[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Rules and Regulations]
[Pages 5160-5188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1520]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 54 and 602

[TD 8812]
RIN 1545-AI93


Continuation Coverage Requirements Applicable to Group Health 
Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: The Consolidated Omnibus Budget Reconciliation Act of 1985 
(COBRA) added health care continuation requirements that apply to group 
health plans. Coverage required to be provided under those requirements 
is referred to as COBRA continuation coverage. Proposed regulations 
interpreting the COBRA continuation coverage requirements were 
published in the Federal Register of June 15, 1987 and of January 7, 
1998. This document contains final regulations based on these two sets 
of proposed regulations. The final regulations also reflect statutory 
amendments to the COBRA continuation coverage requirements since COBRA 
was enacted. A new set of proposed regulations addressing additional 
issues under the COBRA continuation coverage provisions is being 
published elsewhere in this issue of the Federal Register. The 
regulations will generally affect sponsors of and participants in group 
health plans, and they provide plan sponsors and plan administrators 
with guidance necessary to comply with the law.

DATES: Effective Date: These regulations are effective February 3, 
1999.
    Applicability Dates: Sections 54.4980B-1 through 54.4980B-8 apply 
to group health plans with respect to qualifying events occurring in 
plan years beginning on or after January 1, 2000. See the Effective 
Date portion of this preamble and Q&A-2 of Sec. 54.4980B-1.

FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis, 202-622-4695. This is 
not a toll-free number.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1581. Responses to these collections of 
information are mandatory in some cases and required in order to obtain 
a benefit in other cases. Group health plans are required to provide 
certain individuals a notice of their COBRA continuation coverage 
rights when certain qualifying events occur and are required to inform 
health care providers who contact the plan to confirm the coverage of 
certain individuals of the individuals' complete rights to coverage. To 
obtain COBRA continuation coverage or extended coverage, certain 
individuals are required to notify the plan administrator of certain 
events or that they are electing COBRA continuation coverage, and plans 
are required to notify certain individuals of insignificant 
underpayments if the plan wishes to require the individuals to pay the 
deficiency. This information will be used to advise employers and plan 
administrators of their obligation to offer COBRA continuation 
coverage, or an extended period of such coverage; to advise qualified 
beneficiaries of their right to elect COBRA continuation coverage and 
of insignificant errors in payment; and to inform health care providers 
of individuals' rights to COBRA continuation coverage.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated average annual burden per respondent varies from 30 
seconds to 330 hours, depending on individual circumstances, with an 
estimated average of 14 minutes.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to these collections of information must 
be retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On June 15, 1987, proposed regulations (EE-143-86) relating to 
continuation coverage requirements applicable to group health plans 
were published in the Federal Register (52 FR 22716). A public hearing 
was held on November 4, 1987. Written comments were also received. A 
supplemental set of proposed regulations (REG-209485-86) was published 
in the Federal Register of January 7, 1998 (63 FR 708). No public 
hearing was requested or held after the publication of the supplemental 
proposed regulations; written comments were received. After 
consideration of these comments, after review of the reported court 
decisions under the parallel COBRA continuation coverage provisions of 
the Employee Retirement Income Security Act of 1974 (ERISA) and the 
Public Health Service Act, and based on the experience of the IRS in 
administering the COBRA continuation coverage requirements, a portion 
of the regulations proposed by EE-143-86 and REG-209485-86 is adopted 
as revised by this Treasury decision. The revisions are summarized in 
the explanation below. Also being published elsewhere in this issue of 
the Federal Register is a new set of proposed regulations, which 
addresses additional issues.

Explanation of Provisions

Overview

    The regulations are intended to provide clear, administrable rules 
regarding COBRA continuation coverage. The regulations give 
comprehensive guidance on many questions under COBRA, with a view to 
enhancing the certainty and reliance available to all parties--
including employees, qualified beneficiaries, employers, employee 
organizations, and group health plans--in determining their COBRA 
rights and obligations. The guidance is designed to further the 
protective purposes of COBRA without undue administrative burdens or 
costs on employers, employee organizations, or group health plans.
    For example, the regulations:
     Prevent group health plans from terminating COBRA 
continuation coverage on the basis of other coverage that a qualified 
beneficiary had prior to electing COBRA continuation coverage, in 
accordance with the Supreme Court's

[[Page 5161]]

decision in Geissal v. Moore Medical Corp.
     Give employers and employee organizations significant 
flexibility in determining, for purposes of COBRA, the number of group 
health plans they maintain. This will reduce burdens on employers and 
employee organizations by permitting them to structure their group 
health plans in an efficient and cost-effective manner and to satisfy 
their COBRA obligations based upon that structure.
     Provide baseline rules for determining the COBRA 
liabilities of buyers and sellers of corporate stock and corporate 
assets and permit buyers and sellers to reallocate and carry out those 
liabilities by agreement. This will significantly enhance employers' 
ability to negotiate and to plan appropriately for the treatment of 
qualified beneficiaries in connection with mergers and acquisitions, 
while protecting the rights of qualified beneficiaries affected by the 
transactions.
     Limit the application of COBRA for most health flexible 
spending arrangements. This will ensure that COBRA continuation 
coverage under health flexible spending arrangements is available in 
appropriate cases without requiring continuation coverage where that 
would not serve the statutory purposes.
     Eliminate the requirement that group health plans offer 
qualified beneficiaries the option to elect only core (health) coverage 
under a group health plan that otherwise provides both core and noncore 
(vision and dental) coverage.
     Give employers, in determining whether the small-employer 
plan exception applies, the option of counting by pay period rather 
than by every business day, and provide, for that exception, for the 
consistent treatment of part-time employees through the use of full-
time equivalents.
    The COBRA continuation coverage requirements enacted on April 7, 
1986 have been amended by the Omnibus Budget Reconciliation Act of 1986 
(OBRA 1986), the Tax Reform Act of 1986 (TRA 1986), the Technical and 
Miscellaneous Revenue Act of 1988 (TAMRA), the Omnibus Budget 
Reconciliation Act of 1989 (OBRA 1989), the Omnibus Budget 
Reconciliation Act of 1990 (OBRA 1990), the Small Business Job 
Protection Act of 1996 (SBJPA), and the Health Insurance Portability 
and Accountability Act of 1996 (HIPAA).\1\ These amendments made 
numerous clarifications and modifications to the COBRA continuation 
coverage requirements, moved the requirements from section 162(k) to 
section 4980B, added various other features, such as the disability 
extension to the required period of coverage, and significantly altered 
the sanctions imposed on employers and plans for failing to comply with 
the requirements. The specific changes made by these amendments are 
discussed below in connection with the provisions of the regulations 
that relate to them.
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    \1\ The COBRA continuation coverage requirements have also been 
affected by an amendment made to the definition of group health plan 
by the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993). OBRA 
1993 amended the definition of group health plan in section 
5000(b)(1), which the COBRA continuation coverage provisions of the 
International Revenue Code incorporate by reference.
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    The legislative history of COBRA provides that the Department of 
the Treasury has the authority to interpret the coverage and tax 
sanction provisions of COBRA and that the Department of Labor has the 
authority to interpret the reporting and disclosure provisions. 
Accordingly, these regulations apply in interpreting the coverage 
provisions of COBRA in Title I of ERISA, as well as those in the 
Internal Revenue Code. With minor exceptions, the final regulations and 
the new proposed regulations being published today do not address the 
notice provisions of the COBRA continuation coverage requirements.

Organization

    The final regulations being published today follow the structure of 
the 1987 proposed regulations, with related questions-and-answers 
grouped into topics. Each topic is now in a separate section, and 
sections have been added to the new proposed regulations being 
published today for (1) business reorganizations and employer 
withdrawals from multiemployer plans and (2) the interaction of the 
Family and Medical Leave Act of 1993 (FMLA) and COBRA. The substance of 
the 1998 proposed regulations has been integrated into the questions-
and-answers of the 1987 proposed regulations. The ordering of some of 
the questions-and-answers has changed, and all of the questions-and-
answers relating to the original statutory effective date have been 
deleted. In addition, in a few cases, the content of two separate 
questions-and-answers in the 1987 proposed regulations has been 
combined into a single question-and-answer; in other cases the content 
of a single question-and-answer has been expanded to two or more 
questions-and-answers. These changes have resulted in the renumbering 
of the questions-and-answers. The new proposed regulations being 
published today are designed to fill gaps designated in the final 
regulations as reserved.

Effective Date

    The 1987 proposed regulations provide that they will be effective 
upon publication as final regulations. Some commenters suggested that 
the final regulations should have a delayed effective date. The final 
regulations follow this suggestion; they apply with respect to 
qualifying events occurring in plan years beginning on or after January 
1, 2000. For any period before the effective date of the final 
regulations, the plan and the employer must operate in good faith 
compliance with a reasonable interpretation of the requirements in 
section 4980B. For the period before the effective date of the final 
regulations, the IRS will consider compliance with the proposed 
regulations in Sec. 1.162-26 (the 1987 proposed regulations) and 
Sec. 54.4980B-1 (the 1998 proposed regulations) to constitute good 
faith compliance with a reasonable interpretation of the statutory 
requirements for the topics that those proposed regulations address, 
except to the extent inconsistent with a statutory amendment adopted 
after the dates the proposed regulations were issued, during the period 
the amendment is effective, or with a decision of the United States 
Supreme Court released after the proposed regulations were issued, 
during the period after the decision is released. For any period 
beginning on or after the effective date of the final regulations with 
respect to topics not addressed in the final regulations, such as how 
to calculate the applicable premium, the plan and the employer must 
operate in good faith compliance with a reasonable interpretation of 
the requirements in section 4980B.
    Compliance with the new proposed regulations will constitute good 
faith compliance with a reasonable interpretation of the statutory 
requirements addressed in the new proposed regulations until the new 
proposed regulations are finalized. In addition, actions inconsistent 
with the terms of the new proposed regulations will not necessarily 
constitute a lack of good faith compliance with a reasonable 
interpretation of the statutory requirements addressed in the new 
proposed regulations; whether there has been good faith compliance with 
a reasonable interpretation of the statutory requirements will depend 
on

[[Page 5162]]

all the facts and circumstances of each case.
    The IRS will not assess the excise tax with respect to a plan that 
operates in good faith compliance with a reasonable interpretation of 
the statutory requirements, as described in the preceding two 
paragraphs. Note, however, that in the case of lawsuits brought by 
qualified beneficiaries to enforce their COBRA continuation coverage 
rights under ERISA or the Public Health Service Act, the courts 
generally have not applied any good faith compliance standard.

