Making the switch between State Continuation & COBRA

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The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law allowing employees, spouses and dependents in certain situations to temporarily continue their health coverage at group rates. In general, COBRA will apply to employers that have 20 or more employees on more than 50 percent of their “typical business days” in the preceding calendar year.

State continuation (often referred to as mini-COBRA) varies by state. While the majority of states have passed their own laws that require smaller employers to provide COBRA-like continuation of benefits for certain employees and their families, not all states offer a continuation program.  In some states, state continuation coverage rules also apply to larger group insurance policies and add to COBRA protections.  (Note: State continuation coverage requirements generally apply to insured plans only.)

When a small business grows above 20 employees* or an employer’s work force falls below 20 employees during the year, its plans will continue to be subject to whichever option (state continuation or COBRA) was applicable at the beginning of the calendar year until a new calendar year begins. 

i.e.  If an employer exceeds 20 employees during a calendar year, then the group health plan may become subject to COBRA on the following first day of January.

If an employer drops below 20 employees during a calendar year, the employer’s group health plan remains subject to COBRA through the end of that calendar year.

On the first day of January, (regardless of policy renewal date) is when the employer should look at whether it’s still considered a small employer (i.e. fewer than 20 employees on at least 50% of the employer’s “typical business days” during the preceding calendar year) or whether it is subject to COBRA compliance.  It will only be exempt from COBRA compliance if during the preceding calendar year, it normally had fewer than 20 employees. However, despite being exempt, an employer cannot terminate existing COBRA coverage even after the end of the calendar year.

*There is an exception to this rule when a small employer’s growth is due to a stock acquisition.

 

 

 

References:

Health FSA & HSA in the same year?

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Q: We just hired a new employee on 7/1 who told us he elected the maximum amount under his previous employer’s health FSA that started in January. We offer a HDHP with an HSA. Is he eligible to participate in an HSA? Or does he need to wait until next year? 

A:  If his health FSA terminated (i.e. he did not elect COBRA), he is eligible to participate in an HSA as of the first of the month after his FSA termination, assuming he’s otherwise eligible for the HSA.

There are 4 basic rules to Qualify for an HSA:

  • Covered under a high deductible health plan (HDHP), on the first day of the month.
  • Have no other health coverage except what is permitted under the regulations
  • Not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else’s tax return.

So if he meets these 4 requirements, he is eligible to open an HSA on the first of the month following the health FSA termination.

When an employee leaves a job during the course of the year, they are still entitled to the earmarked FSA amount for that year (assuming the eligible expenses incurred prior to termination and claims submitted timely), even if they spend more than has been taken out of their paycheck so far. Furthermore, they could contribute to a new employer’s FSA (or HSA) and have additional pre-tax dollars to spend. (The “FSA loophole” doesn’t work for HSAs because the HSAs are portable and the employee’s account even if they leave.) Likewise, an employee may work for two or more entirely different (i.e. unrelated) entities and contribute the maximum amount to both employer’s FSAs at the same time. The health FSA limit is per employee per employer’s health FSA plan.

So if the health FSA and the HSA don’t overlap, (i.e. the health FSA terminated when the employee left the previous employer) he can contribute to an HSA for the remaining months assuming he’s otherwise eligible (mentioned above). The amount he is eligible to contribute, is calculated in two ways (see Limit On Contributions):

  1. “general monthly contribution rule” – which is one-twelfth of the applicable maximum contribution limit for the year for each month of they year they are HSA eligible. (There are tax implications for “over contributing” when not eligible.)
  2. “last month rule” – which basically states an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if they are eligible on the first day of the last month of their tax year (which is Dec. 1 for most). However, to rely on this special rule, the individual must then remain eligible for the HSA through the next 12 months after the last month of their tax year. (i.e. 13 months total).

If he did elect COBRA, assuming no carry-over provision (not common for COBRA participants to be eligible for) or grace period (this is something many COBRA participants are eligible for), or if there is a grace period (or carryover) & he has a zero balance on the last day of the FSA plan year, then he would be eligible for an HSA as of the first day of the month after the health FSA plan year ends (assuming he’s otherwise eligible for the HSA).

COBRA Participants & Open Enrollment

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COBRA regulations state that COBRA qualified beneficiaries (QBs) are entitled to the same rights under a group health plan as are similarly situated non-COBRA beneficiaries i.e. active participants (§ 54.4980B-5 Q&A-1).

COBRA qualified beneficiary includes:

  • individuals currently enrolled and paying for COBRA
  • individuals in their 60-day election period
  • individuals who have elected, but not yet paid for COBRA

During open enrollment, COBRA qualified beneficiaries have the same rights as active employees. (§ 54.4980B–5 Q&A–4c)  For instance, they may:

  1. Add coverage they didn’t previously have while on COBRA (e.g., enroll in dental and vision coverage at OE even if previously covered only by medical) § 54.4980B-5, Q/A-4
  2. Drop coverage
  3. Add dependents (as non-qualified beneficiaries with no independent COBRA rights), even if they were not covered at the time of the qualifying event § 54.4980B-5, Q/A-5
  4. Drop dependents
  5. Switch to another benefit package within the same plan (e.g., change medical plan option from PPO to HMO).

