Final Cobra Regulations Establish Compliance Rules For Employers

On May 26, 2004, the U.S. Department of Labor (DOL) issued final regulations that clarify and expand group health plans’ obligations to provide notices of COBRA continuation coverage rights to qualified beneficiaries. For the most part, the final regulations adopt the rules spelled out by the proposed regulations issued one year earlier; however, the DOL did make some significant changes from the earlier proposal.

Failure to comply with the new regulations could lead to significant costs, including penalties under ERISA, unanticipated medical claims and even attorney’s fees if the issue is litigated. Moreover, now that final regulations are issued, it can be expected that the DOL will increase audit activity on COBRA notice and election issues. Therefore, employers and plan administrators need to act now to bring group health plans into compliance.

The regulations will become effective for notice obligations in plan years beginning on or after November 26, 2004, (this means January 1, 2005, for calendar year plans). This effective date means the new rules will apply to COBRA notices to be sent to or received from qualified beneficiaries who are currently receiving COBRA coverage. Although early compliance is not required, the DOL indicated that plans may demonstrate good faith compliance with COBRA by complying with either the proposed or final regulations.

COBRA requires group health plans to provide a written notice containing general information about COBRA rights to covered employees and their spouses "at the time of commencement of coverage" under the plan. (The statute itself does not provide any specific time period for providing that notice.) Under the final regulations, this notice generally must be provided within 90 days of when an employee (or spouse) becomes covered by the plan. However, if a qualifying event occurs before the end of that 90-day period, then the plan will not be required to provide an initial notice, as long as a COBRA qualifying event election notice is provided on time and meets the requirements under the regulations.

The final regulations also describe the required content of the initial COBRA notice. In particular, the notice must explain a qualified beneficiary’s responsibility to notify the plan administrator of certain qualifying events, including divorce and a child’s loss of dependent status under the plan, and describe the plan’s procedures for providing COBRA election notices. Unlike the proposed regulations, the final regulations do not require the initial notice to describe a qualified beneficiary’s responsibility to provide notice of a second (multiple) qualifying event.

Plans may satisfy this initial COBRA notice by including the required information in the plan’s summary plan description (SPD). The new 90-day time period for furnishing an initial notice parallels the existing 90-day time period for furnishing a SPD to new participants. However, the delivery requirements for initial COBRA notices differ from the SPD delivery requirements. In general, a SPD must be provided only to covered employees. By contrast, the initial COBRA notice must be provided to covered employees and, separately, to their covered spouses (but not to dependent children).

If a covered employee’s spouse becomes covered after the employee (e.g., a covered employee marries and adds his or her spouse to the plan), a separate initial COBRA notice must be provided to the employee’s spouse within 90 days after the spouse becomes covered.

The final regulations include a model initial COBRAnotice, a copy of which is available at www.dol.gov/ebsa/ modelgeneralnotice.doc . The new model notice is shorter and more understandable than the DOL’s prior model notices. It is also fairly easy to modify for use by a typical group health plan. Although the use of the new model is not mandatory (it is just a sample form), the DOL indicated that it will no longer consider use of the prior model notice (which had been issued in 1986) to be good faith compliance with COBRA’s notice requirements.

Plan administrators should not simply send out the DOL’s model notice without modifications. The notice contains choices of optional language and blanks where plan-specific information needs to be inserted. In addition, the model notice is designed for use by traditional single-employer plans. Thus, it would need to be revised before being used by other types of plans, such as multiemployer plans or plans sponsored by unions for their members. It would also need to be modified for use by health flexible spending arrangements, which are subject to less stringent COBRA requirements.

COBRA requires employers to notify group health plan administrators when certain qualifying events occur, including the covered employee’s death, termination of employment, reduction in hours or Medicare entitlement. The final regulations describe the deadline for providing such notice (in general, within 30 days after the date of the qualifying event or the date of the loss of coverage) and the required content of the employer’s notice.

COBRA requires covered employees and other qualified beneficiaries to notify plan administrators of the following: other qualifying events, including the covered employee’s divorce or legal separation, a dependent child’s loss of eligibility to be covered as a dependent under the plan; a Social Security Administration determination that a qualified beneficiary is disabled (or ceased to be disabled); or a second (multiple) qualifying event.

The DOL regulation clarifies the timing for providing these various notices. A qualifying event notice must be provided within 60 days of the later of the qualifying event or the loss of coverage due to that event. For disability notices, a plan can require that notice of a Social Security Administration determination that an individual was disabled be provided within 60 days of the determination and before the end of the 18-month period. If a disability determination is made before the beginning of COBRA coverage, this 60-day period would begin on the date of the qualifying event (or loss of coverage due to the event).

For multiple qualifying events, the regulations confirm that a plan may require that notice of a second (multiple) qualifying event be provided to plan administrators within 60 days of the event. In addition, the DOL modified its model COBRA notices to conform with the IRS’s opinion that a second (multiple) qualifying event will only be considered a second qualifying event if it would have caused the qualified beneficiary to lose coverage under the plan had the first qualifying event not occurred.

