27899129 March 21, 2012 Stacy H. Barrow [email protected] © 2012 Proskauer. All Rights...

27899129

March 21, 2012

Stacy H. [email protected]

© 2012 Proskauer. All Rights Reserved.

COBRA Fundamentals:Understanding COBRA’s Basic Requirements

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Latest Health Care Reform News

Supreme Court Oral Arguments March 26, 27 & 28

Three Main Questions: Are the 2014 Individual Mandates Constitutional?

If the Individual Mandates are not Constitutional, is the Entire Law Unconstitutional?

Is the Issue Ripe for Review?

Expect a decision this summer


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Recent Developments

12/16/11 Essential Health Benefits Bulletin

01/03/12 IRS Notice on Form W-2 Reporting

02/09/12 Final Rule on Summary of Benefits and Coverage

02/09/12 IRS Notice 2012-17 (FAQ re: auto enroll, pay-or-play)

02/15/12 Final Rule on Preventive Care (contraceptives)

02/17/12 Additional Guidance on Essential Benefits (FAQs)

03/12/12 Interim Final Rules for Health Insurance Exchanges


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COBRA Fundamentals

• COBRA in a Nutshell COBRA requires that certain plan sponsors of group health plans offer

certain people the right to elect and pay for certain continued medical coverage for a certain period of time after certain events occur which would cause them to otherwise lose their coverage. Those who are eligible to elect (qualified beneficiaries) must be provided with a certain type of notice within a certain period of time. They have a certain period within which to elect COBRA coverage. If they don’t, they lose their rights. If they do, they can continue their coverage for up to a certain period of time (if they pay a certain premium) unless certain other events (COBRA cut-off events) happen first. If a plan sponsor fails to provide certain of these rights, the sponsor could be liable for certain penalties and/or damages under the Code and ERISA. Sometimes, the sponsor might also be subject to certain state law versions of COBRA that have certain different rights and obligations.

The only thing “certain” is that nothing of COBRA is certain – exceptions and special rules abound.


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COBRA Fundamentals –Understanding the Legal Framework

• What Law Applies? Applicable law includes:

Federal tax code section 4980B; Treas. Reg. §54.4980B-1, et. seq. ERISA sections 601-608 (private employers); DOL Reg. §2590.606-1, et. seq. Public Health Service Act (essentially for state and local governments) Federal government plan has similar mandate by a separate law

Regulatory Jurisdiction is Split IRS regulates substantive rules DOL regulates notice issues CMS/HHS regulates state & local government plans

State “Mini-COBRA” Laws Many states have “mini-COBRA” laws applicable to insured plans Cover smaller employers as well as possibly large employers with insured plans

after federal COBRA expires


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COBRA Fundamentals –Understanding the Legal Framework

• Plans and Employers Covered COBRA applies to “group health plans”

Medical, dental, vision coverage Includes flexible spending arrangements (FSAs) as well as health care

reimbursement accounts (HRAs), including on-site clinics Other types of benefits/coverage, including collection of individual policies Not coverage for general welfare/certain on-site first-aid facilities; not for life

insurance or disability insurance Employee Assistance Programs (EAPs) – depend on nature of services

provided Must be “maintained” by an employer or employee organization

Need employment-related connection Includes plans covering current and/or former employees as well as

independent contractors


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COBRA Fundamentals –Who is the “Employer” for COBRA Purposes?

• Person for whom services are performed, including controlled group members AND successors (due to consolidation, merger, restructuring, or a mere continuation of the employer)

Treas. Reg. §54.4980B-1, Q&A-2

• Certain employers are not covered by COBRA Church plans Federal governmental plans

Federal government plan has its own COBRA-like right State and local governments covered by Public Health Service Act COBRA

rules

Plans covering non-resident aliens (NRAs) Not covered by ERISA if substantially all are NRAs Code exclusion is for individual NRAs not for plans


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• Small Employer Exception Single Employer Plans:

Group health plan maintained by an employer (including controlled group) that normally employed fewer than 20 employees during the preceding calendar year

Note – Based on number of employees, not plan participants Multiple Employer Welfare Arrangements (MEWAs):

Each employer maintaining the plan is looked at separately from a COBRA perspective


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• Counting Employees for “Small Employer” Test Controlled group rules apply

Foreign affiliates count in determining whether an employer is a small employer plan; not based on covered employees

Employed fewer than 20 employees during preceding year Fewer than 20 on at least 50% of typical business days during the

year New employer of any size not subject to COBRA – no employees last

year


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• Counting Employees for “Small Employer” Test Non-common law employees DO NOT count (exclude self-employed

individuals, directors, independent contractors) But they get COBRA if covered by plan subject to COBRA