Plans That Must Comply

    The final regulations provide rules regarding which group health 
plans are subject to COBRA. These rules are generally similar to those 
set forth in the 1987 proposed regulations. However, the rules for 
determining, for purposes of the COBRA continuation coverage 
requirements, the number of group health plans maintained by an 
employer have been deleted, and the new proposed regulations set forth 
substantially different rules, which provide that employers and 
employee organizations generally have broad discretion to determine the 
number of group health plans that they maintain. Other significant 
changes to the 1987 proposed regulations on this point (some of which 
are set forth in the 1998 proposed regulations) include exceptions for 
long-term care services and medical savings accounts and new rules 
regarding the small-employer plan exception.
    As in the 1987 proposed regulations, the final regulations provide 
that, in general, all group health plans are subject to the COBRA 
continuation coverage requirements. However, small-employer plans 
(discussed below), church plans (within the meaning of section 414(e)), 
and governmental plans (within the meaning of section 414(d)) are not 
subject to COBRA. (The final regulations refer to these as plans 
excepted from COBRA.) Plans excepted from COBRA are generally not 
subject to the COBRA continuation coverage requirements or the COBRA 
excise tax, although group health plans maintained by state or local 
governments are subject to parallel continuation coverage requirements 
in the Public Health Service Act (which is administered by the 
Department of Health and Human Services). Also, the Federal Employees 
Health Benefit Program is subject to generally similar, although not 
parallel, temporary continuation of coverage provisions under the 
Federal Employees Health Benefits Amendments Act of 1988.
    The final regulations define group health plan in a manner 
generally similar to that in the 1987 proposed regulations. However, 
certain changes in terminology have been made to reflect the statutory 
cross-reference to section 5000(b)(1) set forth in section 4980B(g)(2) 
(such as the use of the term health care and the definition of 
employee). Additionally, the final regulations, in accordance with 
section 4980B(g)(2), provide that a plan is not a group health plan if 
substantially all the coverage provided under the plan is for qualified 
long-term care services (as defined in section 7702B(c)). The final 
regulations allow plans to use any reasonable method in determining 
whether a plan satisfies this exception. The final regulations also 
provide, in accordance with section 106(b)(5), that amounts contributed 
by an employer to a medical savings account (as defined in section 
220(d)) are not considered part of a group health plan for purposes of 
COBRA (although a high-deductible health plan will not fail to be a 
group health plan simply because it covers a holder of a medical 
savings account).
    Under the final regulations, a group health plan is a plan 
maintained by an employer or employee organization to provide health 
care to individuals who have an employment-related connection to the 
employer or employee organization or to the families of such 
individuals. In accordance with section 5000(b)(1), these individuals 
include employees, former employees, the employer, and others 
associated or formerly associated with the employer or employee 
organization in a business relationship. The final regulations 
generally refer to all individuals covered under a plan by virtue of 
the performance of services or by virtue of membership in an employee 
organization as employees. (As discussed below, the term employee has a 
narrower meaning for purposes of the small-employer plan exception.) 
The final regulations use the term employer to refer to a person for 
whom an individual performs services. Pursuant to section 414(t), the 
term employer also includes, with respect to such a person, any member 
of a group described in section 414(b), (c), (m), or (o) that includes 
the person (a controlled group) as well as any successor of the person 
or of a member of the controlled group.
    Under the final regulations, as under the 1987 proposed 
regulations, a plan generally is considered to provide health care 
whether it does so directly or through insurance, reimbursement, or 
other means and whether it does so through an on-site facility or a 
cafeteria or other flexible benefit arrangement. Insurance includes 
group insurance policies and one or more individual policies under an 
arrangement maintained by the employer or employee organization to 
provide health care to two or more employees. Under the final 
regulations, as under the 1987 proposed regulations, in the case of a 
cafeteria plan or other flexible benefit arrangement, the COBRA 
continuation coverage requirements apply only to the health care 
benefits under the cafeteria plan or other flexible benefit arrangement 
that an employee has actually chosen to receive.
    Many commenters on the 1987 proposed regulations requested 
clarification of the application of COBRA to health care benefits 
provided under flexible spending arrangements (health FSAs). Some 
commentators argued that health FSAs should not be subject to COBRA. 
Health FSAs satisfy the definition of group health plan in section 
5000(b)(1) and, accordingly, are generally subject to the COBRA 
continuation coverage requirements. However, COBRA is intended to 
ensure that a qualified beneficiary has guaranteed access to coverage 
under a group health plan and that the cost of that coverage is no 
greater than 102 percent of the applicable premium.
    The IRS and Treasury believe that the purposes of COBRA are not 
furthered by requiring an employer to offer COBRA for a plan year if 
the amount that the employer could require to be paid for the COBRA 
coverage for the plan year would exceed the maximum benefit that the 
qualified beneficiary could receive under the FSA for that plan year 
and if the qualified beneficiary could not avoid a break in coverage, 
for purposes of the HIPAA portability provisions,\2\ by electing COBRA 
coverage under the FSA. Accordingly, the new proposed regulations 
contain a rule limiting the application of the COBRA continuation 
coverage requirements in the case of health FSAs.
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    \2\ Under HIPAA, a qualified beneficiary who maintains coverage 
after termination of employment under a group health plan that is 
subject to HIPAA can avoid a break in coverage and thereby avoid 
becoming subject to a preexisting condition exclusion upon later 
becoming covered by another group health plan.
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    Under this rule, if the health FSA satisfies two conditions, the 
health FSA need not make COBRA continuation coverage available to a 
qualified beneficiary for any plan year after the plan year in which 
the qualifying event occurs. The first condition that the health FSA 
must satisfy for this exception to apply is that the health FSA is not 
subject to the HIPAA portability provisions in sections 9801

[[Page 5163]]

though 9833 because the benefits provided under the health FSA are 
excepted benefits. (See sections 9831 and 9832.) \3\ The second 
condition is that, in the plan year in which the qualifying event of a 
qualified beneficiary occurs, the maximum amount that the health FSA 
could require to be paid for a full plan year of COBRA continuation 
coverage equals or exceeds the maximum benefit available under the 
health FSA for the year. It is contemplated that this second condition 
will be satisfied in most cases.
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    \3\ The IRS and Treasury, together with the U.S. Department of 
Labor and the U.S. Department of Health and Human Services, have 
issued a notice (62 FR 67688) holding that a health FSA is exempt 
from HIPAA because the benefits provided under it are excepted 
benefits under sections 9831 and 9832 if the employer also provides 
another group health plan, the benefits under the other plan are not 
limited to excepted benefits, and the maximum reimbursement under 
the health FSA is not greater than two times the employee's salary 
reduction election (or if greater, the employee's salary reduction 
election plus five hundred dollars.)
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    Moreover, if a third condition is satisfied, the health FSA need 
not make COBRA continuation coverage available with respect to a 
qualified beneficiary at all. This third condition is satisfied if, as 
of the date of the qualifying event, the maximum benefit available to 
the qualified beneficiary under the health FSA for the remainder of the 
plan year is not more than the maximum amount that the plan could 
require as payment for the remainder of that year to maintain coverage 
under the health FSA.
    A plan is maintained by an employer or employee organization even 
if the employer or employee organization does not directly or 
indirectly contribute to it if coverage under the plan would not be 
available to an individual at the same cost if the individual did not 
have an employment-related connection to the employer or employee 
organization. The final regulations, for purposes of the definition of 
a group health plan, use the term health care instead of the term 
medical care (which was used in the 1987 proposed regulations). This 
change reflects the change in the definition of group health plan made 
by OBRA 1989. However, the final regulations provide that health care 
has the same meaning as the term medical care under section 213(d). 
Like the 1987 proposed regulations, the final regulations set forth a 
summary of items that do and do not constitute health care.
    The final regulations, generally following the 1987 proposed 
regulations, set forth rules for determining whether a group health 
plan is a small-employer plan. In general, a group health plan other 
than a multiemployer plan is a small-employer plan if it is maintained 
for a calendar year by an employer that normally employed fewer than 20 
employees during the preceding calendar year, and a group health plan 
that is a multiemployer plan is a small-employer plan if each of the 
employers contributing to the plan for a calendar year normally 
employed fewer than 20 employees during the preceding calendar year. 
Whether the plan is a multiemployer plan or not, the term employer 
includes all members of a controlled group. An example in the final 
regulations clarifies that the controlled group includes foreign 
members, and thus a U.S. subsidiary with fewer than 20 employees is 
subject to COBRA if the controlled group has 20 or more employees 
world-wide. The final regulations set forth additional rules for the 
application of the small-employer plan exception to multiemployer 
plans, and the new proposed regulations contain the same definition of 
multiemployer plan that is in section 414(f).
    Under the final regulations, an employer is considered to have 
normally employed fewer than 20 employees during a particular calendar 
year if it had fewer than 20 employees on at least 50 percent of its 
typical business days during that year. This rule differs from the rule 
in the 1987 proposed regulations in two ways. First, the 1987 proposed 
regulations use the term working days, whereas the final regulations 
use the statutory term typical business days.
    The second difference relates to the term employee. Under the 1987 
proposed regulations, self-employed individuals and independent 
contractors are counted as employees for purposes of the small-employer 
plan exception if they are covered under a plan of the employer. 
Commenters argued that only common law employees should be counted for 
this purpose. Unlike the definition of covered employee (amended by 
OBRA 1989 to make clear that individuals who are not common law 
employees but who are covered under the group health plan of an 
employer or employee organization by virtue of the performance of 
services are still considered covered employees) and the definition of 
group health plan (amended by OBRA 1993 to make clear that a health 
plan covering individuals who are not common law employees of the 
employer or employee organization, and who are not family members of 
common law employees, is still a group health plan) the reference to 
employees for purposes of the small-employer plan exception have not 
been amended to include individuals who are not common law employees. 
Consequently, under the final regulations, only common law employees 
are taken into account for purposes of the small-employer plan 
exception; self-employed individuals, independent contractors, and 
directors are not counted.
    Although a small-employer plan is generally excepted from COBRA, a 
plan that is not a small-employer plan for a period remains subject to 
COBRA for qualifying events that occurred during that period, even if 
it subsequently becomes a small-employer plan.
    In determining whether a plan is eligible for the small-employer 
plan exception, part-time employees, as well as full-time employees, 
must be taken into account. Several commenters on the 1987 proposed 
regulations requested clarification of how to count part-time employees 
for the small-employer plan exception, and the new proposed regulations 
provide guidance on this issue. Under the new proposed regulations, 
instead of each part-time employee counting as a full employee, each 
part-time employee counts as a fraction of an employee, with the 
fraction equal to the number of hours that the part-time employee works 
for the employer divided by the number of hours that an employee must 
work in order to be considered a full-time employee. The number of 
hours that must be worked to be considered a full-time employee is 
determined in a manner consistent with the employer's general 
employment practices, although for this purpose not more than eight 
hours a day or 40 hours a week may be used. An employer may count 
employees for each typical business day or may count employees for a 
pay period and attribute the total number of employees for that pay 
period to each typical business day that falls within the pay period. 
The employer must use the same method for all employees and for the 
entire year for which the small-employer plan determination is made.
    In determining whether a multiemployer plan satisfies the 
requirements for the small-employer plan exception, the 1987 proposed 
regulations provide a special rule permitting the multiemployer plan to 
be considered a small-employer plan for a year if any contributing 
employer that grew to be too large to qualify for the exception during 
the preceding year ceases to contribute to the plan by February 1 of 
the current year. Questions have been raised about the need for and the 
authority for this special rule, and one commenter pointed out the 
uncertainty of how to

[[Page 5164]]

deal with a qualified beneficiary experiencing a qualifying event under 
such a plan in January of the current year if the qualified beneficiary 
needed confirmation of coverage for urgent services before it was clear 
that the too-large employer would cease contributing to the 
multiemployer plan by February 1. Based on these concerns, the final 
regulations eliminate this special rule for multiemployer plans.
    The new proposed regulations provide guidance, for purposes of the 
COBRA continuation coverage requirements, on how to determine the 
number of group health plans that an employer or employee organization 
maintains. Under these rules, the employer or employee organization is 
generally permitted to establish the separate identity and number of 
group health plans under which it provides health care benefits to 
employees. Thus, if an employer or employee organization provides a 
variety of health care benefits to employees, it generally may 
aggregate the benefits into a single group health plan or disaggregate 
benefits into separate group health plans. The status of health care 
benefits as part of a single group health plan or as separate plans is 
determined by reference to the instruments governing those 
arrangements. If it is not clear from the instruments governing an 
arrangement or arrangements to provide health care benefits whether the 
benefits are provided under one plan or more than one plan, or if there 
are no instruments governing the arrangement or arrangements, all such 
health care benefits (other than those for qualified long-term care 
services) provided by a single entity (determined without regard to the 
controlled group) constitute a single group health plan.
    Under the new proposed regulations, a multiemployer plan and a plan 
other than a multiemployer plan are always separate plans. In addition, 
any treatment of health care benefits as constituting separate group 
health plans will be disregarded if a principal purpose of the 
treatment is to evade any requirement of law. Of course, an employer's 
flexibility to treat benefits as part of separate plans may be limited 
by the operation of other laws, such as the prohibition in section 9802 
on conditioning eligibility to enroll in a group health plan on the 
basis of any health factor of an individual.
    The final regulations modify the rules set forth in the 1987 
proposed regulations for determining the plan year of a group health 
plan under COBRA. These modifications are made to be consistent with 
the rules in the temporary regulations under HIPAA. The definition of 
plan year is important in applying, for example, the effective date 
provisions under the final regulations and the rules for health FSAs 
under the new proposed regulations. Under the final regulations, the 
plan year is the year designated as such in the plan documents. If the 
plan documents do not designate a plan year (or if there are no plan 
documents), the plan year is the deductible/limit year used by the 
plan. If the plan does not impose deductibles or limits on an annual 
basis, the plan year is the policy year. If the plan does not impose 
deductibles or limits on an annual basis and the plan is not insured 
(or the insurance policy is not renewed annually), the plan year is the 
taxable year of the employer. In any other case, the plan year is the 
calendar year.
    The final regulations reflect the statutory provisions that provide 
for the imposition of an excise tax in the event of a failure by a 
group health plan to comply with the COBRA continuation coverage 
requirements of section 4980B(f). In the case of a multiemployer plan, 
the excise tax is imposed on the plan; \4\ in the case of any other 
plan, the excise tax is imposed on the employer maintaining the plan. 
In certain circumstances, the excise tax can be imposed on other 
persons involved with the provision of benefits under the plan, such as 
an insurer providing benefits under the plan or a third party 
administrator administering claims under the plan. Separate, non-tax 
remedies may be available in the case of a plan that fails to comply 
with the COBRA continuation coverage requirements in ERISA.
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    \4\ In this regard, the U.S. Department of labor has advised the 
IRS and Treasury that to the extent a plan fiduciary subjects a plan 
to liability for the COBRA excise tax on account of her or his 
imprudent actions, the plan fiduciary may be held personally liable 
under Title I of ERISA for the amount of the tax.
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Qualified Beneficiaries

