COBRA Basics January 2014

(1)

COBRA Basics

January 2014

Employee Benefits Corporation

Peter Antonie

Compliance Communications Specialist, CEBS, RHU

(2)

Then along came COBRA!

• Consolidated Omnibus Budget Reconciliation Act

• Requires health plan sponsors (employers) to provide continuation of health plan coverage when certain events occur and for specific periods of time

• Requires specific notification procedures and timelines

• There are stiff penalties for non-compliance

• We can answer your questions about applying COBRA

• We administer COBRA if the employer has adopted our COBRASecuresm_service

(3)

• Basic COBRA Concepts

• COBRA & the Health FSA

• COBRA & the HRA

• Common COBRA Compliance Issues

(4)

Basic COBRA Concepts

COBRA’s Legal Framework

• A federal law

• Applies to public and private employers that had 20 or more full time equivalent employees in the prior calendar year

Church controlled plans & federal government plans are exempt from COBRA

• Controlled group employers count all employees in the controlled group

• Applies to all group health plans, not just the medical plan

• Applies to health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs)

Basic COBRA Concepts

COBRA’s legal framework

• IRS and the Department of Labor (DOL) have issued COBRA regulations due to amendment of the Internal Revenue Code and ERISA

• In general, IRS COBRA regulations refer to COBRA rules regarding coverage

• DOL regulations refer to notices and disclosures that employers, plan administrators and qualified beneficiaries (QBs) must provide under COBRA

• The Public Health Safety Act (PHSA) provides regulation for public employers

(5)

COBRA in a nutshell:

• A COBRA triggering event

• Causes loss of group health plan coverage

• Within the maximum coverage period

• Resulting in a qualifying event (QE)

• For a qualified beneficiary (QB)

• Who elects COBRA continuation coverage

• For a limited time period

• Commonly at QB expense

Basic COBRA Concepts

COBRA triggering events*

(1) The death of a covered employee;

(2) The termination (other than by reason of the employee's gross misconduct), or reduction of hours, of a covered employee's employment;

(3) The divorce or legal separation of a covered employee from the employee's spouse;

(6)

Basic COBRA Concepts

Triggering events - continued

• (4) A covered employee's becoming entitled to Medicare benefits under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);*

• (5) A dependent child's ceasing to be a dependent child of a covered employee under the generally applicable

requirements of the plan; or

• (6) A proceeding in bankruptcy under Title 11 of the United States Code with respect to an employer from whose employment a covered employee retired at any time. * Only if the employee’s Medicare entitlement causes family members to lose coverage due to the plan dropping the employee

Basic COBRA Concepts

Loss within the maximum coverage period

• A COBRA loss of coverage need not occur immediately after a triggering event

• If the loss occurs within the “maximum coverage period,” there is a qualifying event

• Triggering event + loss of coverage = qualifying event (QE)

• If triggering event does not produce loss of coverage within the maximum COBRA coverage period, there is no qualifying event

(7)

Resulting in a Qualifying Event

• A qualifying event (QE) is an event that satisfies the regulatory requirements of:

Being the result of a triggering event That caused a loss of coverage

During the maximum coverage period for the triggering event

Basic COBRA Concepts

Resulting in a Qualifying Event

Example #1:

• Joe is laid off (reduction of hours)

• Reduction in hours maximum coverage period is 18-months

• Joe loses coverage at the end of the month of his lay off

• Loss occurs within maximum coverage period

• Joe is offered COBRA for 18-months from first of the month following lay off

(8)

Basic COBRA Concepts

Resulting in a Qualifying Event

Example #2:

• Mary retires (termination of employment)

• Termination of employment maximum coverage period is 18-months

• Mary’s employer will provide 6 months of premium payment after retirement for Mary’s health plan coverage

• Mary’s employer considers her loss of coverage to occur after the severance payment is exhausted

