Turnover rate should not determine COBRA procedures

Virtually everyday, some employer group informs us that they only experience a few qualifying events per year and therefore “it’s not that big of a deal.”  Be assured, COBRA’s mandate applies equally across the board; regardless if you have hundreds of qualifying events or just a few per year.  A recent court case illustrates this exact scenario.

In the case of Tufano v. Riegel Transportation, Inc. [2006 WL 335693 (E.D.N.Y., Feb 11, 2006)], Robert Tufano was terminated from Riegel Transportation, accumulated large medical claims and sued for COBRA noncompliance.  The court found that Riegel Transportation’s COBRA procedures were virtually nonexistent and awarded $10,233.00 in damages.  The following description is being offered as an example of how NOT to administer COBRA.

DOL Extends Timeframes for Plans Affected by Hurricane Katrina

On September 21, 2005 the Department of Labor and the Internal Revenue Service announced additional relief for Hurricane Katrina victims. The relief applies to participants, beneficiaries and plans located in Louisiana, Mississippi and Alabama that have been or later designated as FEMA disaster areas.

The Agencies concluded that as a result of this disaster, a number of participants and beneficiaries covered by group health plans, disability or other welfare plans, and pension plans may encounter problems in exercising their health coverage portability or continuation coverage rights or in filing their benefit claims.

For participants, beneficiaries, and plans in the disaster areas (the counties and parishes in Louisiana, Mississippi or Alabama that have been or are later designated as disaster areas eligible for Individual Assistance by the Federal Emergency Management Agency because of the devastation caused by Hurricane Katrina), the time frames for the period between August 29, 2005 and January 3, 2006 are to be disregarded when determining the following provisions.

Sending Notification via Certified Mail vs. First-Class Mail

In a recent court case (Powell v. Paterno Imports, Ltd., October 28, 2004) the plaintiff, Charles Powell, sued his former employer, Paterno Imports, Ltd. for COBRA notice violations.  This case is notable in that it illustrates the circumstances of sending a notification via certified mail when the addressee does not agree to take receipt of the intended mail.

On August 11, 2003 Charles Powell was terminated from his employment at Paterno Imports.  Paterno Imports notified its Third Party Administrator (TPA) that Mr. Powell had been terminated and instructed them to send COBRA qualifying event notification and election forms via certified mail to the employee’s last known address.  When notified by the post office (3 separate times) that he had certified mail, Mr. Powell did not pick up the mail because he did not recognize the sender’s name.  Apparently the TPA was indicated as the sender.  It should be noted that the DOL has taken the position that there must be a return address on the envelope when mailed through a TPA.  However, the DOL has yet to specify whether the return address needs to be that of the employer or the TPA.

On October 13, 2003 Mr. Powell received a letter from the TPA indicating that he was no longer eligible to elect COBRA.  It was at this time Mr. Powell elected to sue Paterno Imports, Ltd. for COBRA notice violations.

Ultimately the court ruled in favor of Paterno Imports, Ltd. for the following reasons.

• Paterno Imports, Ltd. demonstrated good-faith standards in the method used to contact the former employee at his last known address.
• Paterno Imports, Ltd. obligation for COBRA Qualifying Event notification was met by sending the required notification via certified mail.

The federal district court in Illinois went on to note that COBRA does not require employers to “ensure that the notice is forwarded in an envelope with a return address which is familiar to the employee.”  The fact that the former employee actually received the notification never entered into the case relative to COBRA compliance procedures.  The court upheld a long-standing rule that proof of delivery method, not proof of receipt, is required for COBRA compliance.

The above court case illustrates the importance of proper processes, procedures and record keeping for COBRA compliance. It also illustrates the potential problems associated with delivery when using certified mail.  One of the problems associated with sending notifications via certified mail is that if the addressee does not agree to take receipt of the mail, the notification is not delivered to the intended recipient.