    The rules in the final regulations for determining who is a 
qualified beneficiary generally follow those set forth in the 1987 
proposed regulations, as well as those set forth in the 1998 proposed 
regulations regarding the status of newborn and adopted children as 
qualified beneficiaries. However, certain provisions have been added to 
the final regulations to reflect the special statutory rules that apply 
in the case of bankruptcy of the employer as a qualifying event. 
Modifications have also been made to reflect the decision of the 
Supreme Court in Geissal v. Moore Medical Corp., 118 S. Ct. 1869 
(1998), which held that an individual covered under another group 
health plan at the time she or he elects COBRA continuation coverage 
cannot be denied COBRA continuation coverage on the basis of that other 
coverage.
    Under the final regulations, a qualified beneficiary is, in 
general: (1) any individual who, on the day before a qualifying event, 
is covered under a group health plan either as a covered employee, the 
spouse of a covered employee, or the dependent child of a covered 
employee; or (2) any child born to or placed for adoption with a 
covered employee during a period of COBRA continuation coverage. (The 
final regulations retain the definitions of the terms placement for 
adoption and being placed for adoption that were in the 1998 proposed 
regulations.) For a qualifying event that is the bankruptcy of the 
employer, any covered employee who retired on or before the date of any 
substantial elimination of group health plan coverage is a qualified 
beneficiary; the spouse, surviving spouse, or dependent child of the 
retired covered employee is also a qualified beneficiary if the spouse, 
surviving spouse, or dependent child was a beneficiary under the plan 
on the day before the bankruptcy qualifying event. The final 
regulations add a provision clarifying that if an individual is denied 
coverage under a group health plan in violation of applicable law 
(including HIPAA) and experiences an event that would be a qualifying 
event if the coverage had not been wrongfully denied, the individual is 
considered a qualified beneficiary.
    A covered employee can be a qualified beneficiary only in 
connection with a qualifying event that is the termination (or 
reduction of hours) of the covered employee's employment or the 
employer's bankruptcy. As under the 1987 proposed regulations, the 
final regulations provide that a covered employee is not a qualified 
beneficiary if her or his status as a covered employee is attributable 
to certain periods in which she or he was a nonresident alien (in which 
case the covered employee's spouse and dependent children are also not 
qualified beneficiaries). Although a child born to or placed for 
adoption with a covered employee during a period of COBRA continuation 
coverage is a qualified beneficiary, a child born to or placed for 
adoption with a qualified beneficiary other than the covered employee 
after a qualifying event, or a person who becomes the spouse of a 
qualified beneficiary (regardless of whether the qualified beneficiary 
is the covered employee) after a qualifying event is not a qualified

[[Page 5165]]

beneficiary. The final regulations retain the rule of the 1987 proposed 
regulations under which an individual is not a qualified beneficiary 
if, on the day before the qualifying event, the individual is covered 
under the group health plan solely because of another individual's 
election of COBRA continuation coverage. However, consistent with 
Geissal, the final regulations eliminate the rule in the 1987 proposed 
regulations that an individual is not a qualified beneficiary if, on 
the day before the qualifying event, the individual was entitled to 
Medicare benefits.
    An individual ceases to be a qualified beneficiary if she or he 
does not elect COBRA continuation coverage by the end of the election 
period (discussed below). The final regulations clarify that an 
individual who elects COBRA continuation coverage ceases to be a 
qualified beneficiary once the plan's obligation to provide COBRA 
continuation coverage has ended.
    The term covered employee is defined in the final regulations in a 
manner substantially the same as in the 1987 proposed regulations. 
Although some commenters on the 1987 proposed regulations objected to 
the inclusion in this definition of individuals other than common law 
employees, the statutory definition was amended by OBRA 1989 to include 
such individuals.
    Under the final regulations, a covered employee generally includes 
any individual who is or has been provided coverage under a group 
health plan (other than one excepted from COBRA as of the date of what 
would otherwise be a qualifying event) because of her or his present or 
past performance of services for the employer maintaining the group 
health plan (or by reason of membership in the employee organization 
maintaining the plan). Thus, retirees and former employees covered by a 
group health plan are covered employees if the coverage is provided in 
whole or in part because of the previous employment. Any individual who 
performs services for the employer maintaining the plan or who is a 
member of the employee organization maintaining the plan may be a 
covered employee. Thus, common law employees, self-employed 
individuals, independent contractors, and corporate directors can be 
covered employees. Generally, mere eligibility for coverage--as opposed 
to actual coverage--does not make an individual a covered employee. 
However, if an individual who otherwise would be a covered employee is 
denied coverage under a group health plan in violation of applicable 
law (including HIPAA), the individual is considered a covered employee.

Qualifying Events

    The rules regarding qualifying events under the final regulations 
generally are the same as those in the 1987 proposed regulations. Under 
the final regulations, a qualifying event is any of a set of specified 
events that occurs while a group health plan is subject to COBRA and 
that causes a covered employee (or the spouse or dependent child of the 
covered employee) to lose coverage under the plan. These specified 
events are: the death of a covered employee; the termination (other 
than by reason of gross misconduct), or reduction of hours, of a 
covered employee's employment; the divorce or legal separation of a 
covered employee from the covered employee's spouse; a covered 
employee's becoming entitled to Medicare benefits under Title XVIII of 
the Social Security Act; a dependent child's ceasing to be a dependent 
child of the covered employee under the plan; and a proceeding in 
bankruptcy under Title 11 of the United States Code with respect to an 
employer from whose employment a covered employee retired at any time. 
The addition of employer bankruptcy as a qualifying event reflects the 
amendments made to COBRA by OBRA 1986.
    The reasons for which an employee has a termination of employment 
or a reduction of hours of employment generally are not relevant in 
determining whether the termination or reduction of hours is a 
qualifying event. Thus, a voluntary termination, a strike, a lockout, a 
layoff, or an involuntary discharge each may constitute a qualifying 
event. However, if an employee is discharged for gross misconduct, the 
termination of employment does not constitute a qualifying event. The 
final regulations clarify that a reduction of hours of a covered 
employee's employment includes any decrease in the number of hours that 
a covered employee works or is required to work that does not 
constitute a termination of employment. Thus, if a covered employee 
takes a leave of absence, is laid off, or otherwise performs no hours 
of work during a period, the covered employee has experienced a 
reduction in hours that, if the other applicable requirements are 
satisfied, constitutes a qualifying event. (But see Notice 94-103 
(1994-2 C.B. 569) and the new proposed regulations, described below, 
for special rules regarding FMLA leave.) A covered employee's loss of 
coverage by reason of a failure to work the minimum number of hours 
required for coverage constitutes a reduction of hours of employment.
    Under the final regulations, to lose coverage means to cease to be 
covered under the same terms and conditions as in effect immediately 
before the event. The final regulations clarify that a loss of coverage 
includes an increase in an employee premium or contribution resulting 
from one of the events described above. The loss of coverage need not 
be concurrent with the event; it is enough that the loss of coverage 
occur at any time before the end of the maximum coverage period 
(described below). For employer bankruptcies, the term to lose coverage 
also includes a substantial elimination of coverage that occurs within 
12 months before or after the date on which the bankruptcy proceeding 
begins.
    Under the final regulations, as under the 1987 proposed 
regulations, reductions or eliminations in coverage in anticipation of 
an event are disregarded in determining whether the event results in a 
loss of coverage. Although several commenters objected to this rule, 
the final regulations retain the provision in order to protect 
qualified beneficiaries from being deprived of their COBRA rights 
because an employer or employee organization transposes a loss or 
reduction of coverage to a time before the qualifying event. This rule 
also applies in cases where a covered employee discontinues the 
coverage of a spouse in anticipation of a divorce or legal separation. 
In such a case, upon receiving notice of the divorce or legal 
separation, a plan is required to make COBRA continuation coverage 
available, effective on the date of the divorce or legal separation 
(but not for any period before the date of the divorce or legal 
separation).
    Under the final regulations, as under the 1987 proposed 
regulations, an event must occur while the group health plan is subject 
to COBRA in order to constitute a qualifying event. A plan that is 
excepted from COBRA (for example, by reason of the small-employer plan 
exception) and that later becomes subject to COBRA is not required to 
provide COBRA continuation coverage to individuals who experienced what 
would otherwise be a qualifying event during the period when the plan 
was not subject to COBRA.
    Finally, in the case of a child born to or placed for adoption with 
a covered employee during a period of COBRA continuation coverage, the 
qualifying event that gives rise to that period of COBRA continuation 
coverage is the qualifying event applicable to that child. Thus, if a 
second qualifying event has

[[Page 5166]]

occurred before such a child is born (for example, if the covered 
employee dies), the second qualifying event also applies to the newborn 
child.