To be compliant, during open enrollment it’s important that employers remember to provide COBRA QBs everything they would need to make an informed coverage decision and election as if they were active employees.  The open enrollment materials must be provided to QBs in a manner that is “reasonably expected to ensure receipt”. Generally, this would mean 1st class mail to the last known home address. A Certificate of Mailing is also a best practice. 

Who Is Responsible for Offering COBRA Open Enrollment? 

COBRA open enrollment is always the responsibility of the employer.  Even if the employer has a third party administrator (TPA) handling COBRA notices, ultimately it is still the employer’s responsibility to communicate with their TPA on who will be handling the COBRA open enrollment. This is typically not included as part of the regular TPA COBRA administrative services, but many will assist for an additional fee.

What if an enrolled participant doesn’t send back their OE election?

There are different schools of thought on the answer to this question.

Per COBRA statutes, there are only 6 ways COBRA may terminate before max. coverage period ends: (§ 54.4980B–7 Q/A-1)

  1. Failure to pay on time
  2. Early termination when employer ceases to provide any group health plan
  3. Early termination because of coverage under other group health plan coverage
  4. Early termination because of Medicare entitlement
  5. Early termination when QB in disability extension found not disabled
  6. Early termination for cause (e.g. fraudulent claims)

There is nothing in the regulations that says failure to re-elect during OE is cause for termination. So, it’s my understanding, if the plan(s) the participant is on didn’t change, then their coverage should roll over into the new plan year and they should be billed the new plan year’s premiums. If the plans did change, they should be enrolled in the plan most comparable (i.e. what replaced the coverage they had).  If they fail to send in payment, they’ll term for non-payment accordingly.

However, that being said, at least one court has held that the plan may terminate COBRA coverage for a QB who fails to re-enroll after they are provided OE materials and are notified that failure to re-enroll will lead to a loss of coverage. This is because, §54.4980B-7, Q/A-1(b), provides that “a group health plan can terminate for cause the coverage of a qualified beneficiary receiving COBRA continuation coverage on the same basis that the plan terminates for cause the coverage of similarly situated nonCOBRA beneficiaries.”  So some interpret this, (as did the the court ruling) to mean, because COBRA participants have the same rights (and responsibilities) during open enrollment as similarly situated employees, if an employer requires active enrollment by employees during open enrollment, they can require active enrollment by COBRA participants too.

In my experience, it’s best to keep QBs enrolled on their current plans (or the the plans most comparable to what they currently have) unless an employer is provided other guidance from their legal counsel.

NOTE: Don’t forget about your employees on FMLA. They too have the same open enrollment rights for the health plan as active employees

 

Mergers and Acquisitions – COBRA Continuation Coverage

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There are numerous implications for benefit plans as a result of a merger or acquisition (M&A). One question raised frequently by HR departments is, who is responsible for COBRA for the COBRA qualified beneficiaries?

In simplified terms, the COBRA M&A qualified beneficiaries consists of—

  • those qualified beneficiaries already receiving COBRA coverage before the sale under a plan of the seller as a consequence of employment associated with the assets or the entity being sold; and
  • those qualified beneficiaries who experience their qualifying event in connection with the sale.

Often during the M&A negotiations, the only due diligence done in regards to benefit plans is a quick check to make sure Forms 5500 have been filed (if applicable) and to make sure there are no outstanding lawsuits or audits. Therefore, when the purchase agreement is silent in regards to COBRA, or the agreement is not followed, one can look to the guidelines the IRS has established in the COBRA regulations as to which party is liable to provide COBRA continuation coverage in a business reorganization.

In general, unless the purchase agreement stipulates otherwise, if the selling group maintains a group health plan after the sale, then a group health plan maintained by the selling group must provide COBRA coverage to M&A qualified beneficiaries.

i.e. If the seller maintains any health coverage, even if the entity sold (or employees terminating) never participated in that particular coverage, then that health plan must be made available to M&A qualified beneficiaries

If no plan remains (e.g. the selling group ceased providing any group health plan) COBRA liability may shift to buyer if the sale is a stock sale, or it may also shift to the buyer if the sale is an asset sale and the buyer is a successor employer (which is a legal determination).

When in doubt, it is best to work with qualified counsel to ensure liability issues regarding COBRA continuation coverage in connection with a M&A are properly addressed.

COBRA extensions & Medicare

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As mentioned in a previous post Common Medicare entitlement (enrollment) COBRA mistake…are you making it too?, Medicare entitlement (i.e. eligible & enrolled) is only a COBRA qualifying event (QE) if it causes an employee to lose group health coverage (i.e. under 20 lives, or retiree plan). So due to Medicare Secondary Payer (MSP) rules, Medicare entitlement is not a COBRA QE for the employee, nor is it a QE for the spouse (or dependent) who loses the employee’s group health coverage when the employee voluntarily drops the employer’s plan and enrolls in Medicare.

