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A Service of OnQue Technologies, Inc. |
Questions and Answers from the COBRA Help
Desk
Frequently (and Not-So-Frequently) Asked
Questions |
December 1, 2005
By Scott Haines, President
OnQue Technologies, Inc.
Santa Rosa, CA |
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Every month
the OnQue staff responds to numerous COBRA questions posed by our broker and
employer customers. The questions we field over a month's time typically cover
a broad range of COBRA subtopics, from the commonplace to the obscure, and our
responses run the gamut as well—from the simple and straightforward to the
complex and cautionary. This COBRA Tip™ is the first in a series of
articles in which we offer a smattering of the more interesting and, hopefully,
informative COBRA questions and answers.
Notification Requirements
When Terminating COBRA
Client: I understand that
we have 30 days to notify a former employee that his 18-month COBRA benefits
are going to expire. Is that correct?
OnQue:
That is incorrect. The Department of Labor(DOL) 2004 regulations require plan
administrators to notify qualified beneficiaries in writing when terminating
COBRA coverage early (prior to the end of the maximum coverage
period).
Early
Termination
It is interesting to note that the regulations do
not set a specific time frame for notification in the case of early
termination. Instead, theregulations require the plan administrator to provide
the notice "as soon as practicable" following the decision to terminate
coverage. While that language may seem somewhat vague, it is necessary because
it allows for circumstances in which it is not possible or "practical" to
provide the notice well in advance of the COBRA termination date. Though not
recommended, the administrator may even provide the notice after the COBRA
termination date, provided the action was taken as soon as practicable
following the decision to terminate coverage. (Listening to attorneys argue
about what is practicable and what is not would be very interesting,
indeed.)
Normal
Termination
Plan administrators are not required to notify
qualified beneficiaries about the normal expiration of their COBRA coverage
(coverage that has gone full-term). However, if a conversion option is
available, COBRA qualified beneficiaries must be notified of their right to
elect that option within 180 days prior to the expiration of COBRA continuation
coverage. The best way to handle this is to provide a notice that reminds the
qualified beneficiary that his or her COBRA coverage is about to end. That
notice should include an explanation of conversion
rights.
COBRA & Health
Reimbursement Arrangements
Client: We have a client who maintains an
HRA. They have a participant who recently terminated and has elected to
participate in COBRA. We have two basic questions:
- What notifications must be made
for the HRA portion of COBRA?
- We understand that a qualified
beneficiary who has elected continuation coverage under COBRA must pay an
“applicable premium” for the period of coverage. How do we determine
the applicable premium?
OnQue: Our COBRA Tip of January 3, 2005,
provides a good overview of the COBRA issues relating to HRAs: "HRAs: Are They Subject to COBRA?".
What notifications must be made for the HRA
portion of COBRA?
There are no special notification requirements with
respect to HRAs; the general notice, the qualifying event notice and election
form should list the HRA as a benefit subject to COBRA.
How do we determine the
applicable premium?
This is a tough question, because the IRS
guidelines leave much to be desired (that's an understatement), although the
agency has promised to issue more specific guidelines in the future. As stated
in the article referenced above, the premium should be based on the
"actuarially determined" cost to provide coverage under the plan. Here's the
problem—HRAs have not been available long enough to provide the
utilization data needed to make accurate actuarial calculations. Further, the
cost of actuarial determination may be too high for many small employers to
bear.
Alternatively, the employer could look to the
carrier for assistance in determining the appropriate premium, particularly in
the first plan year. After that, premium calculation could be based on claims
experience.
Unfortunately, a formula for calculating HRA
premiums does not exist and no one has a handle on how to calculate the
premiums accurately. Actuarial determination is probably the best bet for
ensuring compliance, though its benefits are limited by the factors mentioned
earlier.
COBRA & Medicare
Client: A former employee and his spouse
elected COBRA after losing coverage because of his non-FMLA leave of absence.
Their COBRA coverage started on 8/01/2004. On 10/1/2005 the former employee
became entitled to Medicare A & B. I have terminated his COBRA coverage
because of the Medicare entitlement. It is my understanding that his spouse is
now entitled to continue her coverage for a total of 36 months from the start
of COBRA. Is that correct? (COBRA OnQue® did not automatically create the
extension.)
OnQue: It appears that the spouse is not
eligible to receive the extension to 36 months, because a second qualifying
event has not occurred. You are correct in your understanding that the COBRA
statute identifies Medicare entitlement of a former employee as a second
qualifying event for the covered spouse and dependent children. However, on
February 13, 2004, the Internal Revenue Service issued Revenue Ruling 2004-22,
which effectively eliminated the possibility of a COBRA beneficiary being
qualified for that extension. (To review the details of that ruling, please
refer to "IRS Rules COBRA Not Extended After Medicare
Entitlement".)
