GT Alert

New COBRA Regulations Effective Before End of 2004

November 2004
By Tracey F. George, Greenberg Traurig, Phoenix Office

  View or download the PDF version of this Alert.

The Department of Labor, Employee Benefits Security Administration, published final regulations on May 26, 2004 that herald sweeping changes to COBRA notice requirements. These regulations apply to plan years beginning after November 26, 2004; for calendar year plans, this will require action before January 1, 2005. This Alert highlights the most important provisions of the new regulations, and emphasizes the steps employers and plan administrators should take to ensure compliance.

COBRA currently requires employers and plans to notify qualified beneficiaries of their continuation coverage rights on at least two occasions: (1) at the time their coverage under the plan commences, and (2) on the occurrence of a qualifying event. The new regulations provide guidance regarding the timing and content of these COBRA notices, establish standards for the administration of the notice process, and set forth two additional notice requirements.

COBRA compliance can be difficult, and inadvertent errors are easy to make. Now, with the new regulations scheduled to take effect, heightened vigilance is a must. An apathetic approach is ill-advised, as it is not uncommon for courts to play a punitive role in righting even the unintended wrongs of a plan administrator. Failing to strictly comply with these notice requirements can result in costly statutory penalties and damages awards in the form of all out-of-pocket medical expenses (less premiums and deductibles) incurred by the improperly notified employee.

The new regulations do not radically alter the notice requirements that have been in place since the inception of COBRA; however, they do clarify the time-frame and content required of these notices. In addition, they impose two additional notice requirements. With a little diligence, compliance will not be overly burdensome. In addition, the regulations provide model notice forms that, if adapted and used by employers, will afford a “safe harbor” for compliance.

Immediate Action Required For Compliance

The new regulations will require covered employers and plans to:

• Revise the initial notice of COBRA continuation coverage rights;
• Revise the election notice provided to qualified beneficiaries after the plan is informed of a qualifying event;
• Revise the election form that qualified beneficiaries must complete to elect COBRA coverage;
• Create a new notice to be used by the plan administrator for notifying an individual who has requested continuation coverage that (s)he is not eligible for COBRA coverage (e.g., no qualifying event has occurred);
• Create a new notice to be used by the plan administrator for notifying a qualified beneficiary that COBRA coverage will terminate before the end of the eligibility period (e.g., the qualified beneficiary failed to pay the required premiums);
• Revise existing Summary Plan Descriptions for the health care plan to include new notice procedures.

Notice Required At Commencement Of Coverage

COBRA initially requires a group health plan to “provide, at the commencement of coverage under the plan, written notice to each covered employee and spouse of the employee (if any) of the rights provided under [COBRA].” Although the new regulations do not alter the content requirements for the initial COBRA notice, the new regulations provide a Model General Notice of COBRA Continuation Coverage Rights. The model form is available on the Department of Labor’s website (at www.dol.gov/ebsa/modelgeneralnotice.doc). Use of this form is not required but, if adopted, will serve as a safe harbor for compliance.

Notably, the employer - not the COBRA administrator - is liable for penalties resulting from use of a non-compliant initial notice. Employers should ask plan administrators to hold them harmless for penalties resulting from non-compliance with the initial notice requirement. At a minimum, employers are well-advised to obtain written assurance from administrators that the notices provided are in compliance with the new regulations.

What’s New: Pursuant to the new regulations, this initial notice of coverage must be provided to both the employee and spouse within 90 days of commencement of coverage. It is important to note that, where an employee elects single coverage and later adds a spouse to the coverage, the plan must provide the spouse with a new initial COBRA notice within 90 days after the spouse becomes covered under the plan. Further, if the employee, spouse or dependant child experiences a qualifying event during the 90-day period, the initial COBRA notice must be provided in an abbreviated time period to adequately notify the employee, spouse and child of the right to elect coverage on a timely basis.

Compliance: The new regulations do not specify how this initial notice must be delivered. Generally, any method that actually delivers the notice to the covered employee and spouse is sufficient. Hand delivery to the employee with instruction to show it to the spouse is not sufficient — and the new regulations confirm this. The most efficient and cost-effective deliver method is by first-class mail, addressed to both the covered employee and spouse. Notably, although the new regulations allow for a single notice to a covered employee and spouse who reside at the same address, separate notices are required for couples who live apart.

