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A Service of OnQue Technologies, Inc. |
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IRS Rules COBRA Not Extended After Medicare Entitlement |
March 10, 2004
Santa Rosa, CA |
On February 13, 2004, the
Internal Revenue Service issued Revenue Ruling 2004-22, which deals with the COBRA extension
of coverage for spouses and dependents who are receiving COBRA benefits when the former employee
becomes entitled to Medicare. Until this ruling, it has been standard COBRA administration procedure
to offer these family members a total of 36 months of COBRA coverage due to the Medicare "second
qualifying event." But, in the opinion of most analysts, the new IRS ruling changes all that.
This COBRA Tip explains the ruling, the IRS' reasoning behind it, and how it will affect your COBRA
administration procedures.
What Is a Revenue Ruling?
Before we discuss the holding of the new
ruling, it's important to understand what an IRS revenue ruling is and how it affects current
IRS regulations. The Internal Revenue Service defines a revenue ruling as the Service's "official
interpretation" of the Internal Revenue Code (IRC). It is the IRS' conclusion as to how the IRC
should be applied to a specific set of facts. According to the IRS, "Revenue rulings do not have
the force and effect of Treasury Department Regulations, but they may be used as legal precedents."
The IRS cautions against the application of revenue rulings to other situations, unless the facts
and circumstances are substantially the same. In practice, when a revenue ruling is made, it is
considered prudent to follow it as soon as it is issued.
What is the fact situation to which this ruling applies?
Holdings of IRS revenue rulings apply only to the specific fact situation addressed in that ruling.
Here is the fact situation presented in Revenue Ruling 2004-22:
Employee and spouse are covered under a group health plan subject to COBRA.
Employee terminates employment and both employee and spouse lose coverage under
the plan as result of the termination. Both are offered COBRA for up to 18 months. Spouse elects
COBRA and during the 18-month coverage period, the former employee becomes entitled to Medicare.
The plan is notified of the Medicare entitlement within 60 days.
Note:
It is not clear from the facts whether the former employee accepted COBRA coverage for himself.
Regardless, we are of the opinion that the holding would not be different even if the former employee
had elected COBRA. COBRA regulations do not require an employee to elect COBRA for second qualifying
events to result in a 36-month extension for a spouse or dependent. (The IRS has not yet responded to
OnQue's inquiries for clarification.)
What is the legal issue addressed by this
ruling?
The issue raised by
this fact situation and addressed squarely by the ruling is:
Is the Medicare entitlement of a covered employee a second qualifying event for a qualified beneficiary if the
Medicare entitlement would not have resulted in a loss of coverage for the qualified beneficiary under the
group health plan that is providing the COBRA coverage?
What is the holding of this ruling?
The IRS concluded that in this fact situation the employee's spouse would not be entitled to an extension of
the maximum coverage period by reason of the former employee's Medicare entitlement. The plan was not required
to make COBRA coverage available to the spouse beyond the end of the initial 18-month period.
How does this ruling affect your COBRA administration?
Chances are the holding in Revenue Ruling 2004-22
is contrary to the way you are currently handling COBRA administration in the case of a former employee
becoming entitled to Medicare after COBRA election. IRS regulations that govern COBRA describe the
circumstances under which a second qualifying event can expand the maximum coverage period due to
an initial qualifying event, such as termination or reduction in hours. This expanded period applies
only to those qualified beneficiaries who became qualified at the time of the initial event and
continue on COBRA coverage at the time of the second qualifying event. Because a covered employee is
not a qualified beneficiary with respect to any 36-month qualifying event, only the spouse or dependent
children of a covered employee may receive up to a maximum of 36 months of COBRA coverage.
According to the IRS' interpretation of
existing COBRA law, a spouse and dependent child of a covered employee may be entitled to an
extension of coverage up to a maximum of 36 months only if the 36-month event (or second qualifying
event) results in a loss of coverage for the qualified beneficiary under the plan within the maximum
coverage period. To decide whether an event is a "second qualifying event" that will trigger the
36-month extension, the IRS uses the following test:
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Apply the terms of the plan to the qualified beneficiary as if the covered employee had not experienced the
termination of employment; and
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Ascertain whether the occurrence of the 36-month event would result in a loss of coverage for the qualified
beneficiary under the plan within 36 months after the covered employee's termination of employment.
Thus, whether the employee's spouse is entitled to
a total period of 36 months of COBRA coverage, measured from the date of the employee's termination of
employment, depends on whether the Medicare entitlement is considered to be a qualifying event. When
this test is applied to the fact situation presented in the ruling, (the Medicare entitlement of a
covered former employee occurs after COBRA is elected), the Medicare entitlement cannot create a loss
of coverage for the qualified beneficiaries and is not a qualifying event. To make the proper
determination, the question that must be answered is whether, in the absence of COBRA coverage,
would Medicare entitlement have resulted in the loss of coverage for a qualified beneficiary?
Why isn't Medicare entitlement a second qualifying event?
Under the IRS' interpretation of its own regulations,
a qualifying event can occur only if there has been a resulting loss of coverage. Medicare entitlement cannot
cause a loss of coverage, and so it is not a qualifying event. The Medicare Secondary Payer provisions of the
Social Security Act prevent plans from treating current employees, their spouses and dependents differently
from other group plan participants solely because one of them has attained age 65, or is entitled to Medicare
benefits by reason of the attainment of age 65. In short, it is unlawful for a plan to use Medicare entitlement
as a reason to terminate a participant's coverage under the plan.
To apply this reasoning, the IRS looked at the fact situation raised in Revenue Ruling 2004-22 as if the
covered employee had not been terminated. In other words, for the purpose of the ruling, the IRS ignores
the initial event - termination - that triggered COBRA coverage in the first place. In this hypothetical
scenario, the fact that the employee became entitled to Medicare benefits cannot result in a loss of coverage
for any plan participant. Therefore, the spouse is not entitled to an extension of the COBRA maximum coverage
period to 36 months because the employee's entitlement to Medicare could not be a qualifying event.
Conclusion: It is likely that you are currently
treating the Medicare entitlement of a former covered employee as a second qualifying event, which then results
in the extension of COBRA coverage of up to 36 months for the covered spouse and dependent of that former employee.
We suggest that COBRA administration procedures need to be modified to take IRS Revenue Ruling 2004-22 into
account.
For a copy of IRS Revenue Ruling 2004-22, click on
IRS Revenue Ruling 2004-22
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| How COBRA OnQue Software
Handles These Issues: |
The latest version of COBRA OnQue, available soon,
reflects the IRS ruling that Medicare entitlement after termination is not a second
qualifying event for COBRA purposes. In such situations, the software will no longer offer covered spouses and
dependents a COBRA extension of up to 36 months.
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This information is provided by
OnQue Technologies, Inc. for educational purposes only and does not constitute
legal advice. If legal advice or other professional assistance is required, the
services of a competent professional should be sought.
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