E. Cobra Developments

The Consolidated Omnibus Budget Reconciliation Act of l985 (COBRA) affected the operation of employer-provided health care plans. IRS Code 4980B provides that a group health plan must offer continuation of coverage to those who would otherwise lose it. If an employer fails to offer such coverage, the law imposes penalties ranging from $100 to $200 per day for each day an individual is not covered. All employers are urged to review, understand and follow the technical complexities of this law with personnel supervisors, particularly because COBRA is an administrative compliance night- mare. Part of the problem for employers is that the Department of Labor, the agency responsible for protecting employees whose companies don't offer them their COBRA rights, has never issued guidelines or regulations. The only guidelines available are those proposed by the Internal Revenue Service in l987, and an employer complying with this never-finalized IRS rule is not protected from a plaintiff's claim in court.

It isn't surprising that many companies run afoul of the law and fail to follow properly rules regarding notification requirements, conversion privileges, excluded individuals and time restrictions, because the law does not provide much guidance or instruction. In fact, good faith compliance may not be sufficient to protect the employer.

Based on cases decided in this area, employers have to assume burdens not always considered. The law is now being interpreted very broadly and the courts are ruling regularly that COBRA coverage be provided. Because the cases typically pit a former employee or an employee's dependent with substantial medical expenses against the employer or an insurance company, many courts are willing to interpret and apply COBRA with a view toward extending coverage wherever possible.

Understanding the key elements of COBRA law will help your company avoid harsh penalties that arise when the rules are not followed. The following points highlight important compliance elements of the law.

Definition Of Group Health Plans

A group health plan is any plan maintained by an employer to provide for medical care to employees, former employees, or families of employees, whether that care is provided through insurance, reim- bursement or a health maintenance organization. Typically, corporate wellness programs are excluded from being considered a group health plan, as are employee discount programs where any merchandise offered for discounted sale is not health related.

All group health plans are subject to the continuation provisions of COBRA, with the exception of private employers who normally employ less than 20 workers during the preceding calendar year. However, small employers must count all full-time and part-time employees together with other persons treated as employees under IRS Code definitions (i.e., sole proprietors, partners, agents, officers and directors who are eligible to participate in any of the company's group health plans) under this rule.

Definition Of A Qualified Beneficiary

A qualified beneficiary is any individual covered under a group health plan maintained by the employer. A new qualified beneficiary cannot be added after the day of termination by later birth, marriage or later-adopted children. Also, a qualified beneficiary who fails to elect COBRA continuation coverage stops being "qualified" at the end of the election period.

Definition Of A Covered Employee

A covered employee is any individual who was provided benefits under a group health plan by virtue of either current or previous employment. Retirees and former employees covered by a group health plan may also be included in this definition, as well as agents, independent contractors, and directors of the company, provided they actually participated in the plan.

Definition Of A Qualifying Event

Upon the discharge of the employee as a result of a voluntary or involuntary termination, with the exception of gross misconduct, all terminated employees may choose to continue plan benefits currently in effect at their own cost. A person entitled to make a COBRA continuation election (a qualified beneficiary) must be permitted to make the election for at least 60 days commencing not later than the date on which the coverage terminates under the plan, and ending not earlier than 60 days after the date coverage terminates, or the date the qualified beneficiary receives notification of the qualifying event. However, the beneficiary must not be covered under Medicare or any other group health plan.

Other qualifying events occur upon the death, divorce or legal separation of a covered employee or upon a dependent child's arrival at the age at which he or she is no longer eligible to be covered by the plan. Once the covered employee or qualified beneficiary becomes eligible, that person is entitled to receive the same group health plan coverage that was in existence before the qualifying event.

TIP: A company's hands may not be tied in the event that a group health plan is modified or eliminated; an employer may be permitted to change or eliminate a current plan provided all qualifying beneficiaries and covered employees are allowed to participate similarly under new plans.

Length Of Benefits

For termination of the covered employee, the extended coverage period is 18 months. However, if the terminated individual was considered disabled for Social Security purposes, the COBRA period is extended up to 29 months or the date the qualified beneficiary becomes covered by Medicare, whichever is earlier. Upon the death, divorce or legal separation of the covered employee, the benefit coverage period is 36 months to spouses and dependents.

Responsibility Of Employers

The law requires that employers and/or plan administrators separately notify all employees and covered spouses and dependents of their rights to continued coverage. To avoid problems, this should be done by certified mail, return receipt requested to prove delivery and com- panies should periodically check for address and relocation changes and update employee files.

Employees and dependents whose insurance is protected under COBRA must also be provided with any conversion privileges otherwise available in the plan (if such coverage exists) within a six-month period preceding the end of the continuation period.

COBRA policies need not be complex; they should explain to employees in simple language that they may be entitled to continue their health insurance upon a qualifying event.

Counsel Comment #45: Prudent employers and plan administrators should provide a timely notice of COBRA eligibility upon an employee's termination of employment or the occurrence of any qualifying event to ensure the commence- ment of the continuation period, even if the employer intends to provide coverage at its expense for some portion of the COBRA continuation period. For protection, if you provide company- paid medical benefits to employees terminated for reductions in force and other "neutral" layoffs, obtain a signed waiver or acknowledgment from the employee documenting that the employer-provided health coverage is in satisfaction of the employer's COBRA obligation for that period. Be sure to compute the COBRA entitlement date for continuation of benefits so that the employee may make the election properly until 60 days after the employer-provided coverage expires.

In one case the court upheld a $1 million judgment against a company which erred in informing an employee that he was eligible for COBRA coverage. The man had asked his employer if he would be able to continue medical coverage for himself and his wife, who was pregnant and expecting twins, even if he resigned to start his own business. Although the company said yes, it later attempted to revoke coverage after complications during childbirth created huge medical bills. The court ruled that the company could not revoke his COBRA coverage because he had been provided with erroneous information, even though he was not entitled to coverage at the onset!

TIP: Supervisors and human resources staff must examine all notice and benefits information carefully to understand, clarify and communicate COBRA exclusions and limitations. Always be sure that your company provides correct information when denying COBRA coverage to an individual because of the existence of a secondary health plan or other factors.

An employer may not be required to offer insurance continuance under COBRA if gross misconduct can be shown, but proving this is often a problem. Who determines what constitutes gross misconduct? Gross misconduct is typically defined in each state's unemployment insurance code, which can be used as a guideline. Cases brought under COBRA are currently finding their way to the appeals level, so many COBRA questions still remain unanswered. At this point, employers should proceed with caution in this area.

Counsel Comment #46: If you fire a worker for alleged or gross misconduct, always contest the employee's application for unemployment benefits. Unless such a claim is contested by your company from the moment the application for benefits is filed, you run the risk that a favorable decision made on the employee's behalf will preclude your right to deny COBRA benefits under the gross misconduct exception. As the saying in personnel law goes, "No good deed out of kindness goes unpunished."