What’s New: The new regulations provide that a Summary Plan Description for the health plan, which contains the required information, will satisfy this notice requirement if it is distributed within 90 days of commencement of coverage.

Compliance: When the SPD is relied upon to meet notice requirements, special care should be taken to see that a copy is delivered both to the covered employee and spouse. In any event, notification by mailing an SPD can be expensive, and it likely will be more practical to mail an initial notice to “Mr. and Mrs. Employee and family.”

Qualified Beneficiaries’ Notice To Plan Administrators

Covered employees and qualified beneficiaries are required to notify plan administrators of qualifying events, including but not limited to: legal separation/divorce; loss of dependent child status; determination of disability by the Social Security Administration. Generally, the notice to the plan must be provided within 60 days of the occurrence of the event.

What’s New: Plans are required to establish “reasonable procedures” for furnishing these notices.

Compliance: A plan’s notice procedures are deemed “reasonable” under the new regulations if they:

• are described in the SPD;
• specify the individual or entity designate to receive notice;
• indicate the means by which notice must be given;
• set forth what information is needed regarding the purported qualifying event in order for the plan to provide continuation coverage;
• are in compliance with the timing, content and source of notice requirements in the new rules.

It is extremely important to establish these “reasonable procedures.” Otherwise an employee or qualified beneficiary may be able to effect notice (and thereby obligate the plan to provide coverage) simply by giving informal, oral notice to someone who is not even responsible for administering COBRA.

Qualifying Event Notice Requirements For Employers And Plan Administrators

Time Requirements

Employers and plan administrators have important notice requirements, and the time-frames for these notices are clarified in the new regulations. Specifically, employers must notify plan administrators of qualifying events, and plan administrators must notify qualified beneficiaries of their rights to elect coverage, within the following time-frames:

• within 30 days, employers must notify plan administrators of a covered employee’s death, termination, reduction in hours, or Medicare eligibility;
• within 14 days of receiving notice, plan administrators must notify qualified beneficiaries of their right to elect continuation coverage under the plan;
• if the qualifying event is one that requires the qualified beneficiary to notify the plan administrator (e.g., legal separation/divorce), the 14-day notice period runs from the date the plan receives notice from the qualified beneficiary.

What’s New: The regulations clarify that where the employer is also the plan administrator and the qualifying event is the employee’s death, termination, reduction in hours, or Medicare eligibility, the employer must notify the qualified beneficiary of the right to elect continuation coverage within 44 days of the qualifying event. Before the new regulations, it was not clear whether an employer who is also the plan administrator was required to provide this notice within 14 or 44 days. In any event, it goes without saying that the sooner this Qualifying Event Notice is provided, the sooner the election period will expire. For that reason alone, notice should be provided as soon as possible after a qualifying event.

Content Requirements

The new regulations will require modification of the election notices sent to covered employees and qualified beneficiaries after the plan administrator is notified of a qualifying event. In addition, the new regulations specify required content for the election form used by covered employees and qualified beneficiaries to elect COBRA coverage.

What’s New: The new regulations specify 14 categories of information that must be included in the Qualifying Event notice:

• The identity of the plan and the party responsible for COBRA administration;
• Identification of the qualifying event;
• The identity of each qualified beneficiary who may elect COBRA coverage and the date plan coverage is terminated if not elected;
• A statement that each qualified beneficiary has an independent right to elect COBRA coverage, that the employee’s spouse may elect coverage for any other qualified beneficiary, and that a parent or legal guardian may elect coverage for a minor child;
• An explanation of the procedures for electing COBRA coverage, as well as the time period during which election may be made and the time period by which the election must be made;
• An explanation of the consequences for failing to elect or waiving coverage, including the impact on HIPAA rights if COBRA coverage is not elected and procedures for revoking a waiver of COBRA coverage before the end of the 60-day election period;
• A description of the COBRA coverage available if elected (or a reference to the SPD description), including the date on which COBRA coverage will commence;
• An explanation of the applicable maximum 18-month or 36-month coverage period, the termination date, and events that would give rise to early termination of coverage;
• A description of the circumstances under which COBRA coverage can be extended due to a second qualifying event or disability determination, and the length of extension available;
• A description of the qualified beneficiary’s responsibility to provide notice of a second qualifying event or Social Security Administration disability determination or determination that (s)he is no longer disabled, including a description of the procedures and time limits for providing these notices and the consequences for failing to provide notice;
• A description of the amount that must be paid for COBRA coverage;
• A description of the due dates for payment, the right to pay monthly, applicable grace periods, the address to which payment should be sent and the consequences for delayed payment or non-payment:
• An explanation of the importance to keep the administrator informed of current addresses of all participants;
• A statement that the notice “does not fully describe the rights under the plan,” and more details regarding rights are available in the SPD or from the plan administrator.