• Loss occurs within the maximum coverage period

• Mary is offered COBRA for 18-months after her severance is exhausted

loss was not postponed more than 18-months

Basic COBRA Concepts

Resulting in a Qualifying Event

Example #3

• Donny turns 26 on 9/13

• Loss of dependent status maximum coverage period is 36-months

• Donny loses dependent status from his father’s health plan 9/30

• Loss of coverage occurs within maximum coverage period

• Donny is offered COBRA for 36-months starting 10/1

(9)

For a Qualified Beneficiary*

• A qualified beneficiary (QB) is an employee, spouse** or dependent child

Dependent child is defined by the plan not the COBRA regulation

• Who loses group health plan coverage due to a qualifying event and

• Was covered the day prior to the qualifying event

*Treasury Regualtion §54.4980B-1, Q/A-1(a)

** Includes same sex spouses. Domestic partners are not spouses and not

QBs – do not have election rights

Basic COBRA Concepts

For a Qualified Beneficiary

• Exception for coverage the day prior to QE

If an employee drops coverage for their spouse and/or dependents in anticipation of a divorce, COBRA still needs to be offered when the divorce is final

(10)

Basic COBRA Concepts

For a Qualified Beneficiary

• Includes child born to or adopted by the qualified beneficiary after electing COBRA

• Some individuals covered by the plan may not be qualified beneficiaries but are covered individuals

Spouse added through marriage after qualifying event

Spouse or family members added to coverage during open enrollment after qualifying event

Domestic partner

Basic COBRA Concepts

COBRA election

*

• A qualified beneficiary “must actively elect to continue coverage and must make the required payments in order to remain covered.”

• Each QB has independent COBRA election rights

• However, another individual or entity can elect COBRA for the QB



e.g., a hospital, power of attorney, etc.

* Schoka v. Supercuts Incorporated, 1995 U.S. Dist. LEXIS 15945 (N.D. Cal. 1995).

(11)

COBRA Election

• Employer has 30-days to notify QB of right to elect COBRA

Employee has 60 days to notify employer/plan of divorce or loss of dependent status

• Failing to offer COBRA or failing to offer COBRA timely are the most common reasons employers are subject to regulatory penalties

Basic COBRA Concepts

COBRA Election

• Coverage offered must be identical to what the QB had prior to the qualifying event

Type and coverage level

• Coverage level may be decreased upon enrollment in continuation coverage

e.g. family to single coverage

(12)

Basic COBRA Concepts

COBRA Election

• The election notice must at least explain*

1. The reason for loss and date of the loss 2. The maximum continuation period;

3. The continuation coverage termination date;

4. Events that would allow an extension of the coverage period; 5. Last day election to participate can be made;

6. Premium due and date of initial and future premiums;

7. Events that will cause continuation coverage to be terminated earlier than the end of the maximum period

e.g., late premium payment, enrollment in another employer’s group health plan, etc.

* DOL Reg. §2590.606-4; Model Notice is on DOL website

Basic COBRA Concepts

COBRA Election

• QB has 60-days from date of qualifying event or date election notice is sent*, whichever is later, to elect continuation

If notice is sent prior to the loss of coverage, QB has 60-days to elect from QE date

If notice is sent after the loss of coverage, QB has 60-days to elect from the date the notice was sent Postmark date of the returned election notice is

deemed the date the election was made

* Send Notice to last known address of QB. Separate Notices not necessary if all QBs live at same address

(13)

COBRA continuation period

18 Months - loss of coverage due to:

•Termination of employment

•Reduction in hours

36 Months - loss of family member coverage due to:

•Death of the covered employee

•Divorce or legal separation

•Employee’s entitlement to Medicare*

•Loss of dependent status

* March webinar topic

Basic COBRA Concepts

COBRA Continuation Period

• Extending the original COBRA continuation period:

Disability extension – provides an additional 11 months to the 18-month period (to 29 months, applies to all QBs)

Multiple Event - A 36-month triggering event that occurs during the 18-month or 29-month period

• Example: former employee dies 6 months into COBRA 18-month period, spouse/family is offered 36 months from original COBRA date

