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You May Need To Offer Conversion Coverage When COBRA Ends — Do you know your legal obligations?
October 22, 2003
Santa Rosa, CA
Although federal law does not require it, most group health plans offer participants coverage under an individual insurance policy when group health plan benefits are lost. (Many states require employers to include a conversion option in their group health plans.) Under federal COBRA rules, employers that do offer an individual conversion option to active employees must make that option available to COBRA qualified beneficiaries as well. This COBRA Tip will explain your obligations regarding conversion coverage for COBRA recipients.

Who must be offered conversion rights? Not every COBRA beneficiary must be offered the opportunity to convert from continuation coverage under the group plan to an individual policy. The 1999 final COBRA regulations provide that the right to convert to an individual health insurance policy applies only to those qualified beneficiaries who have exhausted their maximum COBRA coverage periods. Therefore, beneficiaries whose COBRA coverage terminates early are not eligible to convert to individual coverage under the plan. Early COBRA termination may be the result of nonpayment of premiums, cancellation of the entire group health plan, or a qualified beneficiary acquiring other health insurance, such as coverage under a new employer's health plan.

Conversion coverage option: Under the 1999 final COBRA regulations, if conversion coverage is available under your plan to active employees, you must provide COBRA qualified beneficiaries the option of enrolling under the conversion health plan. This offer must be made during the 180-day period that ends on the date on which the beneficiary's maximum COBRA coverage will expire. Note that current COBRA rules do not include an actual notice requirement, only that you provide qualified beneficiaries "the option of enrolling under a conversion health plan if one is available." It is possible that information contained in your Summary Plan Description would be considered a legally sufficient offer of conversion coverage. But we strongly recommend that written notice of conversion options be provided to all qualified beneficiaries within 180 days of the expected end of their maximum COBRA coverage period.

New COBRA election notice: In addition to the requirement that conversion coverage, if available, be offered within 180 d ays of the end of the maximum COBRA period, the newly proposed COBRA rules require that COBRA election notices provide qualified beneficiaries with information regarding the opportunity to elect other health coverage. Other coverage may be either an alternative to continuation coverage, or in addition to it. Examples of other coverage that may be available are: alternative coverage under the group plan such as disability coverage; individual coverage under a conversion health plan after all COBRA coverage is exhausted; or retiree health coverage.

Note: Many states have laws that mandate different, and more stringent, notice requirements. For example, in California, employers must provide accurate notification of the availability of conversion coverage, its terms and conditions, within 15 days of termination of group coverage; Wisconsin requires notice to be given within 5 days of loss of group coverage.

The proposed COBRA rules also require that you provide in the election notice an explanation of how election of other coverage would affect continuation coverage rights and the right to guaranteed access under the Health Insurance Portability and Accountability Act (HIPAA) for all qualified beneficiaries. For example, once a qualified beneficiary chooses coverage under an individual conversion policy, he is no longer eligible to enroll in another individual policy free of pre-existing condition limitations.

HIPAA right of portability: Under the Health Insurance Portability and Accountability Act (HIPAA), some people may be eligible to buy individual health insurance policies without being subject to exclusions for pre-existing medical conditions. To be eligible for HIPAA protection, individuals must have had coverage under a group health plan, including COBRA continuation coverage, without a break in coverage of more than 62 days. If there is a "significant break in coverage" of 63 days or longer, HIPAA protections are lost. (Although, some state laws allow a break in coverage of more than 62 days before pre-existing condition exclusions kick in.) In the case of COBRA beneficiaries, all coverage under COBRA must be exhausted before being eligible for guaranteed access to individual health coverage under HIPAA.

The right to purchase individual health insurance coverage with no pre-existing medical condition exclusions is known as "portability." But HIPAA portability applies only when:
  1. An employee leaves a job with group health plan coverage and moves to another job with group health plan coverage;
  2. An employee loses groups health plan coverage and wants to purchase individual health insurance coverage; and
  3. A person has coverage under an individual health insurance policy and enrolls in a new group health plan.
HIPAA does not provide portability rights when a person has individual health insurance coverage and moves to other individual coverage.

ERISA preemption of state laws: Although courts disagree, most jurisdictions have ruled that state insurance laws, not federal laws such as COBRA and HIPAA, govern the terms and conditions of conversion policies. For example, in 2001, the Ninth Circuit Court of Appeals ruled that claims against an insurer for reimbursement of medical expenses under an individual conversion policy were regulated by state law and not preempted by ERISA. The appellate court reasoned that once the insured has converted from a group policy under an ERISA plan to an individual policy, the individual policy is not regulated by ERISA, but by state insurance laws. But it is federal law that requires you to offer individual conversion policies to COBRA beneficiaries when group plan coverage ends if they are made available under your plan to active employees. If a qualified beneficiary is not offered the right to choose an available conversion policy, the enforcement of that right is under federal ERISA law, not state insurance laws.

Summary: Important federal COBRA rules to remember regarding conversion policies:
  • You are not required by federal law to make conversion policies available.
  • But, if you do make conversion policies available to active employees when they lose group coverage, you must make the same policies available to COBRA qualified beneficiaries.
  • Federal COBRA regulations require you to offer qualified beneficiaries the right to enroll in a conversion health plan at the end of their maximum COBRA coverage period.
  • You must provide qualified beneficiaries with the option of enrolling in a conversion health plan during the180-day period that ends on the COBRA expiration date.
  • Under the newly proposed Department of Labor COBRA regulations, if a conversion option is available at the end of COBRA coverage, your election notices must:
  1. Describe the available options;
  2. Explain how election of conversion coverage would affect continuation coverage rights of all qualified beneficiaries;
  3. Discuss the rights to guaranteed access to individual health coverage; and
  4. Contain a statement that more complete information regarding coverage rights is available in your Summary Plan Description or from the plan administrator.
How COBRA OnQue Software Handles These Issues:
  • Within 60 days prior to the expiration of COBRA coverage, COBRA OnQue automatically generates a notice informing qualified beneficiaries of the option to enroll in a conversion health policy, if available. This notice also summarizes qualified beneficiaries' rights under HIPAA.
  • COBRA OnQue provides an election notice that conforms to the requirements of the newly proposed COBRA rules.
Related COBRA Tip:
California's New Conversion Policy Requirements
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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