Guest Article

(From the June 2, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks in the article have been added by BenefitsLink.)

ACTION NEEDED-- Proposed Guidance on COBRA Notice Requirements Warns Administrators to Stop Using Old Model Notice Immediately, Update Description of COBRA Rights in SPDs

The Department of Labor has issued proposed regulations relating to the various COBRA notice requirements for group health plan sponsors, administrators, and covered employees and qualified beneficiaries. 68 FR 31832 (May 28, 2003). The proposed regulations generally outline the timing and content requirements for COBRA notices, and add some notice requirements not specified in the statute.

The proposed regulations relate specifically to the COBRA notice requirements codified in ERISA. However, the proposals also would apply to the COBRA notice provisions codified at IRC section 4980B in most circumstances. As a result, non-ERISA group health plans subject to IRC section 4980B should be interested in the Labor Department's proposals. The Department of Health and Human Services is responsible for issuing regulations under the Public Health Service Act's COBRA requirements for state and local government employers, but those regulations generally must conform to COBRA regulations issued by the Labor and Treasury Departments.

Action Alert

Even though these are only proposed regulations, the preamble raises two points that group health plan sponsors and administrators may need to act on now. First, the preamble states administrators should stop using the model general COBRA notice the Department provided in ERISA Technical Release 86-2 (June 26, 1986) immediately because it no longer represents good faith compliance with the general COBRA notice requirement. Presumably, the model general notice included in the proposed regulations would be an acceptable substitute.

The second point is that the Labor Department is now taking the position that group health plan summary plan descriptions (SPDs) should include information about the new health insurance tax credit for trade-displaced workers as part of the discussion about participants' COBRA rights and responsibilities. (The COBRA rights and responsibilities discussion is required by the Labor Department's updated SPD content regulations.) Many plan administrators probably will need to issue a summary of material modification (SMM) to their SPDs to comply with the Department's position.

Please contact your Deloitte advisor if you have questions or need more information.

Summary of Proposed Regulations

The proposed regulations are subdivided into four parts: (1) general notice of continuation coverage; (2) notice requirement for employers; (3) notice requirements for covered employees and qualified beneficiaries; and (4) notice requirements for plan administrators. The first and fourth parts also include supplements with model notices plans could use to satisfy the relevant requirements, but the proposed regulations would not require them to do so. The model notices are based on the requirements for single-employer plans.

General COBRA Notice

ERISA section 606(a)(1) requires group health plans to provide a written notice of COBRA rights to covered employees and their spouses when their coverage begins. Plan administrators often include this general COBRA notice in their plans' SPDs.

The proposed regulations generally would require plan administrators to furnish this notice within 90 days after coverage begins. A plan could address a single notice to the covered employee and her spouse if they live together and their coverage begins at the same time (or if the covered employee's coverage does not begin more than 90 days before the spouse's coverage). In other circumstances, plans will have to furnish separate notices to both the covered employee and her spouse.

The proposed regulations also spell out the content requirements for the general COBRA notice. Among other things, the notice would have to include:

As noted, the proposed regulations include a model notice plan administrators could use to satisfy these content requirements.

Finally, the proposed regulations confirm that plans can continue to satisfy this general COBRA notice requirement by including all the required information in the plan's SPD. But this will work only to the extent the plan administrator furnishes the SPD to covered employees and their spouses within the 90-day time period required by the proposed regulations.

Notice Requirement for Employers

The employer often is responsible for notifying the plan administrator when a qualifying event occurs. ERISA section 606(a)(2). The employer generally must provide this notice to the plan administrator within 30 days of the qualifying event, but plans may provide for the 30-day time period to begin running when the qualified beneficiary actually loses coverage.

Under the proposed regulations, this employer notice would have to "include sufficient information to enable the administrator to determine the plan, the covered employee, the qualifying event, and the date of the qualifying event."

Notice Requirements for Covered Employees and Qualified Beneficiaries

In some circumstances, the covered employee or qualified beneficiary bears the burden of notifying the plan administrator of a qualifying event. For example, ERISA section 606(a)(3) requires the covered employee or qualified beneficiary to notify the plan administrator within 60 days if the qualifying event is the covered employee's divorce or legal separation, or a dependent child ceasing to be eligible for coverage as a dependent under the plan's terms. If covered employees or qualified beneficiaries fail to timely notify the plan administrator of these qualifying events, they forfeit their rights to COBRA benefits.

The covered employee or qualified beneficiary also is responsible for notifying the plan administrator within 60 days of experiencing a second qualifying event after COBRA coverage begins. Furthermore, it is the covered employee's or qualified beneficiary's responsibility to notify the plan administrator if the Social Security Administration determines he or she is disabled, and thus eligible for the 11 month COBRA disability extension, or determines he or she is no longer disabled.

The proposed regulations would require plans to establish "reasonable procedures" for covered employees or qualified beneficiaries to furnish these notices. The plan's procedures would be deemed reasonable if they (1) are described in the plan's SPD, (2) specify the individual or entity designated to receive such notices, (3) describe the information about the qualifying event or disability determination the plan administrator needs to provide the covered employee or qualified beneficiary with the appropriate COBRA rights, and (4) satisfy certain other requirements.

The proposed regulations would clarify that plans could establish "reasonable" content requirements for these notices, but they generally would not be allowed to reject a notice as untimely just because it does not include all the required information. Additionally, plans would be required to accept the notice from the covered employee or qualified beneficiary, or from a representative acting on behalf of the covered employee or qualified beneficiary. A notice provided to the plan by any one of these individuals would be treated as satisfying the notice requirement for all related qualified beneficiaries with respect to the qualifying event.

Notice Requirements for Plan Administrators

Once a group health plan administrator receives notice of a qualifying event, it generally has 14 days to provide a COBRA election notice to each qualified beneficiary. ERISA section 606(c). Significantly, the proposed regulations would clarify that in cases where the employer is responsible for notifying the plan administrator of a qualifying event and the employer is the plan administrator, the employer generally has 44 days from the date of the qualifying event to provide the COBRA election notice. (There has been some debate over whether, in this circumstance, the employer can take advantage of both the 30 days it normally would have to notify the plan administrator of the qualifying event and the 14 days the plan administrator would have to provide the COBRA election notice.)

Among other things, the proposed regulations would require the COBRA election notice to include the following:

The proposed regulations include a model notice plan administrators could use to satisfy these content requirements.

Finally, the proposed regulations would establish two additional notice requirements for plan administrators. The first would apply only in circumstances where the covered employee or qualified beneficiary is required to notify the plan administrator of a qualifying event. In this case, if the plan administrator receives such a notice and determines the individual is not entitled to COBRA coverage, the plan administrator would have to notify the individual of that determination within 14 days and include an explanation of why the individual cannot elect COBRA coverage.

The second would apply when a plan administrator prematurely terminates a qualified beneficiary's COBRA coverage. (This usually happens when the qualified beneficiary fails to timely pay its COBRA premiums.) In this case, the proposed regulations would require the plan administrator to notify the qualified beneficiary "as soon as practicable" after deciding to terminate coverage. The notice would have to explain why the plan administrator is terminating coverage, and any other rights to coverage the qualified beneficiary may have under the plan or applicable law, including conversion rights.

Comments

The Labor Department is accepting comments on the proposed regulations through July 28, 2003.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.