It should be noted that if the proper processes, procedures and record keeping are in place, COBRA notification requirements are met if the COBRA notice is sent via first-class mail.  In retrospect, if Paterno Imports, Ltd. had requested that the notification be sent by first-class mail, it would have been delivered to Mr. Powell without regard to whether he wanted to receive the mail or not.

It is recommend that notifications be sent via first-class mail and be documented with a Certificate of Mailing Report.  You can produce the Certificate of Mailing Report by selecting that report within COBRA Reports from the Reports Menu in your software.
 

DOL Proposes Rules Changing USERRA

On September 20, 2004 the Department of Labor issued proposed regulations that would change the Uniformed Services Employment and Reemployment Rights Act of 1994 also known as USERRA. The proposed regulations would allow group health plan administrators and fiduciaries to establish “reasonable” procedures for military service members who elect continuation coverage under USERRA.

Background on USERRA

The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) was signed into law on October 13, 1994 and was significantly updated in 1996 and 1998. USERRA was originally drafted as a result of the call-up of military reservists during military operations in the Persian Gulf, Somalia and Haiti in the early 1990’s and is based on statutes and case law that dates back to World War II. USERRA was intended to minimize the disadvantages to an individual occurring when that person needs to be absent from his or her civilian employment to serve in this country's uniformed services. USERRA provides reemployment protection and other benefits for veterans and employees who perform military service.

The law is intended to encourage non-career uniformed service so that America can enjoy the protection of these military branches, staffed by qualified people, while maintaining a balance with the needs of private and public employers who also depend on these same individuals.

USERRA potentially covers every individual in the country who serves in (or has served in) the uniformed services and applies to all employers in the public and private sectors, including the Federal government. The law seeks to ensure that those who serve their country can retain their civilian employment and benefits, and can seek employment free from discrimination because of their service. USERRA is administered by the United States Department of Labor through the Veterans’ Employment and Training Service (VETS).

Under USERRA, if a military member leaves his civilian job for service in the uniformed services, he is entitled to return to the job, with accrued seniority, provided he or she meet the law's eligibility criteria. USERRA applies to voluntary as well as involuntary service in peacetime as well as wartime, and the law applies to virtually all civilian employers, including Federal, State and local governments, and private employers, regardless of size.

Under USERRA, employers are required to offer up to 18 months of continuation coverage to employees (and their dependents) who take military leave. If the military member serves longer than 31 days, they will automatically receive military health benefits for themselves and their dependents through the U.S. Department of Defense health care program called TRICARE (which was formerly known as Civilian Health and Medical Program of the Uniformed Services or CHAMPUS). Although this may satisfy the military members need for coverage, employees and their dependents must also be given the opportunity to elect at least 18 months of continuation coverage under their employer-sponsored health plan.

Following military service, the employee and eligible dependents must be allowed to re-enroll in the employer’s group health plan without a waiting period or exclusion that wound not have otherwise been imposed had coverage not been suspended or terminated due to the military service.

The law is similar to COBRA except for a few differences.

Unlike COBRA, USERRA applies to all employers including employers that have fewer than 20 employees.
The maximum amount of coverage is no more than 18 months and there are no extensions due to disability determinations or multiple qualifying events.
If the leave is less than 31 days the employer can charge upto the active employee share of the insurance premium. If the leave is 31 days or greater the employer can charge up to 102% of the active employee share of the insurance premium.
A major difference is that USSERA does not specify notice or election requirements as well as the timing of premium payments. The law simply states that if an election is made, the service member is responsible for payment of the applicable premium.
Item number 4 above illustrates a major gap in USERRA and the Department of Labor’s proposed regulations published September 20th intended to address electing coverage, premium payments, type of coverage, and duration of coverage issues.
 

IRS Rules Health Credit Tax Coverage (HCTC) Available for Alternate Coverage.

The IRS issued a Private Letter Ruling (200432012) on August 6, 2004 indicating the special health coverage tax credit (HCTC) was available to those retirees who elected to receive alternate health care coverage as part of the bankruptcy proceedings by their former company.