Employer files Chapter 11 bankruptcy – retirees have lifetime coverage, spouses and dependents of retirees are offered 36-months COBRA coverage after retiree dies

(14)

Basic COBRA Concepts

Medicare & COBRA*

• Individuals become eligible for Medicare at age 65 (i.e., are eligible for coverage), or due to disability or kidney failure (ESRD)

• For COBRA purposes, “entitled to Medicare” means the individual is eligible for and enrolled in Medicare

• The Medicare entitlement of an active employee, spouse or dependent does not cause loss of group health plan coverage (Medicare Secondary Payer (MSP) rules)

MSP rules do not allow the employer’s health plan to take into account the Medicare entitlement of the individual for providing coverage

* Upcoming March webinar topic

Basic COBRA Concepts

Medicare & COBRA

• QB who became entitled to Medicare prior to a qualifying event must still be offered COBRA

• Becoming entitled to Medicare after electing COBRA is reason to terminate COBRA early for that QB

Other QBs on the plan do not lose their coverage

• Employee who became entitled to Medicare prior to termination (e.g., retirement) or reduction in hours is offered COBRA for 18-month period

 Spouse and any dependents are offered COBRA for 18-months from QE date or 36-months from Medicare entitlement date depending on which period provides greater continuation period

(15)

Generally at QB expense

• No requirement that the employer pay any portion of the COBRA premium

• Initial premium is due within 45-days of electing COBRA

• Future payments due first of the month, with 30 day grace period

• Another individual or entity can pay the COBRA premium for the QB



e.g., a hospital, a governmental agency, etc.

Basic COBRA Concepts

Notices – examples of note

• Initial Notice

Provided when employee first enrolls and when family members are added to plan

• Election Notice

Provided when a qualifying event occurs

• Premium Notice

Provided once initial COBRA premium has been paid and for future months’ payments (we use a set of premium coupons)

(16)

Basic COBRA Concepts

Notices – examples of note (continued):

• Early Termination Notice

Provided when COBRA period ends early

• Unavailability notice

Provided whenever the requested COBRA period is not available

• Open enrollment notice

QBs must be notified of any health plan open enrollment opportunities that apply to active employees

• Conversion notice

Provided 6-months prior to end of COBRA period if plan(s) allows for conversion

Basic COBRA Concepts

Applicable premium

• Qualified Beneficiary (QB) can be charged up to 102% of applicable premium for active employees (up to 150% during 11-month disability extension)

 Some state continuation provisions prohibit charging more than 100% for some or all of the plans (e.g., Wisconsin for the health insurance plan)

• Same applicable premium must apply to all similarly situated QBs

(17)

Premium Determination Period

• The determination period is a 12-month period of time established by the Employer for each benefit plan

Commonly tied to the renewal date of the plan

• This period of time must be consistent from year to year

• Employers must determine the applicable COBRA premium in advance of each determination period

• The premium rate for a QB can increase as long as the new rates are determined prior to the start of the new

determination period

Basic COBRA Concepts

Premium Determination Period

• Three situations allow an Employer to increase COBRA premiums other than at the beginning of the

determination period:

During the disability extension the Employer may increase the premium amount (the plan may charge up to 150% of the premium during the extension period)

If the plan is not charging the maximum amount, then the plan may increase the premium amounts (if the plan was not charging 102% or 150% of the applicable premium)

(18)

Basic COBRA Concepts

Premium Determination Period

• If an Employer has an increase in the premium rates that does not correspond with the determination period, they are supposed to wait until the next determination period to increase the COBRA premium rates.

Example: Determination Period is January thru December and employer renews health plan early

• If the Employer changes insurers for legitimate business reasons during the determination period, it is believed that new COBRA premium amounts may be charged to the QB. Neither the statute nor the regulations address this issue; however, the plan modification rule would likely apply

(19)

• Same Qualifying Events apply

(e.g., termination of employment, reduction in hours, death, divorce, etc.)

