IRS Issues Guidance on COBRA

From Employee Benefits Alert

April 1998

The IRS has released proposed regulations that clarify some uncertainties that had existed regarding continuation coverage and has released a notice that answers participant’s questions about electing COBRA coverage in light of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA").

The proposed regulations clarify a number of issues that arose due to the interaction of COBRA and HIPAA. Although the proposed regulations will not be effective until published as final regulations, reliance on the proposed regulations will be considered good faith compliance with a reasonable interpretation of the statutory requirements.

Disability Extension of COBRA Coverage

A principal result of HIPAA was that the disability extension of the COBRA coverage period from 18 months to 29 months available to disabled beneficiaries was made available when the disability occurred within the first 60 days of COBRA continuation coverage. Under prior law, the qualified beneficiary had to be disabled at the time of the qualifying event. The proposed regulations provide that if the plan has elected to measure the maximum coverage period and the period for providing notice of a qualifying event from the date coverage would be lost (rather than from the date on which the qualifying event occurs), then that later date would start the 60 day period of COBRA continuation coverage for purposes of the disability extension.

The proposed regulations also clarify that all qualified beneficiaries are entitled to the extension of coverage, not just the disabled beneficiary.

Disability Extension Premiums

The proposed regulations clarify the rules relating to the increased premium that may be charged during the disability extension period. A plan may charge 150% of the applicable premium (rather than the normal 102%) if a disabled qualified beneficiary experiences a second qualifying event during the 11-month disability extension period. The second qualifying event would extend the COBRA coverage period to 36 months, and the plan may charge the 150% premium until the end of the 36-month maximum coverage period. If the second qualifying event occurs during the original 18-month coverage period, however, the plan may only charge the 102% premium for the full 36-month maximum coverage period. The imposition of the 150% premium under the regulations will not be considered a violation of the HIPAA rules preventing discrimination in premiums on the basis of health status.

The proposed regulations do not provide guidance as to whether the plan may impose the 150% premium on any qualified beneficiary electing coverage under the disability extension provisions who is not disabled. The IRS is seeking comments on this issue.

Newborn and Adopted Children

The proposed regulations clarify that the maximum coverage period for a newborn or adopted child is measured from the date of the original qualifying event that started the COBRA coverage period during which the child is born or adopted. Thus, the birth or adoption of a child does not begin a new COBRA coverage period or extend the coverage period with respect to the child.

IRS Notice on COBRA Elections

IRS Notice 98-12 describes factors that employees should consider in deciding whether to elect COBRA continuation coverage. The Notice uses a question and answer format to discuss issues such as an employee's rights under COBRA and HIPAA, which employer plans are subject to COBRA and HIPAA, and what facts an employee should consider when deciding whether to elect continuation coverage. The notice also tells employees where they can obtain more information about COBRA and HIPAA.

Employers are not required to provide the notice to employees. Employers who do provide the notice to employees may use it to supplement the information that they are required to give covered employees and beneficiaries. The notice may also be modified to provide information specific to a plan. Employers who provide the notice to covered employees are not exempt from providing other notices that are required to be furnished under COBRA or from providing any other information that the law requires employers to provide to participants in group health plans.

COBRA Coverage for Employees With Other Insurance Coverage

The original 1987 proposed Treasury Regulations under COBRA provide that employers are not required to make continuation coverage available if the qualified beneficiary is covered under another group health plan at the time he or she makes a COBRA election. Under this regulation, employers are not required to make COBRA coverage available to a terminated employee who was covered under two group health plans (e.g., double coverage under the employee's plan and the plan of the employee's spouse).

Employees who were denied continuation coverage because of preexisting coverage under another group health plan have sued their employers on the grounds that COBRA states that continuation coverage may be terminated when the qualified beneficiary first becomes, after the date of his COBRA election, covered under another group health plan. The employee lawsuits have contended that COBRA does not permit employers to deny continuation coverage when the employee had preexisting coverage under another group health plan at the time the COBRA election is made.

To date, two federal appeals courts have held that employers must provide continuation coverage under these circumstances, and three appeals courts have held that employers need not provide continuation coverage. Now, one of these cases has reached the U.S. Supreme Court, and the IRS has filed a brief indicating that it considers the proposed regulations to be an incorrect interpretation of the law. The final result will depend upon the Supreme Court's holding, but the IRS has announced that taxpayers may continue to rely on the proposed regulations pending the outcome of the case. No excise tax will be imposed for failure to provide continuation coverage when there is preexisting coverage under another group plan. Employees may, however, sue employers in private actions for improperly denying continuation coverage.

For a copy of Notice 98-12 or for further information about COBRA, HIPAA or other employee benefits matters, please contact Paul J. Powers, Jr. or Kirk H. O'Ferrall at our New York office.