COBRA HEALTH CONTINUATION BENEFITS UNDER THE NEW AND OLD REGULATIONS

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1 COBRA HEALTH CONTINUATION BENEFITS UNDER THE NEW AND OLD REGULATIONS By Roberta Casper Watson Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis Tampa and St. Petersburg, Florida Jo Anne Rosenfeld Trenam, Kemker, Scharf, Barkin Frye & O'Neill & Mullis Tampa and St. Petersburg, Florida Overview On April 7, 1986, COBRA (P.L ) was passed into law. Subsequently, substantive and technical amendments to COBRA were made in the Omnibus Budget Reconciliation Act of 1986 ("OBRA 1986"), the "Tax Reform Act of 1986" ("TRA 1986"), the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), and the Revenue Reconciliation Act of 1989 ("RRA 1989"), the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), the Small Business Job Protection Act of 1996 ( SBJPA ), and the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ). In addition, the Omnibus Budget Reconciliation Act of 1993 ( OBRA 1993") made changes to Section 5000 of the Code which affected COBRA. COBRA greatly increases the obligations and administrative burdens of employers providing group health benefits and imposes severe penalties for those failing to comply with those obligations. COBRA does not create new classes of covered employees, nor does it require increased benefits, but it does require continuing health care coverage at group rates for employees and their dependents who would otherwise lose health benefits upon the occurrence of certain specified events. Statutory provisions added by COBRA appear in the Internal Revenue Code of 1986, as amended ("IRC" or the Code ), the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Public Health Service Act ("PHSA"). On June 15, 1987, the Secretary of the Treasury issued proposed regulations regarding the initial COBRA provisions. These regulations assumed that certain technical corrections to TRA 1986 would be adopted, and those changes were generally adopted as part of TAMRA. Statutory changes made in 1996 were addressed in additional proposed Treasury regulations issued on January 7, In many respects, however, the 1987 regulations had not been modified to reflect the various changes that have been made to the statutory provisions. At last, on February 3, 1999, the Treasury issued a massive package of final regulations to be effective with respect to a plan for the plan year beginning in 2000, and to govern qualifying events occurring in that plan year or thereafter, and at the same time

2 issued additional proposed regulations. Those proposed regulations, with minor clarifications, were issued in finalize form on January 10, 2001, and at the same time minor clarifications were made to the 1999 final regulations. The 2001 final regulations generally apply to qualifying events occurring on or after January 1, 2002, although some of the provisions have slightly different effective dates. Until final regulations have been issued regarding an issue, a good faith interpretation is mandated by the regulations. During the period before a published final regulation takes effect, compliance with either the final regulation or the new or old proposed regulations is generally acceptable, except to the extent that any of them have been overridden by subsequent statutory changes or U.S. Supreme Court decisions. Note that none of the above regulations addresses the computation of COBRA premiums, so that subject will continue to be subject to good faith compliance. In the years since COBRA was enacted, many developments in COBRA have also occurred through court decisions, including the addition of concepts not addressed at all in the statute and regulations. The Treasury noted in the 1999 regulations that the courts have tended to disregard its good faith interpretation concept, and have simply applied the statute as they believed it should be interpreted, regardless of the plan administrator s good faith. I. EMPLOYERS AND EMPLOYEES COVERED BY COBRA--Field result goes here EMPLOYERS AND EMPLOYEES COVERED BY COBRA-- A. What is an Employer? Field result goes here What is an Employer? The final regulations, in Treas. Reg B-2 Q&A-2, define the employer as: 1. A person for whom services are performed; 2. Any other member of a controlled group or an affiliated service group with such person, pursuant to Sections 414(b), (c), (m), or (o) of the Code; 3. Any successor to any of the above. Treas. Reg B-2 Q&A-2(b) generally defines a successor employer as an employer that results from a consolidation, merger, or similar restructuring of the employer or if it is a mere continuation of the employer.

3 B. COBRA Applies to All Plan Sponsors EXCEPT Field result goes here COBRA Applies to All Plan Sponsors EXCEPT 1. Small Employer Exception. Field result goes here Small Employer Exception. Employers who normally employed fewer than 20 employees during a typical business day during the preceding calendar (not plan) year. IRC 4980B(d)(1); ERISA 601(b); and PHSA 300bb-1(b)(1). In the private sector, all members of a controlled group or an affiliated service group are treated as a single employer. IRC 414(b), (c), (m), (o) and (t); and ERISA 607(4). Also, leased employees providing services to an employer will be treated as employees of that employer. IRC 414(n); and ERISA 607(4). a. 20-Employee Threshold.Field result goes here 20-Employee Threshold. (1) Days Counted. (a) Under the final regulations, an employer is considered to have normally employed fewer than 20 employees during a particular calendar year if, and only if, it had fewer than 20 employees on at least 50 percent of its typical business days during that year. Treas. Reg B-2 Q&A 5(b). (b) The count can be determined on each typical business day or each pay period. In the latter case, the count determined for the pay period is attributable to each business day in the pay period. Whichever method is used must be used consistently for an entire calendar year. Prop. Treas. Reg B-2 Q&A 5(e). (c) Under the 1987 proposed regulations, an employer was considered as having normally employed fewer than 20 employees during a particular calendar year if it had fewer than 20 employees on at least 50% of its working days during that year. Prop. Treas. Reg Q&A-9(b). See Martinez v. Dodge Printing Centers, Inc., 13 EBC 1348 (D.C. Colo. 1991).