COBRA Continuation Coverage

    The 1987 proposed regulations generally refer to the coverage that 
a qualified beneficiary is entitled to as the coverage that was in 
effect on the day before the qualifying event. While that is generally 
true, the final regulations have been revised to incorporate the 
statutory standard that a qualified beneficiary is entitled to the 
coverage made available to similarly situated beneficiaries with 
respect to whom a qualifying event has not occurred. The final 
regulations generally use as a shorthand for this statutory language 
the phrase ``similarly situated nonCOBRA beneficiaries'' instead of the 
phrase ``similarly situated active employees'' used in the 1987 
proposed regulations. In certain contexts in the final regulations, 
though, the phrase ``similarly situated active employees'' is still 
used because in those contexts--such as the right to make an 
independent election for COBRA continuation coverage--qualified 
beneficiaries who are spouses and dependent children of covered 
employees are entitled to the rights that employees have (and in those 
contexts, spouses and dependent children who are not qualified 
beneficiaries typically do not have the rights that employees have).
    The 1987 proposed regulations address in a separate question-and-
answer the type of coverage that must be made available to qualified 
beneficiaries if a change is made in the coverage provided to similarly 
situated nonCOBRA beneficiaries. The final regulations include this 
rule in the question-and-answer that defines COBRA continuation 
coverage. In doing so, the final regulations delete several specific 
requirements in the 1987 proposed regulations. For example, if coverage 
for the similarly situated nonCOBRA beneficiaries is changed or 
eliminated, the 1987 proposed regulations require that qualified 
beneficiaries be permitted to elect coverage under any remaining plan 
made available to the similarly situated active employees. Many 
commenters objected that in the case of a mere change in benefits, the 
requirement to give qualified beneficiaries an election among other 
plans would give them greater rights than those active employees might 
have. The final regulations follow the suggestion of the commenters in 
providing that the general principle--that qualified beneficiaries have 
the same rights as similarly situated nonCOBRA beneficiaries--applies 
in this situation. The same principle also applies in determining 
whether credit for deductibles must be carried over from a discontinued 
plan to a new plan. Nevertheless, if an employer or employee 
organization providing more than one plan to a group of similarly 
situated nonCOBRA beneficiaries eliminates benefits under one plan 
without giving the similarly situated nonCOBRA beneficiaries the right 
to enroll in another plan, that option would still have to be made 
available to qualified beneficiaries if the employer continued to 
maintain a group health plan because of the employer's obligation to 
continue to make COBRA continuation coverage available.
    The 1987 proposed regulations include detailed rules requiring that 
qualified beneficiaries generally be offered the option of electing 
only core coverage or both core and noncore coverage. These rules were 
based on a reference in the conference report to the Tax Reform Act of 
1986. Many commenters expressed the opinion that the reference in the 
conference report is an insufficient basis for including this concept 
in the regulations when nothing in the statute itself suggests a 
distinction between core and noncore coverage. Commenters also 
contended that the core/noncore distinction would create undue 
administrative complexity and promote adverse selection. After careful 
consideration, the IRS and Treasury have decided not to include in 
either the final or the new proposed regulations any such requirement 
to offer for core coverage separately. However, comments are invited on 
whether such a requirement should be adopted.
    The 1987 proposed regulations establish standards for determining 
the deductibles and limits that apply to COBRA continuation coverage in 
a period in which an individual or a group of family members has 
coverage that is not COBRA continuation coverage and then elects COBRA 
continuation coverage. (Of course, during a period in which an 
individual or group of family members had only COBRA continuation 
coverage, the rules for deductibles and limits would apply to them in 
the same manner as they would to similarly situated nonCOBRA 
beneficiaries.) Some commenters objected to the provisions of the 1987 
proposed regulations for computing deductibles or limits on a family 
basis in the case of a qualifying event (such as divorce) that splits a 
family into two (or more) units. The 1987 proposed regulations would 
require that each resulting family unit be credited with all the 
expenses incurred by the entire family before the qualifying event. The 
final regulations revise this rule. Under the final regulations, in 
computing deductibles and limits for the family unit receiving COBRA 
coverage, the plan is required to take into account only those expenses 
incurred before the qualifying event by family members who are part of 
the resulting family unit after the qualifying event.
    The 1987 proposed regulations provide that qualified beneficiaries 
moving outside the area served by a region-specific plan must be given 
the right to obtain other coverage from the employer maintaining the 
region-specific plan. The rule conditions the right to other coverage 
on the employer having employees in the area to which the qualified 
beneficiary is moving. This proposed rule unduly limits the application 
of the rule in the case of an employer or employee organization that 
could provide other coverage to the qualified beneficiary without 
having to establish a new plan or enter into a new group insurance 
contract even though the employer did not have employees or the 
employee organization did not have members in the area that the 
qualified beneficiary was moving to. This might be the case, for 
example, if the employer or employee organization maintained a self-
insured plan or maintained an insured plan through an insurance company 
licensed to provide that same product in the area that the qualified 
beneficiary was moving to. The final regulations eliminate the 
condition that an employer have employees in the area to which the 
qualified beneficiary is moving and instead require that coverage be 
made available to the qualified beneficiary if the employer or employee 
organization would be able to provide coverage to the qualified 
beneficiary under one of its existing plans. Generally the coverage 
that must be made available is that made available to the similarly 
situated nonCOBRA beneficiaries. If, however, the coverage made 
available to the similarly situated nonCOBRA beneficiaries cannot be 
made available in the area that the qualified beneficiary is moving to, 
then the coverage that must be made available is coverage provided to 
other employees.
    The 1987 proposed regulations require, in the case of a plan 
providing open enrollment rights, that open enrollment rights be 
extended to qualified beneficiaries if an employer maintains two or 
more plans. Thus, that rule, by its terms, does not require that open 
enrollment rights be given if an

[[Page 5167]]

employer maintains a single plan and allows active employees during 
open enrollment to switch between categories of coverage such as single 
and family or among categories such as employee-only, employee-plus-
one-dependent, or employee-plus-two-or-more-dependents. The final 
regulations eliminate the condition that an employer or employee 
organization maintain two or more plans for a qualified beneficiary to 
have open enrollment rights. Thus, open enrollment rights must be 
extended to qualified beneficiaries in any case in which they are 
extended to similarly situated active employees. (Note that the open 
enrollment right of employees to enroll when not previously enrolled 
would not have to be extended to individuals who previously did not 
elect to receive COBRA continuation coverage because an individual 
ceases to be a qualified beneficiary if COBRA continuation coverage is 
not elected.)
    The 1987 proposed regulations require that qualified beneficiaries 
be given the same right to add new family members that similarly 
situated active employees have. Many commenters objected to this rule, 
arguing that it requires more than a mere continuation of coverage. 
However, COBRA continuation coverage is more than just a continuation 
of the coverage a qualified beneficiary had before the qualifying 
event; it includes the same procedural rights to expand or change 
coverage that similarly situated active employees have. Moreover, the 
policy behind the 1987 proposed regulations is reflected in the HIPAA 
amendment to COBRA creating special qualified beneficiary status for 
certain newborn and adopted children as well as in the HIPAA special 
enrollment rights in section 9801(f) for new spouses and for newborn 
and adopted children. Accordingly, the final regulations provide 
guidance on the application of the HIPAA special enrollment rights to 
qualified beneficiaries and retain the rule in the 1987 proposed 
regulations regarding the right of qualified beneficiaries to add new 
family members (even though not eligible for the HIPAA special 
enrollment rights) to the same extent that active employees are 
permitted to add new family members.

Electing COBRA Continuation Coverage

    The final regulations set forth rules regarding elections of COBRA 
continuation coverage by qualified beneficiaries. In general, a group 
health plan is required to offer a qualified beneficiary the 
opportunity to elect COBRA continuation coverage at any time during the 
election period. The election period begins not later than the date the 
qualified beneficiary would lose coverage by reason of a qualifying 
event and ends not earlier than 60 days after the later of that date or 
60 days after the date on which the qualified beneficiary is provided 
notice of her or his right to elect COBRA continuation coverage. For 
purposes of determining whether a qualified beneficiary's election of 
COBRA continuation coverage is timely, the election is deemed to be 
made on the date it is sent to the employer or plan administrator. The 
final regulations clarify that a qualified beneficiary need not herself 
or himself elect COBRA continuation coverage; that election can be made 
on behalf of the qualified beneficiary by a third party (including a 
third party that is not a qualified beneficiary).
    Generally, the employer or plan administrator must determine when a 
qualifying event has occurred, and a qualified beneficiary is not 
required to give notice of the event. However, a covered employee or 
qualified beneficiary is required to notify the plan administrator of a 
qualifying event that is a divorce or legal separation of the covered 
employee or a dependent child's ceasing to be a dependent child under 
the plan terms. The 1987 proposed regulations prescribe that the 
notification should be given to the employer or other plan 
administrator. The final regulations simply require that the notice be 
provided to the plan administrator.
    The notice must be provided within 60 days after the date of the 
qualifying event or the date on which the qualified beneficiary would 
lose coverage because of the qualifying event, whichever is later. If 
the notice is not provided, the group health plan is not required to 
make COBRA continuation coverage available to the qualified 
beneficiary.\5\ In the case of the covered employee's divorce or legal 
separation, a single notice sent by or on behalf of the covered 
employee or any one of the qualified beneficiaries (that is, the spouse 
or a dependent child) satisfies the notice requirement for all those 
who become qualified beneficiaries as a result of the divorce or legal 
separation.
---------------------------------------------------------------------------

    \5\ The U.S. Department of Labor has advised the IRS and 
Treasury that, if a covered employee or qualified beneficiary has 
not been adequately informed of the obligation to provide notice in 
the case of a qualifying event that is the divorce or legal 
separation of the covered employee or that is a dependent child's 
ceasing to be covered under the generally applicable requirements of 
the plan, the covered employee's or qualified beneficiary's failure 
to provide timely notice to the plan administrator will not affect 
the plan's obligation to make continuation coverage available upon 
receiving notice of such event.
---------------------------------------------------------------------------

    The group health plan must make COBRA continuation coverage 
available for the entire election period if the qualified beneficiary 
elects coverage prior to the end of the period (except in the case of a 
revoked waiver, as discussed below). An employer or employee 
organization maintaining a group health plan using an indemnity or 
reimbursement arrangement can satisfy this requirement by continuing 
the qualified beneficiary's coverage during the election period or by 
discontinuing the coverage until the qualified beneficiary elects COBRA 
and then retroactively reinstating the qualified beneficiary's 
coverage. Under the final regulations, as under the 1987 proposed 
regulations, the date of the qualifying event (and thus, the beginning 
of the maximum coverage period) is not delayed merely because a plan 
provides coverage during the election period. Claims incurred by the 
qualified beneficiary during the election period do not have to be paid 
until COBRA continuation coverage is elected and any payment required 
for coverage is made.
    For a group health plan providing health services--including a 
health maintenance organization or a walk-in clinic--a qualified 
beneficiary who has not elected and paid for COBRA continuation 
coverage can be required to choose either to elect and to pay for 
coverage or to pay a reasonable and customary charge for plan services 
(but only if the qualified beneficiary will be reimbursed for that 
charge within 30 days after she or he elects COBRA continuation 
coverage and makes any payment for coverage). Alternatively, the plan 
can treat the qualified beneficiary's use of the plan's health services 
as a constructive election of COBRA continuation coverage and, if it so 
notifies the qualified beneficiary prior to the use of services, can 
require payment for COBRA continuation coverage.
    The final regulations adopt the position in Communications Workers 
of America v. NYNEX Corp., 898 F.2d 887 (2d Cir. 1989), regarding the 
responses that a group health plan must make with respect to the rights 
of a qualified beneficiary during that qualified beneficiary's election 
period. Specifically, the final regulations require that the plan make 
a complete response to any inquiry from a health care provider 
regarding the qualified beneficiary's right to coverage under the plan 
during the election period. Thus, if the qualified beneficiary has not 
yet elected COBRA continuation coverage

[[Page 5168]]

but remains covered under the plan during the election period (subject 
to retroactive cancellation if no election is made), the plan must so 
inform the health care provider. Conversely, if the qualified 
beneficiary is not covered during the election period prior to her or 
his election, the plan must inform the health care provider that the 
qualified beneficiary does not have current coverage but will have 
retroactive coverage if COBRA continuation coverage is elected. (The 
final regulations also include similar requirements with respect to 
inquiries made by health care providers during the 30- and 45-day grace 
periods for paying for COBRA continuation coverage.)
    A qualified beneficiary who waives COBRA continuation coverage 
during the election period can revoke the waiver before the end of the 
election period, but the group health plan is not then required to 
provide coverage as of any date prior to the revocation. Although 
several commenters objected to the rule in the 1987 proposed 
regulations allowing the revocation during the election period of any 
previous waiver, the final regulations retain this rule. If the rule 
permitted irrevocable waivers, plans might induce qualified 
beneficiaries to execute waivers hastily before becoming fully informed 
of their rights and having the opportunity to carefully consider 
whether to elect COBRA. As with the election of COBRA continuation 
coverage, a waiver or a revocation of a waiver is deemed to be made on 
the date sent. The employer or employee organization maintaining the 
group health plan is not permitted to withhold money, benefits, or 
anything else to which the qualified beneficiary is entitled under any 
law or agreement in order to induce a qualified beneficiary to make 
payment for COBRA continuation coverage or to surrender any rights 
under COBRA. Any waiver of COBRA continuation coverage rights obtained 
through such means will be invalid. However, the general rules for 
coverage during the election period apply in the case of waivers and 
revocations of waivers. Thus, in the case of an indemnity arrangement, 
the plan can deny coverage for claims until payment for the coverage 
has been made (as can also be done with those health maintenance 
organizations or walk-in clinics that adopt this method for complying 
with the COBRA continuation coverage requirements during the election 
period).
    A group health plan must offer each qualified beneficiary the 
opportunity to make an independent election to receive COBRA 
continuation coverage and, during an open enrollment period, to choose 
among any options available to similarly situated active employees. 
This requirement also applies to any child born to or placed for 
adoption with a covered employee during a period of COBRA continuation 
coverage. (An election for a minor child may be made by the child's 
parent or legal guardian.) If a covered employee or the spouse of a 
covered employee elects COBRA continuation coverage and the election 
does not specify whether the election is for self-only coverage, the 
election is deemed to include an election of COBRA continuation 
coverage on behalf of other qualified beneficiaries with respect to 
that qualifying event.