When an employer files for bankruptcy reorganization, the employer may have responsibility to offer COBRA to the retirees.  Although bankruptcy filing is considered a qualifying event, due to the high cost of providing group health coverage to retirees, employers who file for bankruptcy reorganization are more likely to consider the elimination of that coverage.  Additionally, federal bankruptcy code includes restrictions in the elimination or termination of retiree health coverage without the bankruptcy court’s approval.  The purpose behind this code is to protect retirees from losing their group health coverage when an employer has filed for bankruptcy.

From the employer’s perspective, they may convert the retiree health plan obligation into a lifetime COBRA coverage obligation.  In this case the qualified beneficiary would pay up to 102 percent of the applicable premium (which is normally higher than the charge to retirees for retiree coverage).  Given the COBRA liability for retirees, lenders may balk at financing the bankrupt employer to expedite the reorganization.  In addition, subsequent successors to the bankrupt employer’s business may be reluctant to take on the COBRA liability for the retirees.

If the employer is experiencing bankruptcy and the retirees are covered by a pension plan, it is quite possible the defined benefit pension plan is under-funded and has been taken over by the Pension Benefit Guaranty Corporation (PBGC).  When the PBGC takes over an under-funded plan, those benefits may be less than what were available under the terminated pension plan.

The special health coverage tax credit (HCTC) was enacted as part of the Trade Act of 2002 which was signed into law on August 6, 2002.  The HCTC portion of the Trade Act in this case provides for a 65 percent health coverage tax credit for those who have attained age 55 and are receiving a pension benefit paid in whole or in part by the PBGC or received a lump sum benefit from the PBGC in connection with a plan otherwise taken over by the PBGC.  This was designed to subsidize 65% of the cost of COBRA continuation coverage and other qualified health insurance.  As you can imagine, the HCTC is a compelling reason for retirees of bankrupt employers who are PBGC eligible to elect COBRA coverage.  In 2003, 19,410 individuals received about $37 million in payments for themselves and dependents for the HCTC.  As of July 2004, enrollment in the HCTC was about 13,200 with about 60 percent of whom were PBGC beneficiaries.

In the private letter ruling mentioned above, the employer provided group health plan coverage to eligible retired employees, their family members and surviving spouses.  The employer was delinquent in required contributions to its defined benefit pension plan.  The defined benefit pension plan was terminated, the employer filed voluntary petitions for bankruptcy, and the Pension Benefit Guaranty Corporation assumed responsibility for the employer’s defined benefit pension plan.  The bankruptcy court approved the sale of substantially all of the employer’s assets to the buyer, an unrelated third party.  The asset purchase agreement provides that the buyer does not have any obligation to provide continuation coverage benefits under section 4980B of the Internal Revenue Code (the Code) to qualified beneficiaries of the employer.

The nonunion retirees of the employer were represented in the bankruptcy action by the Retiree Committee.  The employer and the Retiree Committee negotiated an agreement relating to retiree health benefits, which was approved by order of the bankruptcy court.  Pursuant to the agreement and order, the retiree health benefits were terminated.  For a period of three months after the termination, the retirees were given the option to continue the same coverage but at their expense (Option 1). A separate health care coverage option was also made available to these retirees (Option 2).  The coverage under Option 2 was not necessarily identical to the coverage in effect before the termination, to the coverage made available to the remaining employees, or to coverage made available to employees of the buyer.

Although the employer was the original sponsor of Option 2 and established a trust to fund the benefits of Option 2, sponsorship of the trust providing Option 2 was transferred after the expiration of Option 1 to an association of retired employees who are beneficiaries under Option 2.  The trust’s sole purpose is to provide the benefits of Option 2 to eligible retirees, their family members or surviving spouses.

