All of a Sudden, a COBRA Deadline Looms

New DOL rules will likely prompt widespread revisions of notices, procedures - soon

Thanks to the Department of Labor, benefit professionals now have a batch of COBRA-related items to add to their already strained summer To-Do lists:

• Talk to your services providers and review COBRA services contracts

• Revise current initial and qualifying event COBRA notices (and stop all use of the old DOL model notice!)

• Update health plan procedures and SPDs

• Create new notices for specific COBRA situations

These To-Do items come courtesy of proposed regulations issued May 28, which broke the DOL’s 17-year near-total silence on COBRA notices. Though comments are being requested (until July 28), the DOL intends the rules to take effect for plan years starting on or after January 1, 2004.

This may foretell increased DOL audit activity in this area. This Alert summarizes the key points of the new COBRA rules and describes the actions we recommend employers— either those that outsource COBRA administration or those that retain at least some of that work in-house—take over the next several months.

Employers will have to decide what priority to give compliance with new rules that are, after all, only in proposed form. Because we do not expect major public comments or revisions in the final version of these rules, we recommend that clients take this opportunity to review their COBRA compliance generally.

If you find that plan notices or procedures do not meet the current legal standards, this would be an ideal time to update SPDs, procedures, and notices to comply both with current law and with the new regulations. When notices and procedures are completely up to date under current law, employers should evaluate whether to make the modifications needed to meet the new standards right away or to wait until the regulations become final. One factor to consider: even though the rules are only proposed, the DOL apparently takes the position that some of the new rules are really just statements of current law. In addition, once the regulations are in their final form, employers may have as little as 60 days to comply. As a result, getting a head start is certainly advisable.

The proposed regulations include sample model notices that will be useful to benefit plan administrators. Plan administra-tors can provide comments on the regulations to the Employee Benefits Security Administration (formerly the PWBA) at: eORI@EBSA.dol.gov.

Employers should review the changes required by these new regulations (described in more detail below). This is important so that the employer can (a) communicate its requirements with administrators and (b) update health plan SPDs.

Check with the COBRA administrator to identify its approach to these new regulations. All employers need to update SPDs to comply with these new rules, but if the COBRA administrator cannot share procedures and and/or will not be sending out new notices that are required, an employer might want to hold off updating its SPDs. Employers will need to work closely with their administrators to make sure that all of the new procedural requirements are appropriately identified in notices and that updated SPDs reflect the administrators’ practices.

Part of the work to be done with COBRA administrators is ensuring that changes in services and processes are also included in the service contract. Service contracts should be reviewed and modified as needed to ensure that the administrator: (a) meets the timing and content requirements for initial notices or any other notices provided; and (b) is specifically required to provide the two new types of notice required under the proposed rules. The contract should also require that the administrator provide the employer with procedural information needed for health plan SPDs. The issuance of these new rules may also provide an opportunity for an employer to review its COBRA service contract in general to assure that it provides adequate protections.

Initial COBRA Notice. Along with establishing minimum content and filing requirements for this notice, the DOL provides a model. In certain cases, the initial notice may have to be provided as soon as 14 days, but the general standard is 90 days from the date coverage starts. The DOL also makes an important new statement about its only prior guidance on COBRA notices – a model issued in 1986. Any employer still using that notice should stop doing so immediately, as the DOL indicates that use of that notice no longer constitutes good faith compliance with COBRA.

Notice Following a Qualifying Event. The new proposed rules require extensive information in the notice of COBRA rights and election form provided to qualified beneficiaries following a qualifying event. Some of this information may not typically be provided in current versions. For example, the notice must now: state that each qualified beneficiary has an independent right to elect continuation coverage; indicate that the employee or spouse may make an election on behalf of all qualified beneficiaries; explain the consequences of failing to elect or waive continuation coverage; and describe any alternative coverage options the qualified beneficiary may have. Employers may, but are not required to, use the model notice and election form in the proposed regulations.