Duration of COBRA Continuation Coverage

    The 1987 proposed regulations incorporate the statutory bases for 
terminating COBRA continuation coverage except the rule (added by OBRA 
1989 and amended by HIPAA) that COBRA coverage can be terminated in the 
month that is more than 30 days after a final determination that a 
qualified beneficiary is no longer disabled. The new proposed 
regulations add this statutory basis for terminating COBRA coverage, 
with two clarifications. First, the new proposed regulations clarify 
that a determination that a qualified beneficiary is no longer disabled 
allows termination of COBRA continuation coverage for all qualified 
beneficiaries who were entitled to the disability extension by reason 
of the disability of the qualified beneficiary who has been determined 
to no longer be disabled. Second, the new proposed regulations clarify 
that such a determination does not allow termination of the COBRA 
continuation coverage of a qualified beneficiary before the end of the 
maximum coverage period that would apply without regard to the 
disability extension.
    Section 4980B(f)(2)(B)(iv) provides that a qualified beneficiary's 
right to COBRA continuation coverage may be terminated when the 
qualified beneficiary ``first becomes,'' after the date of the COBRA 
election, covered under another group health plan (subject to certain 
additional conditions) or entitled to Medicare benefits. The final 
regulations add two new questions-and-answers that provide guidance on 
this provision.
    The 1987 proposed regulations substitute ``is'' for the statutory 
phrase ``first becomes.'' The effect of this substitution was to permit 
an employer to cut off a qualified beneficiary's right to COBRA 
continuation coverage based upon other group health plan coverage that 
the qualified beneficiary first became covered under before she or he 
elected COBRA coverage. In the case of entitlement to Medicare 
benefits, the 1987 proposed regulations not only shift the statutory 
``becomes'' to ``is,'' they also exclude from the definition of 
qualified beneficiary anyone who is entitled to Medicare benefits on 
the day before the qualifying event. After careful consideration, the 
IRS and Treasury concluded that the better interpretation of the 
statute is that other group health plan coverage that a qualified 
beneficiary has before the COBRA election is not a basis for cutting 
off the qualified beneficiary's right to COBRA continuation coverage. 
(The same rule applies for entitlement to Medicare benefits.)
    Based upon the recommendation of the IRS, the Solicitor General 
filed an amicus brief before the Supreme Court urging this position, 
which was unanimously adopted by the Supreme Court in Geissal v. Moore 
Medical Corp., 118 S. Ct. 1869 (1998). The final regulations adopt the 
position urged by the IRS and Treasury and adopted by the Court in 
Geissal. They provide that an employer may cut off the right to COBRA 
continuation coverage based upon other group health plan coverage or 
entitlement to Medicare benefits only if the qualified beneficiary 
first becomes covered under the other group health plan coverage or 
entitled to the Medicare benefits after the date of the COBRA election.
    The statutory rule allowing a plan to discontinue COBRA 
continuation coverage on account of coverage under another group health 
plan was amended by OBRA 1989 to prohibit the discontinuance if the 
qualified beneficiary's other coverage was subject to a preexisting 
condition exclusion. This amendment was further modified by HIPAA to 
allow discontinuance of COBRA continuation coverage if the preexisting 
condition exclusion does not apply or is satisfied by reason of the 
limitations on preexisting condition exclusions in section 9801. The 
final regulations reflect this amendment and clarify that coverage 
under another group health plan includes coverage under a governmental 
plan.
    Many commenters asked whether mere eligibility for Medicare 
justifies a discontinuance of COBRA continuation coverage. In addition, 
many inquiries have been received that ask whether the qualified 
beneficiary must be entitled to both Part A and B of Medicare. The 
final regulations clarify that entitlement to Medicare benefits means 
being enrolled

[[Page 5169]]

in Medicare and does not mean merely being eligible to enroll in 
Medicare. The final regulations also clarify that being entitled to 
either Part A or B is sufficient for the plan to discontinue COBRA 
continuation coverage (assuming that the entitlement to Medicare 
benefits first arises after COBRA continuation coverage has been 
elected).
    The 1987 proposed regulations allow a plan to discontinue providing 
COBRA continuation coverage to a qualified beneficiary for cause on the 
same basis that the plan could terminate for cause the coverage of a 
similarly situated active employee (except for payments that would be 
untimely if made by a nonCOBRA beneficiary but that are made within the 
grace periods provided by COBRA). The final regulations provide that, 
for example, if a plan terminates the coverage of similarly situated 
active employees for the submission of a fraudulent claim, then the 
COBRA continuation coverage of a qualified beneficiary can also be 
terminated for the submission of a fraudulent claim.
    The 1987 proposed regulations reflect the statutory rules that were 
then in effect for the maximum period that a plan is required to make 
COBRA continuation coverage available. Since then the statute has been 
amended to add the disability extension, to permit plans to extend the 
notice period if the maximum coverage period is also extended (referred 
to as the optional extension of the required periods), and to add a 
special rule in the case of Medicare entitlement preceding a qualifying 
event that is the termination or reduction of hours of employment. The 
new proposed regulations reflect these statutory changes. The maximum 
coverage period for a qualifying event that is the bankruptcy of the 
employer has also been added to the new proposed regulations.
    The 1998 proposed regulations set forth the requirements for a 
disability extension to apply to a qualified beneficiary. Those 
requirements have been incorporated into the final regulations, with 
one clarification. One of the conditions for a disability extension to 
apply is that the qualified beneficiary be disabled during the first 60 
days of COBRA continuation coverage. In the case of a qualified 
beneficiary who is born to or placed for adoption with a covered 
employee during a period of COBRA continuation coverage, the final 
regulations clarify that the 60-day period is measured from the date of 
the child's birth or placement for adoption.
    The 1987 proposed regulations set forth standards for expanding the 
maximum coverage period in the case of multiple qualifying events. 
Since 1987, the statutory rules for multiple qualifying events have 
been affected by the addition of the disability extension and the 
optional extension of required periods. The final regulations reflect 
the statutory changes.
    In addition, the final regulations clarify that a termination of 
employment following a qualifying event that is a reduction of hours of 
employment does not expand the maximum coverage period. Accord, Burgess 
v. Adams Tool & Engineering, Inc., 908 F. Supp. 473 (W.D. Mich. 1995); 
contra, Gibbs v. Anchorage School District, 1995 U.S. LEXIS 6290 (D. 
Ark. 1995). The underlying pattern in the statute is generally to 
require 18 months (or 29 months, in the case of a disability extension) 
of coverage for qualifying events that are the termination or reduction 
of hours of a covered employee's employment and 36 months for other 
qualifying events. The statutory provision for expansion of the 18-
month period to 36 months upon the occurrence of a second qualifying 
event generally follows this pattern by allowing a qualified 
beneficiary who would have been entitled to 36 months of coverage if 
the second qualifying event had occurred first to get a total of 36 
months of COBRA continuation coverage. The statute lists six categories 
of qualifying events, and termination of employment and reduction of 
hours of employment are in the same category (just as divorce and legal 
separation are in the same category of qualifying event). Treating a 
reduction of hours of employment and a termination of employment as 
variations of a single qualifying event rather than as two distinct 
qualifying events is consistent with the overall design of the statute.
    The 1987 proposed regulations address situations in which, 
following a qualifying event, an employer provides alternative 
coverage, rather than COBRA continuation coverage, to a former employee 
and her or his spouse and dependent children. The 1987 proposed 
regulations provide that if the alternative coverage does not satisfy 
the requirements for COBRA continuation coverage, each qualified 
beneficiary must be given the opportunity to elect COBRA continuation 
coverage instead of the alternative coverage. If, however, the 
alternative coverage would satisfy the requirements for COBRA 
continuation coverage, the 1987 proposed regulations provide that, at 
the time of the original qualifying event, the employee, spouse, and 
dependent children need not be provided with the opportunity to elect 
COBRA continuation coverage. The final regulations generally retain 
these rules but also clarify that if the employer increases the 
employee share of premiums upon the occurrence of a qualifying event, 
the qualified beneficiaries must be offered the opportunity to elect 
COBRA continuation coverage.
    The 1987 proposed regulations further provide that, if the 
alternative coverage does not satisfy the requirements for COBRA 
continuation coverage and if, after the original qualifying event, a 
qualifying event occurs that would cause a spouse or dependent child to 
lose the alternative coverage, the spouse or child must be offered 
COBRA continuation coverage. However, if the alternative coverage 
satisfies the requirements for COBRA continuation coverage, and if 
another qualifying event that causes the spouse or dependent child to 
lose the alternative coverage occurs more than 18 months after the 
original qualifying event, the 1987 proposed regulations provide that 
the spouse or dependent child need not be offered COBRA continuation 
coverage. The final regulations modify the 1987 proposed regulations 
and provide that if an event such as the death of or divorce from the 
covered employee would end the right of a spouse or dependent child to 
receive the alternative coverage (whether during or after the first 18 
months of COBRA continuation coverage), then that event is a qualifying 
event, regardless of whether the alternative coverage would satisfy the 
requirements for COBRA continuation coverage.
    The Uniformed Services Employment and Reemployment Rights Act of 
1994 (USERRA) gives certain members of the military reserves the right 
to up to 18 months of continuation coverage when they are called to 
active duty. Many people have asked if the USERRA and COBRA periods of 
continuation coverage run concurrently or consecutively. The final 
regulations clarify that USERRA coverage is alternative coverage. Thus, 
the periods run concurrently.
    The 1987 proposed regulations include the statutory rule requiring 
that a conversion option otherwise made available under the plan be 
made available within 180 days before the end of the maximum coverage 
period. The final regulations adopt this rule without change.

Paying for COBRA Continuation Coverage

    The 1987 proposed regulations identify the qualified beneficiary as 
the person that can be required to pay the

[[Page 5170]]

applicable premium. Many plans and employers have asked whether they 
must accept payment on behalf of a qualified beneficiary from third 
parties, such as a hospital or a new employer. Nothing in the statute 
requires the qualified beneficiary to pay the amount required by the 
plan; the statute merely permits the plan to require that payment be 
made. In order to make clear that any person may make the required 
payment on behalf of a qualified beneficiary, the final regulations 
modify the rule in the 1987 proposed regulations to refer to the 
payment requirement without identifying the person who makes the 
payment.
    The 1998 proposed regulations address the amount that a plan can 
require to be paid for COBRA continuation coverage during the 
disability extension. This amount is 150 percent of the applicable 
premium instead of the limit of 102 percent of the applicable premium 
that applies for coverage outside the disability extension. The 1998 
proposed regulations specifically reserve the issue of the amount a 
plan could require to be paid in a case where only nondisabled family 
members of the disabled individual receive COBRA continuation coverage 
during the disability extension. The preamble to the 1998 proposed 
regulations solicited comments on this issue. Commenters suggested that 
the 150 percent rate could be required if the disabled individual was 
part of the coverage group but that the limit could be the 102 percent 
rate if only nondisabled qualified beneficiaries were in the coverage 
group. The final regulations adopt this suggestion.
    The 1987 proposed regulations provide that the amount required to 
be paid for a qualified beneficiary's COBRA continuation coverage must 
be fixed in advance for each 12-month determination period. Many 
commenters suggested exceptions that could be made to this general 
rule. Section 4980B(f)(4)(C) explicitly requires that the determination 
of the applicable premium be made for a period of 12 months and that 
the determination be made before the beginning. Therefore, the final 
regulations do not permit an increase in the applicable premium during 
the 12-month determination period. However, the final regulations do 
revise the general rule from the 1987 proposed regulations to recognize 
the difference between the applicable premium (which may not be 
increased during a 12-month determination period and which is the basis 
for calculating the maximum amount that the plan can require to be paid 
for COBRA continuation coverage) and the maximum amount that the plan 
can require to be paid for COBRA continuation coverage. Thus, the final 
regulations permit a plan to increase the amount it requires to be paid 
for COBRA continuation coverage during a determination period to take 
into account the permitted increases during the disability extension, 
to explicitly permit a plan that is requiring payment of less than the 
maximum permissible amount to increase the amount required to be paid 
during the 12-month determination period, and to permit an increase if 
a qualified beneficiary changes to more expensive coverage (but also to 
require a reduction if the qualified beneficiary changes to less 
expensive coverage).
    The 1987 proposed regulations set forth the statutory requirement 
that qualified beneficiaries be allowed to pay for COBRA coverage in 
monthly installments. The 1987 proposed regulations add that plans may 
allow payment to be made at other intervals, and specifically mention 
quarterly or semiannual payment as examples. The final regulations 
adopt the rule in the 1987 proposed regulations, but the final 
regulations add weekly payment as an example to make clear that shorter 
than monthly installments are also permitted.
    The 1987 proposed regulations provide that the first payment for 
COBRA continuation coverage does not apply prospectively only. In order 
to make clear that a plan is not precluded from allowing a qualified 
beneficiary to apply the first payment prospectively only, the final 
regulations provide that qualified beneficiaries need not be given the 
option of having the first payment for COBRA continuation coverage 
apply prospectively only.
    The 1987 proposed regulations address the issue of timely payment 
for COBRA continuation coverage, including an interpretation of the 
statutory grace periods of 45 days for the initial payment and 30 days 
for all other payments. Commenters pointed out that the application of 
the statutory grace period rules could produce an anomalous result in 
some situations, such as allowing a plan to require payment for the 
third month of COBRA continuation coverage earlier than the plan could 
require payment for the first two months. OBRA 1989 amended the 45-day 
grace period rule to prevent this, and the final regulations conform to 
the OBRA 1989 change. The final regulations also clarify that payment 
is considered made on the date it is sent.
    The final regulations also add a requirement (similar to the one 
described above for the election period) relating to the response that 
a plan must give when a health care provider, such as a physician, a 
hospital, or a pharmacy, contacts the plan to confirm coverage of a 
qualified beneficiary with respect to whom the required payment has not 
been made for the current period (but for whom any applicable grace 
period has not expired). In such a case, the plan is required to inform 
the health care provider of all of the details of the qualified 
beneficiary's right to coverage during the applicable grace periods.
    Many individuals have inquired about a plan's right to discontinue 
their COBRA continuation coverage because the amount of the payment 
made was short by an amount that is not significant. Sometimes the 
error has been clearly one of transposed digits on a check tendered for 
payment; in other instances, payment has been short by such a small 
amount that it would be unreasonable to attribute the shortfall to 
anything other than mistake. The final regulations establish a 
mechanism for the treatment of payments that are short by an 
insignificant amount. Either the plan must treat the payment as 
satisfying the plan's payment requirement or it must notify the 
qualified beneficiary of the amount of the deficiency and grant the 
qualified beneficiary a reasonable period of time for the deficiency to 
be paid. The final regulations provide that, as a safe harbor, a period 
of 30 days is deemed to be a reasonable period for this purpose.