The Retiree Committee requested a ruling on whether Option 2 is qualified health insurance for purposes of the health coverage tax credit, whether Option 2 can still be qualified health insurance if the trust providing Option 2 is sponsored by a separate employee association, and whether the fact that a retiree may elect Option 2 outside of the applicable COBRA election period will affect whether it is qualified health insurance.

The IRS ruling in the above case is as follows:

1. Coverage under Option 2 is “qualified health insurance” with respect to those individuals to whom the employer had the obligation to make COBRA continuation coverage available.

2. Coverage under Option 2 will not cease being qualified health insurance merely because sponsorship of the trust providing Option 2 is transferred to an employee association so long as the sole purpose of the trust remains the provision of health benefits to the employer’s retired employees and their family members and surviving spouses.

3. Allowing retirees or surviving spouses to elect Option 2 beyond the end of the minimum period required for allowing qualified beneficiaries to elect COBRA continuation coverage will not affect whether Option 2 is qualified health insurance.

In conclusion, COBRA coverage relative to bankruptcy proceedings combined with the PBGC and the availability of the HCTC can be very complex.  It is recommended a detailed review of the IRS rulings and discussion with your benefits attorney when this situation is encountered. 

CAL COBRA

With the large number of California users, we implemented a tracking system in the COBRA software for CAL-COBRA.  We receive numerous calls asking why the software does not offer employees thirty-six months for a termination or reduction in work hours.  The fact is federal COBRA only offers these individuals eighteen months and then CAL-COBRA offers an additional eighteen months.  Employers are required to notify these COBRA participants in the last two months of federal COBRA that they are entitled to an additional eighteen months of state continuation coverage.

The software will prompt the user to produce a document detailing their rights under CAL-COBRA.  If they decide to continue medical coverage, the insurance provider is responsible for collecting premiums.  Premiums will still be based upon the group rate but the insurer may charge a ten percent administrative charge (50% surcharge for disabled participants).

Upon sending the notification in the sixteen month under federal COBRA, you will want to notify the system of qualified beneficiaries who have elected to continue under CAL-COBRA.  To notify the system:

1. Open the participant’s file by selecting the “Open COBRA Participant File” option found under the FILE Menu;
2. Click on the “CAL-COBRA” Tab (if it is not showing, you have not notified the system under the insurance plan information that the plan was issued in California);
3. Verify the CAL-COBRA start and end dates as well as the number of months on CAL-COBRA;
4. Select the Medical plan (ancillary plans are not eligible for CAL-COBRA continuation) and coverage type; and
5. If the insurance company notifies you of the participant’s termination from the plan, enter the date on this Tab.

A notes section has been added for CAL-COBRA qualified beneficiaries so the user may enter other important information regarding CAL-COBRA participation.  A recent Assembly Bill (AB254) passed which has repealed the CAL-COBRA Senior requirements after December 31, 2004.  We anticipate the CAL-COBRA Election Notice will be edited in February removing the language regarding the “CAL-COBRA Senior” continuation option.

Are Beneficiaries of Same Gender Marriages eligible for COBRA?

Recent court cases and news coverage regarding same gender marriages in Massachusetts, California and Vermont have raised many questions about employee benefits eligibility in these circumstances. Although only a handful of states have engaged in the legal challenges associated with same gender marriage, we may see many other states follow suit in the short term. In this article we will address the impact of same gender marriages for the employer and employee as it relates to federal COBRA law as well as state continuation laws. In addition we will cover the federal tax implications of same gender beneficiaries participating in group health plans.

COBRA provides continuation coverage to “qualified beneficiaries” who lose coverage due to a qualifying event such as termination or a reduction in work hours. The term “qualified beneficiary” includes the employee, employee’s spouse and dependent children. The legal definition of “spouse” becomes important when determining eligible benefits. Prior to the enactment of the Defense of Marriage Act (DOMA), enacted on September 21st, 1996, state laws determined the marital status of individuals. During that time in 1996, the state of Hawaii was close to implementing legislation to allow same-sex marriages. Congress stepped in and enacted DOMA to clarify that “marriage” involves the union of a man and a woman. Since its enactment nearly 8 years ago, DOMA has provided a uniform Federal law definition of the definition of “spouse” as described below.