Full-time and part-time employees count Part-timers can be determined based on fractions of full time employees

and on a per-day or per-pay period basis


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• Counting Employees for “Small Employer” Test Multiemployer plans – Special rules:

Group health plan under which each of the employers normally employed fewer than 20 employees during the preceding calendar year

If one employer in the plan fails the under 20 employee test, the entire multiemployer plan is subject to COBRA

If a new “large” employer is added to a small employer multiemployer plan, the plan is subject to COBRA immediately upon the addition of the new employer

If a contributing employer’s workforce increases during the year, and that causes the employer to go over 19 employees, the plan is subject to COBRA on the January 1 immediately following the calendar year in which the employer’s workforce increased


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• COBRA’s “Small Employer” Test – Other Special Rules M&A Rule (Rev. Rul. 2003-70)

If stock sale, group health plan maintained by combined entity will cease to be excepted from COBRA as of date of stock transfer

If asset sale and plan is maintained by acquiring company, plan continues to be excepted as small employer plan for at least remainder of year of asset acquisition

Large Employer Becomes Small If a plan that was subject to COBRA becomes a small-employer plan,

the plan remains subject to COBRA for qualifying events that occurred before it was excepted


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COBRA Fundamentals –Identifying Qualified Beneficiaries

• Who is a “Qualified Beneficiary”? Covered employees, spouses, dependent children Special rule for bankruptcies

• Who is covered by a plan but not a Qualified Beneficiary? Newly-acquired dependents Domestic partners

• Significance of status as qualified beneficiary Only qualified beneficiaries have COBRA rights Each qualified beneficiary has a separate COBRA right from each other

qualified beneficiary


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• Who is a qualified beneficiary? Any individual who, immediately before a qualifying event was covered under a

group health plan as a covered employee, spouse or dependent child Includes child born to or placed for adoption with a covered employee during

COBRA coverage Does not include newly acquired dependents

E.g., employee quits, elects COBRA, gets married during the 18-month period and then gets divorced; spouse is not a qualified beneficiary for COBRA purposes

Consider “in anticipation” rule Drop coverage “in anticipation” of divorce; later divorce is still a qualifying

event and divorced spouse may have rights as qualified beneficiary


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EE

Child #1

EE & SP

Child #1

Child #2

Child #2

SP

During Active Status; One Family Unit

COBRA

=

▪ Significance of Status as Qualified Beneficiary▪And EACH Qualified Beneficiary Has a Separate Right


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COBRA Fundamentals –Identifying Qualifying Events

• Defining COBRA Qualifying Events

Qualifying Event = EVENT + LOSS OF COVERAGE

Event without a “loss of coverage” – not a qualifying event E.g., retire without losing coverage is not a qualifying event

“Loss of coverage” without an “Event” – not a qualifying event E.g., Change of insurer; change from union to non-union;

termination of one plan out of several; failure to pay premiums -- not alone qualifying events

Must all occur when plan is subject to COBRA


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• COBRA Qualifying Events

Six qualifying events:

1. Death of covered employee

2. Termination (other than by gross misconduct) or reduction in hours of covered employee’s employment

3. Divorce or legal separation of covered employee

4. Covered employee’s entitlement to Medicare

5. Cessation of dependent child status

6. Certain bankruptcy filings

Only #2 and #6 can affect covered employees


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• Defining COBRA Qualifying Events “Loss of Coverage” Defined

cease to be covered under the same terms and conditions as in effect immediately before the qualifying event

Loss need not occur immediately upon the event Example 1: Lose coverage at end of month following the event; event is

qualifying Example 2: Retirees continue coverage for life with no change in terms of

coverage. If employer terminates retiree coverage, it’s a QE for any QBs who did not benefit from their maximum period of COBRA coverage

Allowed to measure COBRA coverage from loss of coverage date instead of event Typical for plans that cover to end of month of event


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• Defining COBRA Qualifying Events –“Loss of Coverage” Defined

“In Anticipation” Rule – Event is still a qualifying event if coverage loss is in anticipation of event E.g., Terminate plan in advance of plant closing; closing is still a

COBRA qualifying event E.g., Terminate coverage “in anticipation” of a divorce; divorce is

still a qualifying event

Gap in coverage exists between loss of coverage and event COBRA does not fill that gap


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• COBRA Qualifying Events – Special Rule Gross Misconduct Exception

Defining “gross misconduct” No statute or regulation defining it; strictly case law Involves more than negligence or incompetence or unsatisfactory

performance Includes misconduct that is intentional, wanton, willful, deliberate, reckless

or in deliberate indifference to an employer's interest; see Boudreaux v. Rice Palace, Inc., 2007 WL 1670419 (W.D.La., 6/11/2007) for a good discussion of the standard

Consider mitigating circumstances and possible ERISA appeal issues


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• COBRA Qualifying Events – Special RuleBusiness Sales

Termination of employment can include certain types of business transactions Sale of assets of trade or business = termination of employment

(COBRA required) Sale of stock in subsidiary ≠ termination of employment (no

COBRA)

Need to consider acquisition issues carefully to make sure COBRA issues and liabilities are properly allocated among the parties in the transaction documents


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COBRA Fundamentals –What is “COBRA Coverage”?