Compliance: The Department of Labor included a safe-harbor form that can be used to meet these content requirements. In addition, this Model COBRA Continuation Coverage Election Notice contains a sample election form. However, this election form should be modified to meet the information-gathering needs specific to each plan. The model election form is available on the Department of Labor’s website (at www.dol.gov/ebsa/modelelectionnotice.doc).

Plan Administrators Have Two New Notice Requirements

The new regulations require, for the first time, plan administrators to provide (1) “Notice of unavailability of continuation coverage,” and (2) “Notice of early termination of continuation coverage.”

What’s New: The first new notice requirement provides:

• Notice of Unavailability. Within 14 days of receiving notice from a covered employee or qualified beneficiary of a purported qualifying event, a plan administrator must provide the individual with a written notice, explaining why coverage is not available. The explanation must be written in a manner that would be understood by the average plan participant.

Compliance: This new notice requirement is triggered by the employer’s receipt of (1) a Qualifying Event Notice; (2) a Notice of Second Qualifying Event; or (3) a Social Security Disability Determination Notice. As with the initial notice, this Notice of Unavailability can be sent to all family members by first-class mail, addressed to “Mr. and Mrs. Employee and Family.”

What’s New: The second new notice requirement provides:

• Notice of Early Termination. As soon as reasonably practicable, plan administrators are required to notify a qualified beneficiary if COBRA coverage will be terminated earlier than the end of the maximum period of continuation coverage (e.g., because the individual fails to pay the required COBRA premiums and costs). Again, the notice must be written in a manner that would be understood by the average plan participant.

Compliance: COBRA continuation coverage can be terminated before the maximum available period only if:

• The employer no longer provides group health coverage to any of its employees;
• The covered individual fails to timely pay the premiums owed for COBRA coverage;
• The covered individual becomes eligible for Medicare coverage;
• The covered individual becomes covered under a different group health plan that does not have a legally applicable exclusion or limitation regarding pre-existing conditions;
• In provided in the plan, the individual’s coverage was terminated for cause (e.g., submission of fraudulent claims).

The Department of Labor, in the new regulations, did not include safe-harbor forms for either of the new notice requirements.

Practical Tips

Benefits personnel charged with COBRA compliance are strongly encouraged to take the following steps well in advance of the next plan year:

1. Revise the initial notice of COBRA continuation coverage rights or adapt the safe harbor form provided by the Department of Labor;
2. Review policies and procedures for distributing initial notice to ensure timely notice to both eligible employees and spouses;
3. Develop reasonable procedures whereby employees can provide the employer with notice of a qualifying event. Ensure that these procedures are published and distributed with the initial notice and the summary plan description;
4. Revise the election notice provided to qualified beneficiaries after the plan is informed of a qualifying event or adapt the safe harbor form provided by the Department of Labor;
5. Revise the election form that qualified beneficiaries must complete to elect COBRA coverage. The safe harbor form is located at the end of the election notice form provided by the Department of Labor;
6. Create a new notice to be used by the plan administrator for notifying an individual who has requested continuation coverage that (s)he is not eligible for COBRA coverage (e.g., no qualifying event has occurred);
7. Create a new notice to be used by the plan administrator for notifying a qualified beneficiary that COBRA coverage will terminate before the end of the eligibility period (e.g., the qualified beneficiary failed to pay the required premiums);
8. Revise existing Summary Plan Descriptions for the health care plan to include new notice procedures; and
9. Contact qualified labor and employment counsel with any questions to ensure compliance.

© 2004 Greenberg Traurig

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