Preemption of State Laws

[Guest Jeff Kropp]

Any thoughts on whether COBRA or Public Health Service Act (for governmental entities) completely preempts state insurance

laws regarding continuation coverage?

Basically, Illinois has continuation laws that apply to fully insured plans only. These laws are both more restrictive and more liberal than COBRA. For example, employees only get nine months of coverage under state law after employment terminates. At the same time, no administrative fees may be charged, and any spouse 55 and over can get coverage until Medicare kicks in (after employee's death, retirement, etc.). A recent Supreme Court case (Unum Life) seems to indicate that state laws that expand, and do not otherwise conflict with, ERISA would not be preempted.

The end result is that employers may have to apply the most liberal provisions of both (an administrative nightmare). Perhaps one notice could integrate both COBRA and Illinois laws. Any thoughts from the experts?

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[Guest BENEFISH]

Yes, Illinois and other states have continuation of coverage laws which impact the manner in which we administer COBRA. If the state law requires coverage that COBRA does not (e.g. spouse over 55 to medicare, etc.), state law should be followed. Likewise, COBRA may have requirements which go beyond state law (e.g. can't terminate coverage upon remarriage). You can get messed up trying to figure out how much to charge. Illinois says you can't add the 2% for 9 months of state continuation coverage. Thus, even though COBRA allows the 2% administrative expense, you can't charge it. Illinois allows you to charge 20% more after first 2 years of coverage. But for spouses subject to 36 months of COBRA, you can't charge more than 2% more. Thereafter, you can charge 20% more. Gets confusing.

Consolidate your state and federal notices including initial notices and election forms.

[Guest Jeff Kropp]

Benefish, I generally agree with your thoughts on integrating the forms for both federal and state law (and applying the most liberal provisions of each).

The problem lies with the plan booklets, most of which (including Blue Cross) set forth the laws in their entirety in completely different sections, leaving participants utterly confused as to how they integrate. Also, IL law requires that policies issued by insurers contain the IL continuation language, which requires the carrier to provide notices, etc. (the Department of Insurance has no jurisdiction over employers). Most carriers ignore state law, despite having the required language in their policy. Thus, the carrier could refuse to cover spouses until Medicare age, even though the employer sent the integrated notice to employees.

One solution is to provide the standard federal notice, with a provision at the bottom that states IL law may provide additional coverage, please consult your carrier and/or plan document for more information. Are you as confused as I am? These issues appear to be news to all of our clients (maybe because the preemption theory has gained widespread acceptance over the years or because administrating both is absurd).

Any final thoughts?

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[Kirk Maldonado]

We have the same problem in California. My position is that California can only regulate insurance companies, not benefit plans. Thus, the California legislation is only binding on the insurance companies; not on the employers.

[GBurns]

In most states including Californis, the State regulates not only the insurers and agents, but also the insurance products and the marketing of them. While the dont regulate benefits plans per se, it would be nearly impossible to provide the coverage that the benefits plan would require without complying with the State laws. Kirk,How do you propose or have done it ??

[Kirk Maldonado]

My position is that the State is precluded from taking any action directly against the employer for failure to comply with the State law. Of course, the State can enforce its laws against the insurance companies, but that should have no direct effect on the employer.

[GBurns]

If the employer violates the State or COBRA then the Plan would lose its status and loose the tax benefits etc and in certain cases be subject to State and Federal Labor law violations and EEOC action etc etc. Check out the penalties from DOL and IRS and you will se how foolish it would be to think that there would be no liability.

[Guest Jeff Kropp]

You are right with regard to the potential penalties for not complying with federal COBRA, but wrong with regard to state insurance laws. The confusion I see is that you have never actually read the state insurance laws. If you did, you would see that,in Illinois, the insurance laws require that insurance companies put certain notices regarding state law continuation rights in policies that are marketed and sold in Illinois. The laws are directed at insurers, and their policy language, which explains why the IL state department of insurance has no jurisdiction over employers and cannot regulate employer conduct. That is not to say that an individual cannot elect to continue coverage under state law (where the coverage would otherwise exceed federal COBRA). However, the employer has little or no responsibilty to send out notices or administer state laws (the insurer does). Our standard notice and election forms for federal COBRA simply instructs employees to contact the carrier for more info on state rights. As a practical matter, it is nearly impossible for our clients to administer both laws, and it is unlikely that this was Congress'intent when enacting COBRA.

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