• “Identical Coverage” COBRA coverage is supposed to be identical to the coverage in effect

immediately before the qualifying event This right means:

Qualified beneficiaries have same open enrollment rights Allowed to change plan/coverage under plan/add or eliminate

family member coverage Newly acquired dependents can be added; special enrollment

rights apply; premiums can be adjusted Deductibles/plan limits carry over to COBRA coverage Changes in cost/coverage generally get passed through to

qualified beneficiaries


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COBRA Fundamentals –What is “COBRA Coverage”?

• Identical coverage applies even if coverage is not of the same value to qualified beneficiary e.g., move out of service area of HMO Special HMO rule applies If other coverage available, QB must have the opportunity to elect the

alternative

• But each qualified beneficiary has a separate right to elect COBRA coverage Qualified beneficiary who is a child may add a new spouse and child to

COBRA coverage even though child of active employees may not


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COBRA Fundamentals –The COBRA Notice and Election Rules

• COBRA’s Timeline for Notices and Elections1. General Notice provides at the time employee and spouse first become covered2. Employer notifies plan administrator of event within 30 days of termination or

reduction of hours of employment or death3. Qualified beneficiaries responsible to notify plan administrator within 60 days (for

divorce, legal separation, cessation of dependent child status)4. Plan administrator has 14 days to notify qualified beneficiaries of COBRA rights after

notice in 2. or 3. above5. Qualified beneficiaries generally have 60 days from notice in 4. above within which to

elect COBRA coverage6. Qualified beneficiaries have 45 days after electing within which to pay initial COBRA

premium7. Qualified beneficiaries have 30 days within which to pay regular monthly COBRA

premium


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COBRA’s Timeline for Notices and Elections

▪ Election is retroactive to qualifying event ▪ Leads to adverse selection risk

▪ Notice periods can be managed to speed up the time line and reduce adverse selection risk

Retroactive Premium

Notice to Plan Administrator Notice to QBs Election Period Payment Period

30/60 days

14 days

60 days

45 days

These periods can be reduced These periods are fixed by statute. through administration.


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• Notices Required by COBRA and DOL Regulations General COBRA notice to covered employees and spouses Notice from employers to plan administrators Notices from QBs/covered employees to plan administrators

Notice of qualifying event Notice of disability determinations Notice of multiple qualifying event

Election notice from plan administrators to QBs Two (relatively) new notices from plan administrator to QBs

Notice of unavailability of COBRA coverage Notice of COBRA coverage termination

Other special notices from time to time (e.g., ARRA subsidy notices) Don’t forget about updating the summary plan description


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• Content of General Notice Six items must be covered, including:

Identity of party with more information on COBRA Description of COBRA (qualifying events, qualified

beneficiaries, plan election procedures, etc.) Explanation of qualified beneficiary responsibilities Explanation that more information is available

DOL has issued model notices for use by plan administrators; but must be modified for specific plan procedures

http://www.dol.gov/ebsa/COBRAmodelnotice.html


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• Timing and Delivery of General Notice Statute:

General notice provided “at the time of commencement of coverage under the plan”

Regulations: Within 90 days of becoming covered, or if later Within 90 days plan is subject to COBRA If QE occurs within 90 days, accelerated general notice required

QE notice can serve as general notice Timing tracks SPD delivery requirement


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• Timing and Delivery of General Notice Delivery of General Notice

First class mail, last known address Hand delivery OK for employees, not necessarily for spouse and children Key is to be able to prove notice was provided – ”Mailbox Rule” applies


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• Content of Qualifying Event Notice Required content standard

“Written in a manner calculated to be understood by the average plan participant”

Required details

Must include fourteen topics to be compliant

Must include a fifteenth topic on ARRA subsidy issues

Plus a possible sixteenth topic on special TAA election period and/or HCTC tax credit

Refer to DOL website for models


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• Timing and Delivery of Qualifying Event Notice General rule – 14 days from receipt of notice of qualifying event Exception #1 – multi-employer plans can apply special rules Exception #2 – if a plan is employer-administered, notice of

termination/reduction of hours of employment must be not later than: 44 days from loss of coverage (if COBRA measured from that date)