4 (2) Employees Counted.Field result goes here Employees Counted. (a) Under the final regulations, all common law employees are counted, regardless of whether they are covered by the plan (specifically including non-resident aliens who are common law employees). However, individuals with other business relationships, such as directors of a corporation, law firm partners, and independent contractors, are not counted toward the small-plan exemption, even though those individuals are fully entitled to COBRA rights if the plan is subject to COBRA. Treas. Reg B-2 Q&A 5(c). (b) Each full time employee is counted as one employee for purpose of this test. Each part time employee is counted as a fraction of an employee, with the denominator being the lowest number of hours (not more than 40 hours per week) that a person could work and still be considered a full time employee, and the numerator being the actual number of hours worked by the employee. Treas. Reg B-2 Q&A 5(d) and (e). (c) Under the 1987 proposed regulations: i) In addition to full-time employees, part-time employees and all employees within the meaning of IRC 401(c)(1) were treated as employees for purposes of COBRA. Thus, partners in a law firm were treated as employees for purposes of COBRA. Prop. Treas. Reg Q&A-9(c). However, it was never clear whether a temporary employee who is filling in for another employee on vacation or sick leave is also counted as a separate employee. ii) Non-Common Law Employees. Agents and independent contractors (and their employees, agents and independent contractors), and corporate directors, were all counted as employees, but only if they were covered by the plan. Prop. Treas. Reg Q&A-9(c). (3) Plans Covering More Than One Employer (Other Than Multi-Employer Plans).

5 (a) Under the statutory provisions, it would appear that a multiple-employer group covered by one plan is always treated as a single plan (which would make the entire plan subject to COBRA, even if certain employers employed fewer than 20 persons), or whether it is treated as a collection of plans (which would make COBRA applicable only to the plans of employers employing 20 or more employees). (b) Prop. Treas. Reg Q&A-10 provided that a MEWA was to be treated as a collection of single-employer plans for this purpose, so that employees of a sponsoring employer were not entitled to COBRA coverage unless that employer had at least 20 employees. A multi-employer plan, on the other hand, is subject to COBRA if any of its contributing employers has at least 20 employees. (c) See Johnson v. Reserve Life Insurance Co., 765 F. Supp (C.D. Cal., 1991), which upheld the IRS regulation, and which clarified that only collectively bargained plans are considered multi-employer plans for that purpose with all other multiple-employer plans being considered MEWAs. See also Krogh v. Chamberlain, 708 F. Supp. 1235, 10 EBC 2172 (D. Utah 1989). (4) Multi-Employer Plans.Field result goes here Multi-Employer Plans. (a) Under the new final regulations, a multi-employer plan is subject to COBRA if ANY contributing employer is subject to COBRA under the above rules on account of having 20 or more employees. A provision in the 1987 proposed regulations gave an exempt multi-employer plan until February 1 st of a calendar year to remove any employer that had crossed the 20-employee threshold during the prior calendar year, and if it did so that plan continued to be exempt from COBRA with no interruption. However, this grace period for removal of an employer was deemed unworkable, and under the new proposed regulations the plan entire plan will be subject to COBRA if ANY employer has crossed the 20-employee threshold during the prior calendar year unless that employer is excluded from the plan by January 1 st. Treas. Reg B-2 Q&A 5(f).

6 (b) A multi-employer plan is defined in the new final regulations as a plan maintained pursuant to one or more collective bargaining agreements, to which more than one employer is required to contribute by virtue of such collective bargaining agreement(s), and that satisfies such other requirements as the Secretary of Labor may prescribe by regulation. Treas. Reg B-2 Q&A 3. (5) Field result goes here Cases. (a) In Hubbard v. The Shores Group, Inc., 855 S.W.2d, 924 (Ark. 1993), the court affirmed a dismissal of a breach of contract complaint for failure to state a claim upon which relief can be granted. The plaintiff tried to get the court to recharacterize it as a claim for COBRA violations, but the court refused to do so. The court noted failure to allege, among other things, that the defendant met the 20-employee threshold. (b) In Silver v. I. Goldberg & Partners, Inc., F. Supp. (S.D.N.Y. 1994), 1994 U.S. Dist. LEXIS 10228, the defendant moved for summary judgment dismissing the plaintiff's COBRA claim due to the small employer exemption. The defendant referred to an affidavit in which the plaintiff mentioned the employer as having 11 employees, but was not clear as to the time of that count. The court interpreted the statement as being most likely in reference to a date in 1991, which was also the calendar year of the qualifying event. The court noted that the relevant measuring date for a 1991 qualifying event was 1990, and that no evidence whatsoever had been introduced as to the number of the employer's employees in Therefore, the court refused to grant summary judgment for the defendant. b. Impact of Dropping Below 20-Employee Threshold. Field result goes here Impact of Dropping Below 20-Employee Threshold. OBRA 90 made clear that if an employer ceases to become subject to COBRA because it no longer employs at least 20 employees, it must continue to provide COBRA benefits to qualified beneficiaries whose qualifying events occurred during a year in which the employer was subject to COBRA. IRC 4980B(d)(1); ERISA 601(b); and PHSA 300bb-1(b)(1). The final regulations elaborate and provide examples for this provision. Treas. Reg B-2 Q&A 5(g). 2. Church Plan Exemption. Field result goes here Church Plan Exemption. Churches or associations of churches, within the meaning of IRC 414(e) (but not other charities) are exempt.