However, Medicare entitlement does not have to cause the loss of coverage for the spouse or dependents when it comes to being eligible for a COBRA extension. There is a special rule, which extends the maximum COBRA coverage period for spouses and children, (but not for employees) to 36 months of COBRA coverage vs. the typical 18 months when the qualifying event (e.g. retirement) occurs after the employee becomes entitled to Medicare but remained on their employer’s group plan.

In those cases, the spouse and dependents are entitled to the longer of (i) 18 months from the date of the qualifying event (retirement); or (ii) 36 months from the date of Medicare entitlement.

For example: Jack works for Up the Hill, Inc. He and his wife Jill are covered by a group health plan which is subject to COBRA. Jack becomes entitled (enrolled) to Medicare on May 1st. Jack and Jill also remain covered under the group health plan offered by Up the Hill, Inc. On January 1st (8 months later), Jack retires and therefore Jack and Jill both experience a qualifying event (termination of employment).

Jill would be eligible for 28 months of COBRA coverage. (36 months minus 8 months)

On the other hand, if Jack waits longer than 18 months to retire after he enrolls in Medicare, Jill will just get the regular 18 months of COBRA.

Either way, Jack is only entitled to 18 months of COBRA upon retirement.

COBRA regulations appear simple on the surface but the rules are rather complex.  Best practice is for employers to work with a competent third party COBRA administrator who can help them comply with the challenging requirements.

Common Medicare entitlement (enrollment) COBRA mistake…are you making it too?

 

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Medicare entitlement (i.e. eligible & enrolled) is only a COBRA qualifying event (QE) if it causes an employee to lose group health coverage (i.e. under 20 lives, or retiree plan). Otherwise, due to Medicare Secondary Payer (MSP) rules, Medicare entitlement is not a COBRA QE for the employee.

Likewise if the employee voluntarily drops group coverage because they enroll on Medicare and as a result, the dependents (e.g. spouse) then lose employer coverage, this also is not a COBRA QE for the dependents. Medicare entitlement didn’t “cause” the loss of eligibility, rather the employee deciding to drop the employer’s group coverage did.

In other words, when an employee drops their employer’s plan because they enrolled in Medicare, the spouse should not be offered COBRA coverage, but it happens all the time.

Although this is something often incorrectly administered, it is a potential MSP issue because it could be viewed as an incentive for the employee to drop the group plan in favor of Medicare (knowing the spouse will have continuation coverage).

Employees who are turning 65 may also need additional education, to allow them to make an informed decision when deciding whether to enroll on Medicare in lieu of their employer’s plan.

Don’t let it bite you!

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If an employer is subject to COBRA (COBRA generally applies to all private-sector group health plans maintained by employers that have at least 20 employees on more than 50 percent of its typical business days in the previous calendar year) they must offer their employees (and enrolled dependents)  an opportunity to elect to continue the same health coverage they had on the date of the triggering event.

A health reimbursement arrangement (HRA) by definition is a “group health plan” and if the employee’s coverage consisted of the employer’s group health plan combined with an HRA plan, then the same combination must be offered under COBRA when they experience a COBRA qualifying event (e.g. termination of employment).

How do you determine the COBRA premium?

There is little guidance on the subject, but the IRS has stated the applicable premium can be calculated either on:

  • the basis of past cost, or
  • an actuarial basis

The applicable premium under an HRA may not be based on a qualified beneficiary’s reimbursement amounts available from the HRA. 

The IRS has not issued specific guidance on how to determine the applicable premium under either method. However, in my experience:

Basis of past cost: When there is history (i.e. not the first year for the HRA) the premium usually is based on past claims experience of participants and in general, it reflects the cost to the employer of administering the HRA.  It’s “blended” so it’s the same for all HRA qualified beneficiaries regardless of their account balance. For example, if the annual funding is $1,200 but employees only use $600 on average, the monthly COBRA premium is $50 (600/12) + the permitted 2% administrative fee.​

An actuarial basis: If it’s the first year the employer is offering the HRA, an actuarial method is used and an employer must make a reasonable determination as to what utilization is likely. What’s reasonable? That is a facts/circumstances determination, (e.g. how high is the deductible, is it a first dollar HRA) with the calculation best being left up to the experts (i.e. HRA Third Party Administrator (TPA), licensed actuary) and even then, there may be different logic on what utilization average is reasonable.  However for most, their TPA may be able to provide some general utilization trends based on similar plan designs as a benchmark to help make an estimate.

Example: Post-deductible HDHP compatible HRA, similar plan designs employees who participate in the HRA spend 30% of available HRA dollars. An annual $3,000 HRA contribution is provided.

  • $3,000 x 30% (.3) = $900
  • $900 ÷12 (months) = $75
  • $75 x 2% (COBRA admin fees) = $76.50

Regardless of what method used, the HRA premiums must be calculated in the same fashion as the existing COBRA rules (calculated each year, prior to the 12-month determination period and different HRA COBRA premiums may not be charged to different beneficiaries.)

There are penalties for failing to offer COBRA to HRA participants….don’t let it bite you!