Business Reorganizations

    The 1987 proposed regulations provide little direct guidance on the 
allocation of responsibility for COBRA continuation coverage in the 
event of corporate transactions, such as a sale of stock of a 
subsidiary or a sale of substantial assets. Commenters on the 1987 
proposed regulations requested further guidance on corporate 
transactions, pointing out that the existing degree of uncertainty 
tends to drive up the costs and risks of a transaction to both buyers 
and sellers. The IRS and Treasury share this view and believe also that 
greater certainty helps to protect the rights of qualified 
beneficiaries in these transactions. The IRS has been contacted by many 
qualified beneficiaries whose COBRA continuation coverage has been 
dropped or denied in the context of a corporate transaction. In many 
cases, these qualified beneficiaries have been told by each of the 
buyer and the seller that the other party is the one responsible for 
providing them with COBRA continuation coverage.

[[Page 5171]]

    The preamble to the 1998 proposed regulations requested comments on 
a possible approach to allocating responsibility for COBRA continuation 
coverage in corporate transactions. Commenters suggested that, in a 
stock sale, as in an asset sale, it would be consistent with standard 
commercial practice to provide that the seller retains liability for 
all existing qualified beneficiaries, including those formerly 
associated with the subsidiary being sold. The IRS and Treasury have 
studied the comments and given consideration to several alternatives 
with a view to establishing rules that will minimize the administrative 
burden and transaction costs for the parties to transactions while 
protecting the rights of qualified beneficiaries and maintaining 
consistency with the statute.
    Accordingly, the new proposed regulations make clear that the 
parties to a transaction are free to allocate the responsibility for 
providing COBRA continuation coverage by contract, even if the contract 
imposes responsibility on a different party than would the new proposed 
regulations. So long as the party to whom the contract allocates 
responsibility performs its obligations, the other party will have no 
responsibility for providing COBRA continuation coverage. If, however, 
the party allocated responsibility under the contract defaults on its 
obligation, and if, under the new proposed regulations, the other party 
would have the obligation to provide COBRA continuation coverage in the 
absence of a contractual provision, then the other party would retain 
that obligation. This approach would avoid prejudicing the rights of 
qualified beneficiaries to COBRA continuation coverage based upon the 
provisions of a contract to which they were not a party and under which 
the employer with the underlying obligation under the regulations to 
provide COBRA continuation coverage could otherwise contract away that 
obligation to a party that fails to perform. Moreover, the party with 
the underlying responsibility under the regulations can insist on 
appropriate security and, of course, could pursue contractual remedies 
against the defaulting party.
    The new proposed regulations provide, for both sales of stock and 
sales of substantial assets, such as a division or plant or 
substantially all the assets of a trade or business, that the seller 
retains the obligation to make COBRA continuation coverage available to 
existing qualified beneficiaries. In addition, in situations in which 
the seller ceases to provide any group health plan to any employee in 
connection with the sale whether such a cessation is in connection with 
the sale is determined on the basis of the facts and circumstances of 
each case and thus is not responsible for providing COBRA continuation 
coverage, the new proposed regulations provide that the buyer is 
responsible for providing COBRA continuation coverage to existing 
qualified beneficiaries. This secondary liability for the buyer applies 
in all stock sales and in all sales of substantial assets in which the 
buyer continues the business operations associated with the assets 
without interruption or substantial change.
    A particular type of asset sale raises issues for which the new 
proposed regulations do not provide any special rules. (Thus, the 
general rules in the new proposed regulations for business 
reorganizations would apply to this type of transaction.) This type of 
asset sale is one in which, after purchasing a business as a going 
concern, the buyer continues to employ the employees of that business 
and continues to provide those employees exactly the same health 
coverage that they had before the sale (either by providing coverage 
through the same insurance contract or by establishing a plan that 
mirrors the one that provided benefits before the sale). The 
application of the rules in the new proposed regulations to this type 
of asset sale would require the seller to make COBRA continuation 
coverage available to the employees continuing in employment with the 
buyer (and to other family members who are qualified beneficiaries). 
Ordinarily, the continuing employees (or their family members) would be 
very unlikely to elect COBRA continuation coverage from the seller when 
they can receive the same coverage (usually at much lower cost) as 
active employees of the buyer.
    Consideration is being given to whether, under appropriate 
circumstances, such an asset sale would be considered not to result in 
a loss of coverage for those employees who continue in employment with 
the buyer after the sale. A countervailing concern, however, relates to 
those qualified beneficiaries who might have a reason to elect COBRA 
continuation coverage from the seller. An example of such a qualified 
beneficiary would be an employee who continues in employment with the 
buyer, whose family is likely to have medical expenses that exceed the 
cost of COBRA coverage, and who has significant questions about the 
solvency of the buyer or other concerns about how long the buyer might 
continue to provide the same health coverage.
    Under one possible approach, a loss of coverage would be considered 
not to have occurred so long as the purchasing employer in an asset 
sale continued to maintain the same group health plan coverage that the 
seller maintained before the sale without charging the employees any 
greater percentage of the total cost of coverage than the seller had 
charged before the sale. For this purpose, the coverage would be 
considered unchanged if there was no obligation to provide a summary of 
material modifications within 60 days after the change due to a 
material reduction in covered services or benefits under the rules that 
apply under Title I of ERISA. If these conditions were satisfied for 
the maximum coverage period that would otherwise apply to the seller's 
termination of employment of the continuing employees (generally 18 
months from the date of the sale), then those terminations of 
employment would never be considered qualifying events. If the 
conditions were not satisfied for the full maximum coverage period, 
then on the date when they ceased to be satisfied the seller would be 
obligated to make COBRA continuation coverage available for the balance 
of the maximum coverage period.
    Comments are invited on the utility of such a rule, either in 
situations in which the seller retains an ownership interest in the 
buyer after the sale (for example, a sale of assets from a 100-percent 
owned subsidiary to a 75-percent owned subsidiary) or, more generally, 
in situations in which the seller and the buyer are unrelated. 
Suggestions are also solicited for other rules that would protect 
qualified beneficiaries while providing relief to employers in these 
situations.
    Although the new proposed regulations address how COBRA obligations 
are affected by a sale of stock (and a sale of substantial assets), the 
new proposed regulations do not address how the obligation to make 
COBRA continuation coverage available is affected by the transfer of an 
ownership interest in a noncorporate entity that causes the 
noncorporate entity to cease to be a member of a group of trades or 
businesses under common control (whether or not it becomes a member of 
a different group of trades or business under common control). Comments 
are invited on this issue.

[[Page 5172]]

Employer Withdrawals From Multiemployer Plans

    The new proposed regulations also address COBRA obligations in 
connection with an employer's cessation of contributions to a 
multiemployer group health plan. The new proposed regulations provide 
that the multiemployer plan generally continues to have the obligation 
to make COBRA continuation coverage available to qualified 
beneficiaries associated with that employer. (There generally would not 
be any obligation to make COBRA continuation coverage available to 
continuing employees in this situation because a cessation of 
contributions is not a qualifying event.) However, once the employer 
provides group health coverage to a significant number of employees who 
were formerly covered under the multiemployer plan, or starts 
contributing to another multiemployer plan on their behalf, the 
employer's plan (or the new multiemployer plan) would have the 
obligation to make COBRA continuation coverage available to the 
existing qualified beneficiaries. This rule is contrary to the holding 
in In re Appletree Markets, Inc., 19 F.3d 969 (5th Cir. 1994), which 
held that the multiemployer plan continued to have the COBRA 
obligations with respect to existing qualified beneficiaries after the 
withdrawing employer established a plan for the same class of employees 
previously covered under the multiemployer plan.

Interaction of FMLA and COBRA

    The new proposed regulations set forth rules regarding the 
interaction of the COBRA continuation coverage requirements with the 
provisions of the Family and Medical Leave Act of 1993 (FMLA). The 
rules under the new proposed regulations are substantially the same as 
those set forth in Notice 94-103. The last two questions-and-answers in 
that notice have not been included in the new proposed regulations 
because they relate to general subject matter that is addressed 
elsewhere in the regulations.
    Under the new proposed regulations, the taking of FMLA leave by a 
covered employee is not itself a qualifying event. Instead, a 
qualifying event occurs when an employee who is covered under a group 
health plan immediately prior to FMLA leave (or who becomes covered 
under a group health plan during FMLA leave) does not return to work 
with the employer at the end of FMLA leave and would, but for COBRA 
continuation coverage, lose coverage under the group health plan. (As 
under the general rules of COBRA, this would also constitute a 
qualifying event with respect to the spouse or any dependent child of 
the employee.) The qualifying event is deemed to occur on the last day 
of the employee's FMLA leave, and the maximum coverage period generally 
begins on that day. (The new proposed regulations provide a special 
rule for cases where coverage is not lost until a later date and the 
plan provides for the optional extension of the required periods.) In 
the case of such a qualifying event, the employer cannot condition the 
employee's rights to COBRA continuation coverage on the employee's 
reimbursement of any premiums paid by the employer to maintain the 
employee's group health plan coverage during the period of FMLA leave.
    Any lapse of coverage under the group health plan during the period 
of FMLA leave and any state or local law requiring that group health 
plan coverage be provided for a period longer than that required by the 
FMLA are disregarded in determining whether the employee has a 
qualifying event on the last day of that leave. However, the employee's 
loss of coverage at the end of FMLA leave will not constitute a 
qualifying event if, prior to the employee's return from FMLA leave, 
the employer has eliminated group health plan coverage for the class of 
employees to which the employee would have belonged if she or he had 
not taken FMLA leave.

Special Analyses.

