COBRA and Plan Termination

[sloble@crowleyfleck.com]

Employer terminates health plan then 2 days later lays off a bunch of people then offers a new health plan to the less than 20 remaining employees who help unwind the business. It does not offer COBRA to anyone.

Problems?

[Christine Roberts]

Check the 125 regulations but I believe the new plan would be a successor plan that would re-trigger COBRA obligations. And the 20 - employee threshold is based on the prior year, not the current year, employee population.

I think they are not in compliance, in sum.

[Kirk Maldonado]

The affected employees might consider contacting the DOL.

[sloble@crowleyfleck.com]

Thanks for the replies. I agree. But I do think they would not have a COBRA obligation if they terminated the plan prior to the lay-off (ie if they no longer have any group health plan). Agree/disagree?

The co is in financial straights and is trying to unwind as fast as possible

[Christine Roberts]

They have a successor plan, so COBRA liability exists.

They might also have a partial termination of their qualified retirement plan, if any exists.

[GBurns]

Substance rule over form. This looks like a successor plan.

There seems to be a timing problem.

How much notice of plan termination did they give, anyhow?

Do take note of Christine's warning. Look out for a qualified plan etc also.

[sloble@crowleyfleck.com]

Nothing has happened yet, no notices, no termination YET. The co is in serious decline and unwinding rapidly and may end up terminating the health plan altogether with NO subsequent health plan several weeks before the lay-off. I understand that the co will have lots of issues--termination issues, participant communication issues, etc., but in this scenario there is no successor plan, right? So no COBRA obligation? I realize this may be the least of their worries.

THANKS

[GBurns]

"I understand that the co will have lots of issues ... but in this scenario there is no successor plan, right? So no COBRA obligation?"

Are you serious? Have you read the posts?

[sloble@crowleyfleck.com]

GBurns: I generally appreciate your comments, but I wonder if you are reading my full question?? In the (second) scenario I describe, THERE IS NO MORE PLAN at the time the company shuts down and there is NO SUCCESSOR EMPLOYER. The plan and all plans will go way then the company will go away.

The reason I am posting and looking for help is I have very limited COBRA resources but I would not think there would be a successor plan under THAT scenario. THANKS

[GBurns]

Your second scenario has no successor employer, but I doubt that a wind down could be done that way.When management closes the door to employees, the company does not cease. Very few businesses can go away in that manner. There is still much reporting and closing of accounts and books that must be done, otherwise penalties etc will accrue with subsequent liens and llegal action that will eventually work their way to the Officers if not handled. So there has to be a wind down after the doors are closed and this needs employees even if only to outsource etc.

How will the company be wound down as you stated originally? If it is wound down with either any of the old employees or with new employees, you still have either a successor employer or a continuing employer. Either way COBRA.

You still have the time factor to contend with. Remember the "same desk" etc rules in qualified plans? Same principle, you need to plan the time lag between termination of plan and everything else. And as long as there are employees after either plan termination or employee layoff, that problem exists and it is more than a substance over form issue so you have to be aware and plan.

If you lay off the employees, they are immediately eligible for COBRA notification etc. If you then terminate all health coverage for all employees, then you have solved the problem. No coverage no COBRA. Or as in your second scenarion terminate the employee plan before the lay off as you stated, then since there is nothing then no COBRA.

However, when the employer terminates coverage might not be when the insurance company terminates coverage unless premiums are already in arrears. Premiums in arrears should present a very serious problem if there had been employee salary reductions which have not been sent to the insurance company.

Misappropriation of employee funds and IRS misreporting are some of the problems that could arise. Going out of business does not remove the liability or consequences either.

[JDuns]

If an employer (and all companies in its controlled group) maintains no plans at the time of an employee's termination, there is no COBRA right.

However, if the employer re-establishes a plan after an employee's termination, COBRA rights of the down-sized employee may be resurrected if the new plan is deemed a successor plan.

[Guest AHayhow]

What if the employer is closing one company, but has common ownership of two other companies? I understand that there is a COBRA obligation, but under which of the other two companies? Which one is considered the successor employer? There are a few employees from the closed company being combined with one of the remaining companies, however, the medical plan there is a local HMO that is out of state.

Thanks!

[Kirk Maldonado]

Treasury Regulation Section 54.4980B-4, Q&A - 1© provides in part:

If coverage is reduced or eliminated in anticipation of an event (for example, an employer's eliminating an employee's coverage in anticipation of the termination of the employee's employment, or an employee's eliminating the coverage of the employee's spouse in anticipation of a divorce or legal separation), the reduction or elimination is disregarded in determining whether the event causes a loss of coverage.