To enforce these time deadlines for qualified beneficiary notices, plans must communicate the applicable rules to participants and qualified beneficiaries (through summary plan descriptions or other plan documentation). In the absence of clear communication of the relevant time periods, plan administrators may not deny qualified beneficiaries’ COBRA rights.

Separately, the DOL regulations allow plan administrators to establish "reasonable procedures" for qualified beneficiaries (and their representatives) to follow in furnishing these individual notices. Plans may require notice to be made in writing or on specified forms and to a specified individual or organizational unit (other than the official plan administrator). Plan procedures must satisfy a list of requirements established in the regulations to be considered reasonable. For example, the procedures must be described in the plan’s SPD, or, presumably, a summary of material modifications (SMM), specify the means by which notice must be given and to whom and allow a reasonable period of time for furnishing the notice.

Employers and plan administrators must pay particular attention to the reasonable procedure requirement. If a plan fails to establish reasonable procedures for the furnishing of notices of qualifying events, a covered employee’s or qualified beneficiary’s written or oral notification of a specific qualifying event to any person who customarily handles employee benefits matters of the employer will be considered valid notice to the plan administrator and binding upon the plan. Failure to respond to this oral notification in a timely matter could subject the plan administrator to significant notice penalties of up to $110 per day for the period of the failure for each qualified beneficiary.

This rule on reasonable procedures is a departure from the DOL’s proposed regulations, under which written or oral notification to any officer of the employer was considered valid notice in the absence of reasonable procedures. Although this change is a major improvement for employers, it is still highly recommended that procedures are established, to avoid any confusion as to whether and when notice was actually given in any situation.

COBRA requires plan administrators who receive notice of a qualifying event to provide a notice of the right to elect continuation coverage to the affected qualified beneficiaries. The DOL describes the 14 specific items that must be included in every qualifying event notice. Not only must the notice explain how and when a qualified beneficiary may elect COBRA coverage, it must also identify the qualified beneficiary (by name or by reference to status (such as spouse or dependent child covered under the plan prior to the qualifying event) and describe the consequences of failing to elect COBRA coverage. Unlike the proposed regulations, the final regulations do not require a description of alternative coverage and conversion rights in the election notice. The final regulations also clarify that a description of the health coverage tax credit created by the Trade Act of 2002which affects a small percentage of plans, is optional.

Plan administrators must generally provide the COBRA election notice to qualified beneficiaries within 14 days after receipt of notice of a qualifying event. If an employer is the plan administrator, the DOL confirmed its position that the employer would have up to 44 days from the qualifying event to provide the COBRA election notice.

The final regulations include a model COBRA election notice and COBRA information notice, a copy of which is available at www.dol.gov/ebsa/modelelectionnotice.doc. Like the new model initial COBRA notice, the model COBRA election notice is designed for use by single-employer plans and its use is not mandatory. The model COBRA election notice will need to be customized based on plan-specific information before being used.

The final regulations establish two new notice requirements for group health plans. The notices, not required by the statute, appeared for the first time in the proposed regulations. Plan administrators must provide a "notice of unavailability of continuation coverage" when they receive notice of a qualifying event (such as divorce or a child’s loss of dependent status) for an individual who is not eligible for COBRA coverage under the plan. The notice must explain why the individual is not entitled to COBRA coverage, and it must be provided within the same notice period that would apply if the individual were entitled to COBRA coverage.

Plan administrators must also notify qualified beneficiaries whose COBRA coverage is terminated earlier than the applicable maximum COBRA coverage period. The "notice of termination of health coverage" must describe the date of the termination, the reason for the termination and any alternative coverage available to the individual under the plan or applicable law. It must be provided as soon as practicable after determining that a qualified beneficiary’s COBRA coverage will terminate early. The DOL noted that COBRA termination notices may be combined with HIPAA certificates of creditable coverage.

The final regulations make substantial changes to the requirements for COBRA administration. Employers and plan administrators should review the final regulations carefully and address changes to their COBRA administrative procedures and documentation to ensure compliance in their notices by the stated deadline. Even employers whose COBRA administration is handled by an outside third party must pay close attention to these changes. Although the COBRA administrator will ensure that the notices comply with the new rules and will set up the two new notices, it will be up to the employer to establish the reasonable procedures for giving notice of a qualifying event described above.

Employers must ensure that these new rules are communicated to plan participants, either through the SPD or a SMM. In particular, current participants and qualified beneficiaries who have already received an initial notice must be made aware of the new procedures before they can be required to follow them. If an employer fails to communicate the new procedures to covered individuals, then qualified beneficiaries cannot be penalized (or lose COBRA coverage rights) for failure to follow the plan’s procedures.

Employers should discuss their current or potential procedures and the impact of the final regulations with their legal counsel. McDermott can provide such advice, as well as tailored notices and training on COBRA procedures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.