Rethinking COBRA After Health Care Reform
The Health Care Reform Act made many changes to health plans, but one thing it did not do was expressly eliminate or change the COBRA rules. Although health care reform does not expressly change COBRA, it does, in many ways, impact COBRA, making it important to rethink various aspects of COBRA. The purpose of this newsletter is to highlight some of the COBRA issues plan administrators may need to reconsider.
- Interplay of COBRA Coverage and Health Exchange Coverage: Each state’s Health Exchange must permit special enrollment (outside the Exchange’s annual open enrollment period) when specified triggering events happen, such as an employee losing employer coverage due to a termination of employment. When a qualified beneficiary (QB) loses employer coverage and does not elect COBRA coverage, the QB may take advantage of the Health Exchange’s 60-day special enrollment opportunity. If a QB elects COBRA, the QB is also entitled to special enrollment, but not until he or she exhausts COBRA coverage. Accordingly, a QB who elects COBRA coverage may only be able to enroll in the Health Exchange during the Health Exchange’s annual open enrollment period or upon the expiration of the COBRA maximum coverage period. For many employees, coverage through a Health Exchange may be less expensive than COBRA coverage, but electing COBRA coverage may render an employee ineligible for Health Exchange coverage for some period of time.
- New Model COBRA Notices: In May 2014 the Department of Labor (DOL) issued new model general and election notices. The general notice now includes basic information about the Health Exchanges. The model election notice has been substantially revised to include detailed information about Health Exchanges, enrollment opportunities and restrictions, financial assistance and factors to consider in deciding whether to elect COBRA, Health Exchange coverage, Medicaid or other coverage. There is no specific date the two new model notices take effect, however, employers may wish to consider updating their COBRA notices, sooner rather than later, so individuals understand these new, rather complicated, rules. Providing this information may also encourage QBs to elect Health Exchange coverage rather than COBRA coverage. When updating COBRA notices, we caution employers to use the new model notices as a starting point. For example, the new model election notice omits details about extending COBRA coverage due to disability or a second qualifying event. Many employers will want to retain such information in their election notices. The model general notice and model election notice are available on the DOL website here.
- Severance Agreements: Many employers, under their severance agreements, offer to subsidize COBRA premiums if the individual elects COBRA coverage. Given the interplay between COBRA coverage and Health Exchange coverage (as explained in the first bullet above and in the new COBRA election notice), this approach may no longer be a best practice. If an employer offers to temporarily subsidize COBRA coverage, forcing the employee to elect COBRA coverage to obtain the subsidy, the employee may not be able to elect Health Exchange coverage in lieu of COBRA coverage when the employer subsidy ends. It is interesting to note that the new COBRA election notice even directs employees who have been offered a severance package, including employer subsidized COBRA coverage, to contact the DOL to discuss their options. Due to these recent developments, employers might instead provide an equivalent taxable cash payment to the employee, allowing the employee to choose COBRA coverage, Health Exchange coverage, other coverage or no coverage. Providing taxable cash compensation also avoids potential nondiscrimination issues under Code Section 105(h) if the employee is highly compensated. Please watch our blog later this week, or early next week, for more information about COBRA and severance agreements. Our blog can be accessed here.
- Large Employers Using the Look-Back Measurement Method to Determine Full-Time Employee Status: For purposes of the large employer shared responsibility penalties, which take effect January 1, 2015, if the employer decides to use the look-back measurement method to determine full-time employee status, it will affect COBRA administration. The affected employees will be those who experience a reduction in hours of service during a stability period, because the reduction of hours will occur mid-year, but the loss of coverage will not occur until sometime later, for example, at the end of the plan year. A reduction in hours that causes a loss of coverage is a COBRA qualifying event. Employers using the look-back measurement method will need to determine when the qualifying event occurs and when the COBRA maximum coverage period begins. Plan amendments could be required. For more information about the large employer penalties, please see Health Care Reform’s Employer Shared Responsibility Penalties: A Checklist for Employers.
- Retroactive Cancellation of COBRA Coverage: The Health Care Reform Act includes a provision prohibiting rescission of health coverage. Rescission is defined as the cancellation or discontinuance of coverage having a retroactive effect. However, rescission of coverage is permitted, upon giving 30 days advance notice, when a participant commits fraud or an intentional misrepresentation of material fact, if the plan’s terms permit it. This “no rescission” rule potentially conflicts with COBRA administration, which often requires retroactive cancellation of coverage. The “no rescission” regulations clarify that a cancellation of coverage is not a rescission of coverage if it has a prospective effect or if it is retroactive due “to a failure to timely pay required premiums or contributions toward the cost of coverage.” The ability to terminate coverage retroactively for failure to pay premiums is helpful in the COBRA context. Nevertheless, the “no rescission” rule complicates COBRA administration, and plan administrators may wish to consider the impact of this rule.