OR

44 days from qualifying event date

Employer-administered plans still have 44 days for notice


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• Qualified beneficiaries have 60 days within which to elect COBRA coverage 60 days is a minimum period

Measured from later of loss of coverage due to event or notice of the event

Failure to give notice means open-ended election period

Each qualified beneficiary has a separate election

Employee or spouse generally may elect for family

Waivers allowed; but must have right to revoke waiver during 60-day election period

Coverage after revocation may be limited to be prospective only


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COBRA Fundamentals –Duration of COBRA Coverage

• Duration of COBRA Coverage 18, 29, 36 months depending on the qualifying event

Lifetime coverage for certain bankruptcy qualifying events

Special rules for certain PBGC eligible or TAA eligible individuals

Special multiple qualifying event rules will extend the 18 or 29 month periods

“Reverse” multiple qualifying event rule if Medicare entitlement occurs before termination/reduction of hours of employment

Greater of 18 months from termination/reduction of hours or 36 months from earlier Medicare entitlement


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• Duration of COBRA Coverage Special Disability Rule

SSA disability within first 60 days of COBRA coverage due to a termination or reduction of hours of employment

Timing of disability determination notices

60 days from Social Security Administration determination

OR 60 days from QE/loss of coverage date if SSA determination is before QE/loss of coverage date

AND before end of original 18-month period

BUT not before QB learns of notice requirement

Need to check SPDs for these rules


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Qualifying Event Eligible Qualified Beneficiaries

Duration

Termination/reduction of hours of employment

Employee, spouse, dependent children

Up to 18 months

Termination/reduction of hours with SSA disability


Up to 29 months

Divorce/legal separation, death Spouse, dependent children Up to 36 months

Cessation of dependent child status

Dependent child Up to 36 months

Termination or reduction of hours and employee is entitled to PBGC pension


Until covered employee dies, plus up to 24 months, but not after 12/31/2010

Termination or reduction of hours and employee is entitled to TAA benefits


Until covered employee not eligible for TAA, but not after 12/31/2010


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• Early Termination of COBRA Coverage Premiums not paid in full and on time

Employer (including controlled group) ceases to provide any group health plan

Qualified beneficiary “first becomes, after the date of the COBRA election,” entitled to Medicare or covered by other group health plan coverage

Timing is key

Other coverage does not disqualify if it imposes a preexisting condition exclusion or limitation of the qualified beneficiary

Termination of coverage “for cause”


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COBRA Fundamentals –How Much Does COBRA Cost?

• COBRA Premium Cost Plan may require payment of up to 102% of full cost (employer and employee

for coverage for similarly situated individuals Up to 150% for SSA disabilities during months 19-29 Premium fixed for 12-month determination period

Premiums may be paid on a monthly basis

If premium not paid in full and on time, COBRA coverage is lost

But if shortfall is not significantly less than full amount, must give reasonable period (generally 30 days) to make it up

Not significant is lesser of 10% of premium or $50

ARRA premium subsidy could apply to pay for 65% of applicable COBRA premium


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COBRA Fundamentals –How Much Does COBRA Cost?

• COBRA Premium Cost ARRA premium subsidy could apply to pay for 65% of applicable

COBRA premium

Applies if involuntarily terminated by May 31, 2010 (and after Sept. 1, 2008)

Also applies if hours are reduced and then involuntary termination occurs between March 2, 2010 and May 31, 2010

Required modified notices and special election rights for affected individuals


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COBRA Fundamentals –Penalties for Non-Compliance

• Excise Tax Penalties Self-reported on Form 8928 Basic Excise Tax Structure

$100/day during the “noncompliance period” No more than $100/day/QB; $200/day for same qualifying event Subject to certain minimum/maximum tax rules 30-Day Rule – No tax owed if due to reasonable cause and not willful

neglect and corrected within 30 days of when liable party knew of or, being diligent, would have known of violation

IRS Waiver Rule – IRS may waive all or part of the tax if failure is due to reasonable cause and not willful neglect Waiver to the extent that tax would be excessive relative to the failure

involved


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COBRA Fundamentals –Penalties for Non-Compliance

• ERISA Penalties ERISA notice penalties

Up to $110/day during the failure, determined in a court’s discretion

Courts frequently impose penalties, but not at $110/day ERISA claim for benefits

Claim under ERISA to enforce COBRA rights Claim under ERISA for fiduciary breach

Attorney fees under ERISA Not necessarily limited to prevailing plaintiffs


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Questions?


March 21, 2012Stacy H. Barrow

[email protected]

27899129 March 21, 2012 Stacy H. Barrow [email protected] © 2012 Proskauer. All Rights...

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Transcript of 27899129 March 21, 2012 Stacy H. Barrow [email protected] © 2012 Proskauer. All Rights...