employers.
- The 1999 guidelines limit the application of COBRA to employees covered by flexible spending accounts (FSA) for health care. For employees who maintain an FSA, employers only have to offer COBRA coverage during the year of the qualifying event. In addition, employers are not required to offer COBRA coverage if the amount an employee could receive under the FSA exceeds the amount they would pay for COBRA coverage for the same time period.
- The new regulations eliminate the requirement that employers offer "core coverage" as a separate option for COBRA-eligible employees. Previously, employers who provided an extensive health care benefit package were required to allow employees to elect to continue only the major medical portion, or core coverage, under COBRA, and opt out of additional coverage, like prescription drugs or dental care. Now employees may be required to elect to receive either all the coverage in a plan or no coverage at all. Although this provision may raise the expense for employees, it is also expected to simplify COBRA administration for employers.
- The revised guidelines also clarify an employer's responsibility under the law when an employee who wants COBRA coverage moves to a new geographic area outside the normal boundaries of the group health care plan. If the company's group health care plan is region-specific, the employer is only required to provide COBRA coverage if there are other employees covered in the new geographic region. Employers are not required to make alternative coverage available if none exists in that region.
- Finally, the new rules clarify the small employer exception to COBRA. Under normal circumstances, COBRA does not apply to companies with fewer than twenty employees. But it does apply in cases where a company with fewer than twenty employees pools its health care benefits in a multiple-employer plan under which another company has greater than twenty employees. The new regulations also state that employers cannot terminate COBRA coverage for existing beneficiaries because the number of employees later drops below twenty.
2004 NOTIFICATION RULES CHANGES
The most recent changes to the implementation of COBRA took place on May 26, 2004, with the issuance by the U.S. Department of Labor of its revised rule implementing notification requirements under the law. The information was published in the Federal Register of that date, as "29 CFR Part 2590, Health Care Continuation Coverage; Final Rule." DOL introduced this rule change on May 28, 2003 in order to update notification requirements. The main change introduced by this regulation was to extended by 30 days (from 60 to 90) the time available for an employer to notify an employee of his or her COBRA rights after the employee was enrolled in a group health program.
Overall, compliance with COBRA and the various state laws governing health insurance continuation can be tricky and expensive. Although the revised COBRA regulations clarify some matters, they also add new rules for employers to be aware of and follow. "To ensure compliance with the new regulations, employers should review their COBRA procedures, COBRA notices, and group health plans and summary plan descriptions, including health FSA plan documents," Mark Bogart wrote in The CPA Journal. "Employers should also consider implementing new options permitted under the new rules that could help alleviate some of the complexities in COBRA administration." The U.S. Department of Labor and the U.S. Public Health Service offer free information on how the laws affect businesses.
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