Section 3 of DOMA, states “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

As a federal law, COBRA is subject to the above definition of “spouse” and therefore same gender spouses and civil union partners do not qualify as “spouses” as it relates to COBRA. In some states an employee’s same gender spouse may be covered by a group health plan. If that same gender spouse experiences a qualifying event and looses coverage, the plan is not required to offer COBRA to that same gender spouse. As you know, COBRA sets the minimum requirements for offering continuation coverage but employers may offer greater benefits.

Employer Voluntarily Offers COBRA
Some employers have voluntarily decided to extend COBRA-like continuation coverage for same gender spouses. The implementation of COBRA-like coverage for an employer requires careful consideration of the impact of certain qualifying events. For example, how would the plan recognize divorce or legal separation as a qualifying event for same gender spouses? Is the employer required to offer the full term coverage (18 months) for a COBRA qualifier? Because the employer is offering COBRA coverage on a volunteer basis, it is not required to offer COBRA-like coverage for all qualifying events. Nor is it required to offer the same coverage timeframes as federal COBRA.

If your organization is considering COBRA-like coverage to same gender spouses, the plan administrator should first contact their insurance carriers to determine if it is an allowable benefit. Next, they will need to re-evaluate their benefit plan documents such as Summary Plan Descriptions and enrollment forms for the group health plans. The plan language should clarify the terms “spouse” and “domestic partner.” The documents should also clarify qualifying events, as well as timeframes, that would enable the same gender spouse to receive continued health plan coverage.

State Continuation Coverage
Many states have continuation coverage laws that provide additional coverage after federal COBRA has expired. In some states continuation coverage is made available to employees in organizations not subject to COBRA (such as companies with fewer than 20 employees). State continuation coverage varies however those states that recognize same gender spouses may require continuation health coverage to the same gender spouse. State continuation coverage is subject to ERISA’s preemption clause. Because most state continuation coverage laws were designed to regulate insurers and HMO’s, the states generally impose continuation coverage requirements on insured plans and HMOs and not employers or self-insured ERISA plans. For example, Massachusetts has two kinds of continuation coverage requirements. The first involves employers with insured plans and HMOs who have 2-20 employees. Those employers are not subjected to COBRA but are required to offer continuation coverage to qualified beneficiaries who lose coverage as a result of a qualifying event. The second type of continuation coverage in Massachusetts allows beneficiaries to continue coverage if their coverage under the group plan would otherwise terminate due to termination of participation in the group plan, the layoff or death of the covered employee, a plant closing or the divorce or legal separation of the covered employee. Because Massachusetts has recognized same gender marriages, these spouses who are covered by a group health plan have continuation coverage rights that they do not have with COBRA.

Tax Treatment for Same Gender Spouses on a Group Health Plan
An employer provided group health plan is a non-taxable benefit to the employee, their spouses, children and other dependents. For example, if an employer pays $300 per month for an employee, employees spouse and children for group health coverage, the employee is not liable for tax on the value of the benefit. When coverage under a group health plan is provided to a same gender spouse, the non-taxable benefit may not apply. Favorable tax treatment is not available to the same gender spouse due to the federal Defense of Marriage Act (DOMA) as described above. Because the tax benefit does not apply in this case, the fair market value of the health plan benefit to an employee’s same gender spouse must be considered as income to the employee and subject to applicable federal income, and employment taxes. State income tax liability is subject to state specific tax code. It should be noted that most states that recognize same gender marriages are working to eliminate the state tax liability in this situation.