Rev. Rul. 2002-88, 2002-2 CB 995, provides as follows:

Issue

If an employee eliminates the coverage of the employee's spouse under a group health plan in anticipation of their divorce, when must a plan that is required to make COBRA continuation coverage available to the spouse begin to make that coverage available?

Facts

A group health plan subject to COBRA allows eligible employees to elect coverage for themselves and their spouses. An employee who has elected coverage for the employee's spouse can notify the plan to eliminate the spouse's coverage, and the spouse's coverage will be terminated as of the end of the month in which the notice is provided. Under the terms of the plan, a spouse loses eligibility for coverage on the date of divorce from an eligible employee.

Employee E is enrolled in the group health plan and elected coverage for E's spouse. A decree of divorce is issued dissolving the marriage of E and E's spouse. In anticipation of their divorce, E notified the plan administrator to eliminate the coverage for E's spouse, and coverage for E's spouse was terminated as of the last day of the month. There are no facts to indicate that E's spouse would have otherwise lost coverage under the plan before the divorce. The plan administrator is provided notice of the divorce within 60 days after the issuance of the divorce decree.

Law And Analysis

Section 4980B of the Internal Revenue Code requires certain group health plans to make continuation coverage available to certain individuals who would otherwise lose their coverage under the plan as a result of certain occurrences (the “COBRA continuation coverage requirements”). Section 4980B imposes an excise tax if a plan subject to the COBRA continuation coverage requirements fails to comply with those requirements.

Under section 4980B, the obligation of a plan to make COBRA continuation coverage available arises in connection with a qualifying event. The individuals to whom the COBRA continuation coverage must be made available are qualified beneficiaries.

Under Q&A-1 of § 54.4980B-3 of the Miscellaneous Excise Tax Regulations, an individual generally is a qualified beneficiary if the individual is covered under a group health plan on the day before a qualifying event by virtue of being on that day the spouse of a covered employee.

Under Q&A-1 of § 54.4980B-4, a divorce or legal separation of a covered employee from the covered employee's spouse is a qualifying event if, under the terms of the plan, the divorce or legal separation causes the spouse (or a dependent child of the covered employee) to lose coverage under the plan. Paragraph © in Q&A-1 of § 54.4980B-4 states that if coverage is eliminated in anticipation of a qualifying event, such as an employee's eliminating the coverage of the employee's spouse in anticipation of a divorce or legal separation, the elimination is disregarded in determining whether the qualifying event causes a loss of coverage.

Q&A-1 of § 54.4980B-7 states that COBRA continuation coverage must be provided for a period that begins on the date of the qualifying event. Under Q&A-1 and Q&A-4 of § 54.4980B-7, a plan generally has the obligation to make COBRA continuation coverage available to a qualified beneficiary in the case of a divorce or legal separation for 36 months after the date of the divorce or legal separation. This obligation can end earlier for a variety of reasons, such as failure to make timely payment to the plan for the qualified beneficiary's coverage.

Q&A-2 of § 54.4980B-6 provides that a group health plan is not required to offer a qualified beneficiary the opportunity to elect COBRA continuation coverage in the case of a divorce or legal separation if notice of the divorce or legal separation is not provided to the plan administrator within 60 days after the later of the date of the divorce or legal separation or the date the qualified beneficiary would lose coverage on account of the divorce or legal separation.

E eliminated the coverage of E's spouse in anticipation of their divorce. Under the regulations, this elimination is ignored in determining whether the divorce is a qualifying event. There are no facts to indicate that E's spouse would have otherwise lost coverage under the plan before the divorce. Thus, if the elimination in anticipation of the divorce is ignored, E's spouse would have remained covered until the divorce and then lost coverage because of it. Consequently, the divorce is a qualifying event and E's former spouse is a qualified beneficiary. Because notice of the divorce was provided to the plan administrator within 60 days after the issuance of the divorce decree, the plan has an obligation to make COBRA continuation coverage available to E's former spouse for a period of up to 36 months.

The period of COBRA continuation coverage begins on the date of the qualifying event. There is no authority under the statute or regulations for requiring a plan to make COBRA continuation coverage available before the date of a qualifying event. Thus, the group health plan in the facts described above has the obligation to make COBRA continuation coverage available to E's former spouse effective as of the date of the divorce for a period of up to 36 months.

Holding

If an employee eliminates the coverage of the employee's spouse under a group health plan in anticipation of their divorce, a plan that is required to make COBRA continuation coverage available to the spouse must begin to make that coverage available as of the date of the divorce.