Procedures. The proposed rules require health plans to establish reasonable procedures for furnishing notices and to describe those procedures in SPDs. By establishing procedures in the SPD, an employer will satisfy the requirement that reasonable procedures are in place. The procedures must identify to whom notices will be sent, specify how notices will be given, and describe the information the plan requires to provide continuation coverage resulting from a qualifying event or determination of disability.

COBRA procedures will have to include specific timing requirements. For example, an initial COBRA notice must be sent to employees and their spouses within 90 days of the date that they become covered under the plan or the plan itself becomes subject to COBRA, whichever is later. A single notice may be sent addressed to both the employee and his or her spouse at their home address if they reside together. Procedures will also have to cover who is to receive the notices, and the specific content of the notices.

Importantly, the procedures required by the proposed rules also set time limits on the notices that covered employees and qualified beneficiaries have to provide to the plan administrator. This deadline is generally 60 days, and these notices are provided in the case of certain events—divorce, legal separation, change in dependent status, a second qualifying event, and disability determination (or determination that a disability has ended) by the Social Security Administration. If an SPD fails to describe both the requirement to provide these notices and the procedures for doing so, the time for giving such notice is tolled until an adequate SPD is provided.

SPDs. SPDs are also on the firing line under the proposed rules. The new COBRA notice rules clarify that the SPD should contain the plan’s COBRA procedures, as well as a detailed summary of the qualified beneficiary’s right to continued coverage. Additionally, the SPD must include the ability to elect COBRA coverage under the Trade Act of 2002, which offers a second right to elect COBRA coverage for individuals eligible for trade adjustment assistance (even though few health plans will be affected by these rules). Most health plan SPDs will not currently satisfy these rules. Employers should create or modify COBRA procedures to comply with the new rules and at the same time update SPDs. Updates may be provided to participants in the form of a summary of material modification.

Failure to provide these procedures in the SPD—or to meet the other legal standards for "reasonable" procedures—could have serious consequences. Consider, for example, cases where qualified beneficiaries themselves provide notice of certain qualifying events (e.g., loss of dependent status, divorce, or legal separation). If the plan has not established reasonable procedures for providing notice, this request could be satisfied by any written or oral communication identifying a qualifying event that is reasonably calculated to bring information either to the organizational unit that customarily handles employee benefits matters, or to any officer of the company. This means that by discussing an impending divorce or college graduation with an officer of the company an employee could be considered to be providing adequate notice of a qualifying event. To avoid the possibility that notice can be provided in informal communications, it is critical that the health plan SPD contains reasonable procedures.

In addition, the qualified beneficiary is not subject to deadlines for providing notices until he or she receives an SPD that describes the requirement to provide such notices and the procedures for doing so. This means that if an SPD is insufficient, the plan administrator may have no choice but to allow COBRA elections even when notice is not received until months after a qualifying event.

Notice that COBRA Coverage is Unavailable. The DOL now requires the plan administrator to notify an employee or other qualified beneficiary, who notifies the plan administrator of a qualifying event, but who is not otherwise entitled to COBRA coverage, of the reason such coverage is unavailable. The plan administrator must provide this information within 14 days of receiving notice of a qualifying event. Take, for example, a health plan that provides regular benefits, but not continuation coverage, to domestic partners. When an employee or formerly covered domestic partner notifies the health plan of a split-up, the health plan must now notify these individuals, in writing, that COBRA coverage is not available (COBRA does not require coverage be offered to domestic partners). Another example: a newly divorced employee notifies the plan that he or she must cover an ex-spouse under the plan due to a court order (when the spouse was not a covered dependent under the plan to begin with). In that case, the plan must notify the employee that the ex-spouse has no COBRA right because he or she was not a covered dependent at the time of the qualifying event.

Notice of Termination. Finally, the DOL requires that a qualified beneficiary be sent notice of termination of COBRA coverage when that termination occurs earlier than the end of the maximum period of COBRA coverage. For example, if a qualified beneficiary fails to pay premium within the grace period, that individual must be notified that coverage has or will cease and why, the date coverage ends, and whether the individual has any rights to elect alternative group or individual coverage, such as a conversion right.

Copyright 2003 Gardner Carton & Douglas