There is one circumstance when a same gender spouse would qualify as an employee’s dependent and avoid tax on the benefits of an employer provided group health plan. Section 152 of the Internal Revenue Code states that a same gender spouse may qualify as an employee’s dependent if the following requirements are met:

1.  The same gender spouse or civil union partner receives more than 50 percent of his or her financial support in a calendar year from the employee;
2. The same gender spouse or civil union partner has the employee’s home as his or her principal place of residence and is a member of the employee’s household; and
3. The relationship between the employee and the same gender spouse or civil union partner does not violate local law.

In summary, we have illustrated the impact of same gender spouses as it relates to COBRA continuation coverage. Although DOMA serves as a lynchpin for determining the federal definition of spouse today, recent court cases have challenged this 1996 law. State continuation coverage and tax treatment for group health care coverage for same gender spouses is continually evolving and can be somewhat complex. We would recommend that you consult your accountant and employee benefits attorney when considering amending your plans to include same gender spouses.

Two Technical Corrections released by the Department of Labor

On June 23, 2004, the Department of Labor (DOL) issued technical corrections to the May26, 2004 Final COBRA Regulations. The first correction was in the Federal Register under Section 2590.606-1(d), which permits the Plan Administrator to send a single notice for the employee and covered spouse provided they reside at the same address and coverage begins on the same date. The Federal Register incorrectly mentions “covered employer” and should be replaced with “covered employee.”

The second technical correction is located in the Final Regulation’s election notice (or what we call the “qualifying event letter”). The sample election notice states COBRA continuation coverage may be terminated if (among other things), “a covered employee becomes entitled to Medicare (under part A, Part B, or Both).” The technical corrections changed the term “covered employee” to “qualified beneficiary.”

The change to the election notice (qualifying event letter) will be adjusted accordingly with the release of the updated version of the software. We anticipate releasing the update by October 1, 2004. Keep in mind, the notices and administration procedures you are currently using are still valid. The Final Regulations offer employers six months to prepare for the changes, therefore setting an effective date of November 26, 2004.

COBRA and Medical Flexible Spending Accounts (FSAs)

A medical FSA allows employees to reduce their salary to pay for certain expenses (not paid for by a group insurance plan such as deductibles, coinsurance and over-the-counter drugs) encountered during a “plan year.” Since the employee is reducing his/her salary and lowering their taxable base, they pay less in federal, FICA and (most) state income taxes. In addition, the employer reduces payroll taxes by a minimum of $.0765 for every dollar an employee reduces their salary; a win-win situation for both employee and employer.

Under Section 105 of the Internal Revenue Code (IRC), employees have a “use it or lose it clause.” This means employees must provide enough valid receipts for unreimbursed expenses for the plan year or they forfeit the remaining account funds (because they cannot roll over to the next plan year). Employers also have a risk with a medical FSA in that they are responsible for an employee’s total annual reduction on the first day of the plan year. For example, if an employee elects to reduce his/her salary by $2000.00 and submits a valid receipt for $2000.00 in the first week of the plan year, the employer is responsible for paying the full $2000.00 (regardless of the amount in the employee’s account).

As you can see, there is risk associated with a medical FSA for both the employee and employer. Because of this risk, medical FSAs are subject to COBRA. The rationale behind offering COBRA on an FSA is best illustrated with an employee who elects to reduce his salary by $2000.00 for lasik eye surgery he has scheduled for December. His reductions grow until in November his employment is terminated. Because of the “use it or lose it” rule, he would forfeit the FSA contributions. But with COBRA, he can make after-tax payments and can continue under the plan until he has the surgery and submits the claim.

FSAs have different rules than the standard COBRA-subjected plans because of the unique payment requirements. There are two rules which lessen the risk employers are faced with when offer continuation coverage to FSA members:

1. COBRA continuation coverage should not be offered to a qualified beneficiary who has a negative balance in his/her account (i.e. was reimbursed more than what they have had in reductions at the time of the termination).

2.  COBRA need only be offered to the end of the FSA plan year (and not the full 18, 29 or 36 months). COBRA participants should not be offered the ability to elect a new annual reduction amount and continue in a new plan year.