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that the collections of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that employers with 
fewer than 20 employees are not subject to the requirements set forth 
in the final regulations and, thus, the very smallest employers are not 
affected by the collection of information requirements. Moreover, even 
for small entities with 20 or more employees who maintain group health 
plans and who, thus, are subject to the requirements of COBRA, the 
collections of information will not impose a substantial economic 
impact. The only collections of information imposed on small entities 
by the regulations are (1) to notify qualified beneficiaries of their 
right to elect COBRA continuation coverage upon the occurrence of a 
qualifying event and (2) to notify certain qualified beneficiaries that 
make insignificant payment errors of those errors. With respect to this 
first notice requirement, it is estimated that, on average, in a given 
year, qualifying events will occur with respect to approximately 10 
percent of all covered employees. Thus, an employer with 100 employees 
would be required to send 10 notices to qualified beneficiaries each 
year. The average cost of sending such a notice is estimated to be 
$.50. Thus, the total estimated cost for 10 notices is $5.00, which is 
the estimated annual average burden on an employer with 100 employees. 
With respect to the second notice requirement, it is estimated that, on 
average, at any time, the number of qualified beneficiaries is 
approximately equal to two percent of an employer's workforce. Of that 
number, approximately 1 in 10 will make an insignificant error in 
payment each year that requires the employer to send such a notice. For 
example, an employer with 100 employees will have an average of two 
qualified beneficiaries at any time. Thus, the employer will receive an 
insignificant underpayment about once every five years. Even if the 
employer chose to send out a notice each time such an insignificant 
underpayment occurred, this would amount to only one notice every five 
years. The average cost of sending such a notice is estimated to be 
$5.00, resulting in an average annual burden of $1.00 for an employer 
with 100 employees. Thus, the total annual cost of these two notice 
requirements for an employer with 100 employees is $6.00, which is not 
a significant economic impact. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations. Pursuant to section 7805(f) of the Internal Revenue 
Code, the 1998 notice of proposed rulemaking preceding these final 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.
    Drafting information. The principal author of these regulations is 
Russ Weinheimer, Office of the Associate Chief Counsel (Employee 
Benefits and Exempt Organizations), IRS. However, other personnel from 
the IRS and Treasury Department participated in their development.

[[Page 5173]]

List of Subjects

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, Reporting 
and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 54 and 602 are amended as follows:

PART 54--PENSION EXCISE TAXES

    Paragraph 1. The authority citation for part 54 is amended by 
adding the following entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 54.4980B-1 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-2 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-3 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-4 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-5 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-6 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-7 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-8 also issued under 26 U.S.C. 4980B. * * *

    Par. 2. Sections 54.4980B-0, 54.4980B-1, 54.4980B-2, 54.4980B-3, 
54.4980B-4, 54.4980B-5, 54.4980B-6, 54.4980B-7, and 54.4980B-8 are 
added to read as follows:


Sec. 54.4980B-0  Table of contents.

    This section contains first a list of the section headings and then 
a list of the questions in each section in Secs. 54.4980B-1 through 
54.4980B-8.

List of Sections

Sec. 54.4980B-1  COBRA in general.
Sec. 54.4980B-2  Plans that must comply.
Sec. 54.4980B-3  Qualified beneficiaries.
Sec. 54.4980B-4  Qualifying events.
Sec. 54.4980B-5  COBRA continuation coverage.
Sec. 54.4980B-6  Electing COBRA continuation coverage.
Sec. 54.4980B-7  Duration of COBRA continuation coverage.
Sec. 54.4980B-8  Paying for COBRA continuation coverage.

List of Questions

Sec. 54.4980B-1  COBRA in general.

    Q-1: What are the health care continuation coverage requirements 
contained in section 4980B of the Internal Revenue Code and in 
ERISA?
    Q-2: What is the effective date of Secs. 54.4980B-1 through 
54.4980B-8?

Sec. 54.4980B-2 Plans that must comply.

    Q-1: For purposes of section 4980B, what is a group health plan?
    Q-2: For purposes of section 4980B, what is the employer?
    Q-3: [Reserved]
    Q-4: What group health plans are subject to COBRA?
    Q-5: What is a small-employer plan?
    Q-6: [Reserved]
    Q-7: What is the plan year?
    Q-8: How do the COBRA continuation coverage requirements apply 
to cafeteria plans and other flexible benefit arrangements?
    Q-9: What is the effect of a group health plan's failure to 
comply with the requirements of section 4980B(f)?
    Q-10: Who is liable for the excise tax if a group health plan 
fails to comply with the requirements of section 4980B(f)?

Sec. 54.4980B-3  Qualified beneficiaries.

    Q-1: Who is a qualified beneficiary?
    Q-2: Who is an employee and who is a covered employee?
    Q-3: Who are the similarly situated nonCOBRA beneficiaries?

Sec. 54.4980B-4  Qualifying events.
    Q-1: What is a qualifying event?
    Q-2: Are the facts surrounding a termination of employment (such 
as whether it was voluntary or involuntary) relevant in determining 
whether the termination of employment is a qualifying event?
Sec. 54.4980B-5  COBRA continuation coverage.
    Q-1: What is COBRA continuation coverage?
    Q-2: What deductibles apply if COBRA continuation coverage is 
elected?
    Q-3: How do a plan's limits apply to COBRA continuation 
coverage?
    Q-4: Can a qualified beneficiary who elects COBRA continuation 
coverage ever change from the coverage received by that individual 
immediately before the qualifying event?
    Q-5: Aside from open enrollment periods, can a qualified 
beneficiary who has elected COBRA continuation coverage choose to 
cover individuals (such as newborn children, adopted children, or 
new spouses) who join the qualified beneficiary's family on or after 
the date of the qualifying event?

4.4980B-6  Electing COBRA continuation coverage.

    Q-1: What is the election period and how long must it last?
    Q-2: Is a covered employee or qualified beneficiary responsible 
for informing the plan administrator of the occurrence of a 
qualifying event?
    Q-3: During the election period and before the qualified 
beneficiary has made an election, must coverage be provided?
    Q-4: Is a waiver before the end of the election period effective 
to end a qualified beneficiary's election rights?
    Q-5: Can an employer or employee organization withhold money or 
other benefits owed to a qualified beneficiary until the qualified 
beneficiary either waives COBRA continuation coverage, elects and 
pays for such coverage, or allows the election period to expire?
    Q-6: Can each qualified beneficiary make an independent election 
under COBRA?

54.4980B-7  Duration of COBRA continuation coverage.

    Q-1: How long must COBRA continuation coverage be made available 
to a qualified beneficiary?
    Q-2: When may a plan terminate a qualified beneficiary's COBRA 
continuation coverage due to coverage under another group health 
plan?
    Q-3: When may a plan terminate a qualified beneficiary's COBRA 
continuation coverage due to the qualified beneficiary's entitlement 
to Medicare benefits?
    Q-4: [Reserved]
    Q-5: How does a qualified beneficiary become entitled to a 
disability extension?
    Q-6: Under what circumstances can the maximum coverage period be 
expanded?
    Q-7: If health coverage is provided to a qualified beneficiary 
after a qualifying event without regard to COBRA continuation 
coverage (for example, as a result of state or local law, the 
Uniformed Services Employment and Reemployment Rights Act of 1994 
(38 U.S.C. 4315), industry practice, a collective bargaining 
agreement, severance agreement, or plan procedure), will such 
alternative coverage extend the maximum coverage period?
    Q-8: Must a qualified beneficiary be given the right to enroll 
in a conversion health plan at the end of the maximum coverage 
period for COBRA continuation coverage?

54.4980B-8  Paying for COBRA continuation coverage.

    Q-1: Can a group health plan require payment for COBRA 
continuation coverage?
    Q-2: When is the applicable premium determined and when can a 
group health plan increase the amount it requires to be paid for 
COBRA continuation coverage?
    Q-3: Must a plan allow payment for COBRA continuation coverage 
to be made in monthly installments?
    Q-4: Is a plan required to allow a qualified beneficiary to 
choose to have the first payment for COBRA continuation coverage 
applied prospectively only?
    Q-5: What is timely payment for COBRA continuation coverage?


Sec. 54.4980B-1  COBRA in general.

    The COBRA continuation coverage requirements are described in 
general in the following questions-and-answers:
    Q-1: What are the health care continuation coverage requirements 
contained in section 4980B of the Internal Revenue Code and in ERISA?
    A-1: (a) Section 4980B provides generally that a group health plan 
must offer each qualified beneficiary who would otherwise lose coverage 
under the plan as a result of a qualifying event an opportunity to 
elect, within the election period, continuation coverage under the 
plan. The continuation coverage requirements were added to section 162 
by the Consolidated

[[Page 5174]]

Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272 
(100 Stat. 222), and moved to section 4980B by the Technical and 
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342). 
Continuation coverage required under section 4980B is referred to in 
Secs. 54.4980B-1 through 54.4980B-8 as COBRA continuation coverage.
    (b) COBRA also added parallel continuation coverage requirements to 
Part 6 of Subtitle B of Title I of the Employee Retirement Income 
Security Act of 1974 (ERISA) (29 U.S.C. 1161-1168), which is 
administered by the U.S. Department of Labor. If a plan does not comply 
with the COBRA continuation coverage requirements, the Internal Revenue 
Code imposes an excise tax on the employer maintaining the plan (or on 
the plan itself), whereas ERISA gives certain parties--including 
qualified beneficiaries who are participants or beneficiaries within 
the meaning of Title I of ERISA, as well as the Department of Labor--
the right to file a lawsuit to redress the noncompliance. The rules in 
Secs. 54.4980B-1 through 54.4980B-8 apply for purposes of section 4980B 
and generally also for purposes of the COBRA continuation coverage 
requirements in Title I of ERISA. However, certain provisions of the 
COBRA continuation coverage requirements (such as the definitions of 
group health plan, employee, and employer) are not identical in the 
Internal Revenue Code and Title I of ERISA. In those cases in which the 
statutory language is not identical, the rules in Secs. 54.4980B-1 
though 54.4980B-8 nonetheless apply to the COBRA continuation coverage 
requirements of Title I of ERISA, except to the extent those rules are 
inconsistent with the statutory language of Title I of ERISA.
    (c) A group health plan that is subject to section 4980B (or the 
parallel provisions under ERISA) is referred to as being subject to 
COBRA. (See Q&A-4 of Sec. 54.4980B-2). A qualified beneficiary can be 
required to pay for COBRA continuation coverage. The term qualified 
beneficiary is defined in Q&A-1 of Sec. 54.4980B-3. The term qualifying 
event is defined in Q&A-1 of Sec. 54.4980B-4. COBRA continuation 
coverage is described in Sec. 54.4980B-5. The election procedures are 
described in Sec. 54.4980B-6. Duration of COBRA continuation coverage 
is addressed in Sec. 54.4980B-7, and payment for COBRA continuation 
coverage is addressed in Sec. 54.4980B-8. Unless the context indicates 
otherwise, any reference in Secs. 54.4980B-1 through 54.4980B-8 to 
COBRA refers to section 4980B (as amended) and to the parallel 
provisions of ERISA.
    Q-2: What is the effective date of Secs. 54.4980B-1 through 
54.4980B-8?
    A-2: Sections 54.4980B-1 through 54.4980B-8 apply with respect to 
qualifying events occurring in plan years beginning on or after January 
1, 2000. For purposes of section 4980B, with respect to qualifying 
events that occur in plan years beginning before that date, and with 
respect to qualifying events that occur in plan years beginning on or 
after that date for topics relating to the COBRA continuation coverage 
requirements of section 4980B that are not addressed in Secs. 54.4980B-
1 through 54.4980B-8 (such as methods for calculating the applicable 
premium), plans and employers must operate in good faith compliance 
with a reasonable interpretation of the statutory requirements in 
section 4980B.


Sec. 54.4980B-2  Plans that must comply.