• Maximum COBRA coverage period is to the end of the plan year if health FSA is an excepted benefit

• Maximum COBRA coverage period is 18, 29 or 36 months if health FSA is a non-excepted benefit

• We administer COBRA if the employer has also selected our COBRASecuresm_product

COBRA & the Health FSA

Generally, COBRA is offered to the end of the plan

year to a qualified beneficiary who has lost

eligibility for the health FSA when the health FSA is

under spent.

(20)

COBRA & the Health FSA

• Most health FSAs satisfy the criteria for the limited COBRA obligation

• Limited COBRA obligation applies to “excepted” health FSAs

• Excepted health FSA

Employee is also eligible for employer’s group medical plan*; and,

Health FSA is funded solely with employee pre-tax deductions; or

Employer contribution to health FSA is less than $500; or

If employer contributes more than $500, employee matches or exceeds that contribution with own pre-tax election deductions

• Under the limited COBRA obligation, the qualified beneficiary is offered COBRA only to the end of the plan year when the health FSA is under spent

* Under Health Care Reform, employer cannot offer health FSA to employees who are not eligible for the medical plan – medical plan must be “available” to employees who elect the health FSA

COBRA & the Health FSA

• Under spent account

example: Jay has had $400 in deductions and $150 in paid claims on day of event

• The monthly COBRA premium for events affecting the employee is the remaining deposits to fund the original election divided by the remaining full months X 1.02 (102%)

 Example: Jay deposited $400 toward his $600 election, has four months left in his plan year and needs to fund the remaining $200 deposits. Jay would pay $51 per month as his COBRA premium to the end of the plan year ($50 with 2% COBRA fee added)

(21)

• If the Health Care FSA is an Excepted Benefit, COBRA is offered to the end of the plan year for an under spent account

The COBRA coverage offered is the remaining balance of the annual election, not the total election

The monthly COBRA premium is remaining balance of the annual election divided by the remaining full months

• If the Health Care FSA is not an Excepted Benefit, COBRA is offered for 36 months

The COBRA coverage offered is the remaining balance of the annual election, not the total election

The monthly COBRA premium is the coverage offered divided by the remaining full months

(22)

COBRA & the HRA

• The HRA is a group health plan subject to COBRA

• All triggering events apply

• All QBs are eligible for HRA COBRA coverage

• Only time a participant can fund the HRA is through COBRA premium payment

• Integrated HRA is offered as a package with the health plan for COBRA election

Must elect COBRA for both or waive COBRA for both

• The employer determines the premium for the HRA to add to the premium of the health plan

• We administer COBRA if the employer has also selected our COBRASecuresm_product

COBRA & the HRA

Calculating the COBRA Premium for the HRA

• Cannot be based on the actual claims paid for the specific former employee or family member

• Cannot equal the maximum benefit available, unless the employer can demonstrate that all of the possible HRA funding are always reimbursed

• The 2% COBRA administrative fee (or 150% during the disability extension) can be added to the applicable premium

• Most plans use a past cost method based on previous claims history for the group applied to the future maximum

reimbursement

(23)

Calculating the COBRA Premium for the HRA*

Past cost method example:

• Employer has an HRA that reimburses up to $2,000 of the single plan deductible or up to $4,000 of the family plan deductible each year

• Employer reviews prior plan utilization and determines that the average reimbursement was 25% of the

maximum benefit available for single or family coverage

* Past cost method cannot be used for a new HRA

COBRA & the HRA

Calculating the COBRA Premium for the HRA Example: (continued)

• Employer determines that the applicable premium will be $41.67 per month for a single participant*

$2,000 / 12 months x 25% = $41.67

• Employer determines that the applicable premium will be $83.33 per month for a family participant*

(24)

47

Common COBRA Compliance

Issues

Common COBRA Compliance Issues

• COBRA and Loss of Coverage

• COBRA and the Applicable Premium

• COBRA Election & Premium Payment

• COBRA and Retirement Benefits

• COBRA and Medicare Entitlement

• COBRA & the Health FSA

(25)