If you offer a medical FSA (Dependent Care FSAs do not require COBRA be offered), you will need to notify your system to offer continuation coverage. Under the Group Info Menu, select the Company Information option. On the form, select the “Other Programs” tab. Click on the “Our firm offers a Cafeteria Plan with Medical Flexible Spending Accounts” checkbox and enter the last day of the medical FSA plan year.

Once setup, you will notice a new “Cafeteria Plan” tab when you go to enter a new COBRA qualifier. If the qualifier was enrolled in the medical FSA, you should check their account balance. If funds are available at the time of the qualifying event, they should be offered the right to continue in the medical FSA. In the software, you would select the option and enter their MONTHLY contribution. (You may have to calculate that value if normal contributions are taken out other than monthly.) Since the COBRA program does not collect the two percent administration fee on FSA premiums, you may add two percent to their contribution. Once completed, you will notice the qualifying event letter will offer continuation coverage the same as any other plan.

The software will charge the qualified beneficiary for the medical FSA until the end of the plan year. Although not part of the software package, you may want to produce a notification stating the end of COBRA under the FSA and detail the amount of time the member has to submit eligible claims for reimbursement.

Group Health Coverage During COBRA Election Period

Many employers are unsure of the action to take when an employee or covered dependent experiences a qualifying event. Do they cancel or continue coverage during the sixty day election period? What happens if claims are experienced during this time frame? This section of the newsletter has been illustrated to clarify the events that can happen during the sixty day COBRA election period relative to group plan coverage. It is important to know that COBRA coverage normally commences “from the date that coverage would otherwise have been lost” based on a timely election and the required premiums paid. This requirement creates a conundrum for the employer as to when they should cancel/reinstate coverage. Employers basically have three options during the COBRA election period; continue coverage, cancel coverage or have qualified beneficiaries sign COBRA waiver forms.

Employers may continue coverage - The employer may elect to continue coverage during the election period and then retroactively cancel coverage if no COBRA election is made. Employers should contact their carriers for approval prior to implementing this strategy because claims may be paid for services during this period that would eventually need to be denied if COBRA is not elected. Many carriers would rather not accept this additional risk because it becomes difficult to collect funds for a paid claim from qualified beneficiaries.

Employers may cancel coverage - With most COBRA qualifying events, the employer cancels coverage at the time of the qualifying event and retroactively reinstates coverage if the qualified beneficiary elects COBRA continuation coverage. The advantage to canceling coverage at the time of the qualifying event is that claims occurring during the election period are denied, reprocessed and paid upon election of COBRA coverage. In addition, based on the low percentage of qualified beneficiaries actually electing COBRA, the cancellation of coverage prevents any subsequent claims from being processed. Also, in this scenario it is important to make sure that your carrier allows retroactive reinstatement and accepts delayed payment of the premium(s) for COBRA coverage.

Employers may have qualified beneficiaries sign a COBRA waive form - A qualified beneficiary may waive their right to COBRA coverage upon experiencing a qualifying event and then revoke that waiver at any time during the sixty day election period. In this case the waiver would constitute the elimination of coverage provided “from the date that coverage would otherwise have been lost” and would be provided beginning on the date the waiver is revoked. Therefore, coverage is not provided retroactively for the period between the date coverage would otherwise have been lost and the date the waiver is revoked. Waivers and revocations of waivers are considered to be made on the date they are communicated to the employer or plan administrator and are considered to be an election of COBRA continuation coverage. As you can see, waivers can cause “gaps” in coverage that eventually will lead to ineligible claims being paid or coverage being denied for benefits the qualified beneficiary thought they would be eligible for. Lastly, they increase the administrative process without providing the employer/plan administrator with a permanent waiver of coverage.