In a nutshell, the ruling states that if the
eligibility rules do not require the plan to drop an active employee from
coverage when he/she becomes entitled to Medicare, then COBRA covered
dependents are likewise ineligible to receive an extension of coverage as a
result of the former employee's Medicare entitlement. And, because the law
prohibits plans from using Medicare entitlement as a reason to drop an
employee's coverage in the first place, the revenue ruling effectively
eliminates Medicare entitlement as a second qualifying
event.
There are, however, two cases in which an
employee's Medicare entitlement may be a first (initial) qualifying event,
which means that such entitlement would also be a second qualifying event under
COBRA.
Multiemployer Plans: Medicare's Secondary
Payer rules provide an exception that can be elected by multiemployer plans.
That exception applies to employer members having fewer than 20 employees; it
permits multiemployer plans to provide that employees and their dependents will
be ineligible for coverage when the employee becomes entitled to Medicare due
to age. Provided the multiemployer plan is subject to COBRA, that loss of
coverage would be considered a first qualifying event for the covered spouse
and dependent children.
Small Employer Exemption: The second case
occurs when an employer is exempt from the Medicare Secondary Payer rules
because it has fewer than 20 employees in the current year, but is still
subject to COBRA because it had 20 or more employees in the previous year. In
such cases, an active employee's Medicare entitlement will be a COBRA
qualifying event, provided it results in a loss of coverage under the terms of
the group health plan.
According to the IRS ruling, because an active
employee's Medicare entitlement results in a first qualifying event under these
scenarios, a former employee's Medicare entitlement qualifies as a second
qualifying event for the COBRA-covered spouse and dependent
children.
Unless your company is exempt from the Medicare
Secondary Payer rules because it falls into one of the two categories described
above, a second qualifying event did not occur when the former employee became
entitled to Medicare. Thus, the spouse is not entitled to an extension of COBRA
continuation coverage.
Counting Employees for COBRA
Purposes
Client: Where can I find something in
writing (that is in simple, non-attorney language) that explains what groups
are required to offer COBRA? Am I correct when I tell groups they must offer
COBRA this calendar year if they had 20 or more full-time equivalent employees
for more than 50% of the working days of the prior calendar year? Please
advise.
OnQue: You are generally correct. However, I
agree that it would be wise to provide your clients with a comprehensive answer
to the question of how to count employees. Following is an excerpt from OnQue's
COBRA Tip of July 15, 2003, "IRS Issues
COBRA Revenue Ruling: When small employers receive stock or acquire assets, how
are employees counted for COBRA?":
Employers who had an
equivalent of at least twenty full-time employees on fifty percent of the
business days in the previous calendar year are subject to COBRA. Here are the
basic rules for counting the number of employees when determining if an
employer must offer COBRA benefits:
- All full-time and part-time
employees are counted when determining if an employer had at least twenty
employees in the previous calendar year.
- Part-time employees are counted
as fractions of full-time employees based on the number of hours worked by
full-time employees in that business. For example, if a full-time employee
normally works a 6-hour day, then two part-time employees each working three
hours a day equal one full-time employee.
- Employers may use either a daily
period or a pay period as the basis on which to count these employees. But
whichever period is chosen, it must be used uniformly for the entire
year.
- If the number of employees is
determined on a daily basis, each full-time employee is counted as one
employee. A full-time employee works the number of hours (up to 8 per day, 40
per week) considered normal for that business.
- If the number of employees is
determined on the basis of a pay period, the employer must count the number of
full-time employees working during that period, plus the number of part-time
employees and the hours worked by each during that entire pay
period.
- Only "common-law" employees are
counted -- not independent contractors, self-employed persons and members of
the board of directors (unless such members are also common-law employees) -
even if these individuals receive employee benefits, such as being covered on
the group health plan.
- Common law employees who are
nonresident aliens must be counted when determining whether an employer is
subject to COBRA requirements.
An easy way to determine the full-time equivalent
employee count is to sum the hours worked by your client's part-time and
full-time common law employees, then divide that total by the number of hours
required to be considered a full-time employee. For example, if 15 employees
are full-time (40 hours/week) and 6 work 20 hours per week, then the number of
full-time equivalent employees is 18 (720 hours/40
hours).
Do We Count Union
Employees?
Client: When a company has 5 non-union and
15 union employees, is the company subject to COBRA? I'm asking because the
union employees are enrolled in group health benefits through the union, not
the company.
OnQue: If the company employed an equivalent
of at least twenty full-time employees on fifty percent of the business days in
the previous calendar year, then it is subject to COBRA. That some of those
employees are covered under a different plan has no bearing on the company's
COBRA obligations.
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| Related COBRA Tips |
| Are You Sure You Know the Difference Between Independent
Contractors and Employees? |
| Do
You Know When It's OK to Terminate COBRA Coverage
Early? |
| HRAs: Are They
Subject to COBRA? |
| IRS
Issues COBRA Revenue Ruling: When small employers receive stock or acquire
assets, how are employees counted for COBRA? |
| IRS Rules
COBRA Not Extended After Medicare Entitlement |
| Medicare's Effect on COBRA |
| You May
Need To Offer Conversion Coverage When COBRA Ends |
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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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