COBRA and Loss of Coverage :

• Not offering COBRA timely (within 30 days of loss

or notice of divorce or loss of dependent status)

• Not offering COBRA for all events

• Postponing loss past maximum coverage period

and still offering COBRA

• Not offering COBRA for correct maximum

coverage period

Common COBRA Compliance Issues

Loss of coverage - Examples that are not QEs

• Although still eligible for the group health plan employee, Harry, turns 65 and drops the health plan to enroll in Medicare*. Harry’s wife, Gert, is not offered COBRA because she did not lose coverage due to Harry losing eligibility for the health plan because of Medicare entitlement

• Bessie retired 3 years ago and her employer postponed the loss of coverage until her 3 years of paid insurance expired. There is no QE for Bessie when she loses coverage because the loss is after the maximum COBRA period of 18-months for termination of employment

• Employee, Joe, and Mary got divorced 9-months ago. Neither of them provided notice of the divorce. There is no COBRA to offer Mary since

(26)

Common COBRA Compliance Issues

COBRA Election & Premium Payment :

• Tracking 60-day election period incorrectly

Must be from qualifying event date or date notice is sent whichever is later

• Not allowing for independent election rights

Each QB has independent right to elect COBRA

• Tracking premium payment incorrectly

First payment no later than 45 days after election

Future payments due first of each month

30-day Grace Period from due date for future payments

Common COBRA Compliance Issues

COBRA and the Applicable Premium :

• Not determining applicable premium timely

• Attempting to change applicable premium during the 12-month determination period*

• Attempting to change the determination period during the 12-month determination period*

* Early renewal of the health plan creates an issue with the Determination Period

(27)

* March webinar topic

• Not understanding Medicare Secondary Payer rules for active employees or spouses that become entitled to Medicare

• Not offering COBRA to a QB who is entitled to Medicare prior to the qualifying event

• Incorrectly applying secondary multiple event to spouse/family of retiree who became entitled to Medicare prior to retirement

 36-months COBRA from Medicare entitlement date or 18-months COBRA from retirement date, whichever is greater

• Incorrectly providing secondary multiple event to spouse of former employee when retiree becomes entitled to Medicare after retirement

 Spouse only eligible for remainder of original 18-month period

Common COBRA Compliance Issues

**COBRA & retirement benefits*:**

• Offering COBRA after retirement benefit is exhausted

No COBRA if loss of coverage is postponed past 18 months

• Offering alternative coverage without offering COBRA

 COBRA needs to be offered and waived for active employee plan before alternative coverage goes into place

(28)

Common COBRA Compliance Issues

COBRA & the Health FSA :

• Not offering COBRA at all

• Taking remaining deductions from last paycheck without offering COBRA (violates Uniform Coverage rule)

• Taking remaining deductions from severance or payouts without offering COBRA (violates Uniform Coverage rule)

• Not including employer contributions in calculation of under spent or over spent account value

• Offering COBRA for wrong maximum period

• Not offering COBRA for all qualifying events (e.g., divorce, death, etc.)

Common COBRA Compliance Issues

COBRA & the HRA :

• Not offering COBRA for the HRA

• Not offering COBRA for all of the qualifying events (e.g., not offering COBRA to ex-spouse, etc.)

• Offering COBRA for the HRA separately when the HRA is integrated with the health plan for active employees

• Not creating an applicable premium for the HRA or creating an unreasonable applicable premium

• Automatically moving participants to a retiree HRA without offering COBRA for the active employee HRA

(29)

• Consolidated Omnibus Budget Reconciliation Act

• Requires health plan sponsors (employers) to provide continuation of health plan coverage when certain events occur and for specific periods of time

• Requires specific notification procedures and timelines

• There are stiff penalties for non-compliance

• Health FSA and HRA are subject to COBRA

• We can answer your questions about applying COBRA

• We administer COBRA if the employer has adopted our COBRASecuresm_service

Questions?

• Any questions can be addressed by e-mail or phone at your convenience