As your COBRA service/software provider, we recommend you cancel coverage at the first possible time depending on your termination regulations with the insurers (i.e. on the date of the qualifying event or the end of the month). Administration flows smoother when you need only reinstate the qualified beneficiaries who elect COBRA. Your insurers will probably appreciate this procedure so they are not paying claims that later are denied and need to be collected

Health Care Provider Inquiries During Election Period - Plan Administrators are periodically contacted by health care providers to confirm if a plan participant is eligible for coverage or if the plan provides coverage for a specific service or procedure. If a health care provider makes an inquiry about the qualified beneficiary, it is important for the administrator to provide accurate information relative to the qualified beneficiary’s coverage status during the election period. In order to maintain consistency and continuity, Plan Administrators should designate one person responsible for the communication of COBRA election and payment to health care providers.

If the qualified beneficiary has yet to elect COBRA continuation coverage, but remains covered under the plan during the election period as described above, the administrator must inform the health care provider that the qualified beneficiary is covered but could be retroactively terminated back to the date coverage would normally be lost. On the other hand, if the qualified beneficiary is not covered during the election period as described above, the administrator must indicate to the health care provider that the qualified beneficiary is not covered but will have retroactive coverage if COBRA continuation coverage is elected.

Health Care Provider Inquires During Payment Periods - An administrator must make the same disclosures as described above during the 45-day period for payment of initial premium and during any 30-day period for subsequent premiums. For example if a health care provider requests information about the coverage of a qualified beneficiary who has not made a timely payment but who is in the specified grace period, the administrator must inform the health care provider that the qualified beneficiary is covered but the coverage will be retroactively terminated if payment is not made by the last day of the grace period. Conversely, if a plan cancels coverage when a payment is not made as of the due date but then retroactively reinstates coverage if payment is made within the grace period, the Administrator must inform the health care provider that the qualified beneficiary currently does not have coverage but will have coverage retroactively if payment is made by the last day of the grace period.

HSAs are Not Subject to COBRA

Congress recently passed the Medicare Prescription, Improvement, and Modernization Act of 2003 which became effective on January 1, 2004. The Acts major objective was to offer a prescription drug plan to seniors under Medicare; a major limitation of Medicare throughout the years. In addition, the Act created the ability for individuals to purchase a high deductible insurance plan and create a portable health savings account (HSA). The accounts are designed to allow individuals and employers to fund a pre-tax account throughout the year to pay for unreimbursed medical expenses (i.e. deductibles, coinsurance and Section 213(d) expenses not covered under the insurance plan).

HSAs are similar to flexible spending accounts (FSAs) under a Cafeteria Plan but with a few major differences. A medical FSA incorporates the “use-it-or-lose-it” philosophy whereby unused funds are forfeited by the employee. With the HSA, unused funds roll over and are available for future year’s expenses. Another major difference is HSAs may only be implemented with what the law defines as “High Deductible Health Plans” or (HDHP). A HDHP is a medical insurance plan with an annual deductible of at least $1,000.00 for Single coverage and $2,000.00 for family coverage, adjusted for the cost of living. All employees under age 65 are eligible for maintaining a HSA with the exception of individuals who are covered under other coverage that is not a HDHP and offers duplicate benefits. Lastly, unlike FSAs, the employer is not responsible for offering COBRA continuation coverage with HSAs because of its built-in portability.

HSAs may be used to pay COBRA continuation coverage premiums upon termination which softens the large premiums usually associated with COBRA. In addition to COBRA premiums, HSAs may be used to pay premiums for a long-term care plan, individual coverage while receiving unemployment compensation and any health insurance other than Medicare supplemental plans if the person is age 65 or older and meets the Social Security Act’s disability requirements.

The Internal Revenue Service released IRS Notice 2004-2 regarding Health Savings Accounts. This noticed can be reviewed at http://www.irs.gov/pub/irs-drop/n-04-2.pdf or you may want to read the article released by the Treasury Department at http://www.ustreas.gov/press/releases/js1061.htm.