    The following questions-and-answers apply in determining which 
plans must comply with the COBRA continuation coverage requirements:
    Q-1: For purposes of section 4980B, what is a group health plan?
    A-1: (a) For purposes of section 4980B, a group health plan is a 
plan maintained by an employer or employee organization to provide 
health care to individuals who have an employment-related connection to 
the employer or employee organization or to their families. Individuals 
who have an employment-related connection to the employer or employee 
organization consist of employees, former employees, the employer, and 
others associated or formerly associated with the employer or employee 
organization in a business relationship (including members of a union 
who are not currently employees). Health care is provided under a plan 
whether provided directly or through insurance, reimbursement, or 
otherwise, and whether or not provided through an on-site facility 
(except as set forth in paragraph (d) of this Q&A-1), or through a 
cafeteria plan (as defined in section 125) or other flexible benefit 
arrangement. For purposes of this Q&A-1, insurance includes not only 
group insurance policies but also one or more individual insurance 
policies in any arrangement that involves the provision of health care 
to two or more employees. A plan maintained by an employer or employee 
organization is any plan of, or contributed to (directly or indirectly) 
by, an employer or employee organization. Thus, a group health plan is 
maintained by an employer or employee organization even if the employer 
or employee organization does not contribute to it if coverage under 
the plan would not be available at the same cost to an individual but 
for the individual's employment-related connection to the employer or 
employee organization. These rules are further explained in paragraphs 
(b) through (d) of this Q&A-1. An exception for qualified long-term 
care services is set forth in paragraph (e) of this Q&A-1, and for 
medical savings accounts in paragraph (f) of this Q&A-1.
    (b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, health 
care has the same meaning as medical care under section 213(d). Thus, 
health care generally includes the diagnosis, cure, mitigation, 
treatment, or prevention of disease, and any other undertaking for the 
purpose of affecting any structure or function of the body. Health care 
also includes transportation primarily for and essential to health care 
as described in the preceding sentence. However, health care does not 
include anything that is merely beneficial to the general health of an 
individual, such as a vacation. Thus, if an employer or employee 
organization maintains a program that furthers general good health, but 
the program does not relate to the relief or alleviation of health or 
medical problems and is generally accessible to and used by employees 
without regard to their physical condition or state of health, that 
program is not considered a program that provides health care and so is 
not a group health plan. For example, if an employer maintains a spa, 
swimming pool, gymnasium, or other exercise/fitness program or facility 
that is normally accessible to and used by employees for reasons other 
than relief of health or medical problems, such a facility does not 
constitute a program that provides health care and thus is not a group 
health plan. In contrast, if an employer maintains a drug or alcohol 
treatment program or a health clinic, or any other facility or program 
that is intended to relieve or alleviate a physical condition or health 
problem, the facility or program is considered to be the provision of 
health care and so is considered a group health plan.
    (c) Whether a benefit provided to employees constitutes health care 
is not affected by whether the benefit is excludable from income under 
section 132 (relating to certain fringe benefits). For example, if a 
department store provides its employees discounted prices on all 
merchandise, including health care items such as drugs or eyeglasses, 
the mere fact that the discounted prices also apply to health care 
items will not cause the program to

[[Page 5175]]

be a plan providing health care, so long as the discount program would 
normally be accessible to and used by employees without regard to 
health needs or physical condition. If, however, the employer 
maintaining the discount program is a health clinic, so that the 
program is used exclusively by employees with health or medical needs, 
the program is considered to be a plan providing health care and so is 
considered to be a group health plan.
    (d) The provision of health care at a facility that is located on 
the premises of an employer or employee organization does not 
constitute a group health plan if--
    (1) The health care consists primarily of first aid that is 
provided during the employer's working hours for treatment of a health 
condition, illness, or injury that occurs during those working hours;
    (2) The health care is available only to current employees; and
    (3) Employees are not charged for the use of the facility.
    (e) A plan does not constitute a group health plan subject to COBRA 
if substantially all of the coverage provided under the plan is for 
qualified long-term care services (as defined in section 7702B(c)). For 
this purpose, a plan is permitted to use any reasonable method in 
determining whether substantially all of the coverage provided under 
the plan is for qualified long-term care services.
    (f) Under section 106(b)(5), amounts contributed by an employer to 
a medical savings account (as defined in section 220(d)) are not 
considered part of a group health plan subject to COBRA. Thus, a plan 
is not required to make COBRA continuation coverage available with 
respect to amounts contributed by an employer to a medical savings 
account. A high deductible health plan does not fail to be a group 
health plan subject to COBRA merely because it covers a medical savings 
account holder.
    Q-2: For purposes of section 4980B, what is the employer?
    A-2: For purposes of section 4980B, employer refers to--
    (a) A person for whom services are performed;
    (b) Any other person that is a member of a group described in 
section 414(b), (c), (m), or (o) that includes a person described in 
paragraph (a) of this Q&A-2 and
    (c) Any successor of a person described in paragraph (a) or (b) of 
this Q&A-2.
    Q-3: [Reserved]
    A-3: [Reserved]
    Q-4: What group health plans are subject to COBRA?
    A-4: (a) All group health plans are subject to COBRA except group 
health plans described in paragraph (b) of this Q&A-4. Group health 
plans described in paragraph (b) of this Q&A-4 are referred to in 
Secs. 54.4980B-1 through 54.4980B-8 as excepted from COBRA.
    (b) The following group health plans are excepted from COBRA--
    (1) Small-employer plans (see Q&A-5 of this section);
    (2) Church plans (within the meaning of section 414(e)); and
    (3) Governmental plans (within the meaning of section 414(d)).
    (c) The COBRA continuation coverage requirements generally do not 
apply to group health plans that are excepted from COBRA. However, a 
small-employer plan otherwise excepted from COBRA is nonetheless 
subject to COBRA with respect to qualified beneficiaries who experience 
a qualifying event during a period when the plan is not a small-
employer plan (see paragraph (g) of Q&A-5 of this section).
    (d) Although governmental plans are not subject to the COBRA 
continuation coverage requirements, group health plans maintained by 
state or local governments are generally subject to parallel 
continuation coverage requirements that were added by section 10003 of 
COBRA to the Public Health Service Act (42 U.S.C. 300bb-1 through 
300bb-8), which is administered by the U.S. Department of Health and 
Human Services. Federal employees and their family members covered 
under the Federal Employees Health Benefit Program are covered by 
generally similar, but not parallel, temporary continuation of coverage 
provisions enacted by the Federal Employees Health Benefits Amendments 
Act of 1988. See 5 U.S.C. 8905a.
    Q-5: What is a small-employer plan?
    A-5: (a) Except in the case of a multiemployer plan, a small-
employer plan is a group health plan maintained by an employer (within 
the meaning of Q&A-2 of this section) that normally employed fewer than 
20 employees (within the meaning of paragraph (c) of this Q&A-5) during 
the preceding calendar year. In the case of a multiemployer plan, a 
small-employer plan is a group health plan under which each of the 
employers contributing to the plan for a calendar year normally 
employed fewer than 20 employees during the preceding calendar year. 
The rules of this paragraph (a) are illustrated in the following 
example:

    Example. (i) Corporation S employs 12 employees, all of whom 
work and reside in the United States. S maintains a group health 
plan for its employees and their families. S is a wholly-owned 
subsidiary of P. In the previous calendar year, the controlled group 
of corporations including P and S employed more than 19 employees, 
although the only employees in the United States of the controlled 
group that includes P and S are the 12 employees of S.

    (ii) Under Sec. 1.414(b)-1 of this chapter, foreign corporations 
are not excluded from membership in a controlled group of 
corporations. Consequently, the group health plan maintained by S is 
not a small-employer plan during the current calendar year because 
the controlled group including S normally employed at least 20 
employees in the preceding calendar year.

    (b) An employer is considered to have normally employed fewer than 
20 employees during a particular calendar year if, and only if, it had 
fewer than 20 employees on at least 50 percent of its typical business 
days during that year.
    (c) All full-time and part-time common law employees of an employer 
are taken into account in determining whether an employer had fewer 
than 20 employees; however, an individual who is not a common law 
employee of the employer is not taken into account. Thus, the following 
individuals are not counted as employees for purposes of this Q&A-5 
even though they are referred to as employees for all other purposes of 
Secs. 54.4980B-1 through 54.4980B-8--
    (1) Self-employed individuals (within the meaning of section 
401(c)(1));
    (2) Independent contractors (and their employees and independent 
contractors); and
    (3) Directors (in the case of a corporation).
    (d) [Reserved]
    (e) [Reserved]
    (f) [Reserved]
    (g) A small-employer plan is generally excepted from COBRA. If, 
however, a plan that has been subject to COBRA (that is, was not a 
small-employer plan) becomes a small-employer plan, the plan remains 
subject to COBRA for qualifying events that occurred during the period 
when the plan was subject to COBRA. The rules of this paragraph (g) are 
illustrated by the following examples:

    Example 1. An employer maintains a group health plan. The 
employer employed 20 employees on more than 50 percent of its 
working days during 2001, and consequently the plan is not excepted 
from COBRA during 2002. Employee E resigns and does not work for the 
employer after January 31, 2002. Under the terms of the plan, E is 
no longer eligible for coverage upon the effective date of the 
resignation, that is, February 1, 2002. The employer does not hire a 
replacement for E. E timely elects and pays for COBRA continuation 
coverage. The employer

[[Page 5176]]

employs 19 employees for the remainder of 2002, and consequently the 
plan is not subject to COBRA in 2003. The plan must nevertheless 
continue to make COBRA continuation coverage available to E during 
2003 until the obligation to make COBRA continuation coverage 
available ceases under the rules of Sec. 54.4980B-7. The obligation 
could continue until August 1, 2003, the date that is 18 months 
after the date of E's qualifying event, or longer if E is eligible 
for a disability extension.
    Example 2. The facts are the same as in Example 1. The employer 
continues to employ 19 employees throughout 2003 and 2004 and 
consequently the plan continues to be excepted from COBRA during 
2004 and 2005. Spouse S is covered under the plan because S is 
married to one of the employer's employees. On April 1, 2002, S is 
divorced from that employee and ceases to be eligible for coverage 
under the plan. The plan is subject to COBRA during 2002 because X 
normally employed 20 employees during 2001. S timely notifies the 
plan administrator of the divorce and timely elects and pays for 
COBRA continuation coverage. Even though the plan is generally 
excepted from COBRA during 2003, 2004, and 2005, it must 
nevertheless continue to make COBRA continuation coverage available 
to S during those years until the obligation to make COBRA 
continuation coverage available ceases under the rules of 
Sec. 54.4980B-7. The obligation could continue until April 1, 2005, 
the date that is 36 months after the date of S's qualifying event.
    Example 3. The facts are the same as in Example 2. C is a 
dependent child of one of the employer's employees and is covered 
under the plan. A dependent child is no longer eligible for coverage 
under the plan upon the attainment of age 23. C attains age 23 on 
November 16, 2005. The plan is excepted from COBRA with respect to C 
during 2005 because the employer normally employed fewer than 20 
employees during 2004. Consequently, the plan is not obligated to 
make COBRA continuation coverage available to C (and would not be 
obligated to make COBRA continuation coverage available to C even if 
the plan later became subject to COBRA again).

    Q-6: [Reserved]
    A-6: [Reserved]
    Q-7: What is the plan year?
    A-7: (a) The plan year is the year that is designated as the plan 
year in the plan documents.
    (b) If the plan documents do not designate a plan year (or if there 
are no plan documents), then the plan year is determined in accordance 
with this paragraph (b).
    (1) The plan year is the deductible/limit year used under the plan.
    (2) If the plan does not impose deductibles or limits on an annual 
basis, then the plan year is the policy year.
    (3) If the plan does not impose deductibles or limits on an annual 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, then the plan year is the employer's 
taxable year.
    (4) In any other case, the plan year is the calendar year.
    Q-8: How do the COBRA continuation coverage requirements apply to 
cafeteria plans and other flexible benefit arrangements?
    A-8: The provision of health care benefits does not fail to be a 
group health plan merely because those benefits are offered under a 
cafeteria plan (as defined in section 125) or under any other 
arrangement under which an employee is offered a choice between health 
care benefits and other taxable or nontaxable benefits. However, the 
COBRA continuation coverage requirements apply only to the type and 
level of coverage under the cafeteria plan or other flexible benefit 
arrangement that a qualified beneficiary is actually receiving on the 
day before the qualifying event. The rules of this Q&A-8 are 
illustrated by the following example:

    Example: (i) Under the terms of a cafeteria plan, employees can 
choose among life insurance coverage, membership in a health 
maintenance organization (HMO), coverage for medical expenses under 
an indemnity arrangement, and cash compensation. Of these available 
choices, the HMO and the indemnity arrangement are the arrangements 
providing health care. The instruments governing the HMO and 
indemnity arrangements indicate that they are separate group health 
plans. These group health plans are subject to COBRA. The employer 
does not provide any group health plan outside of the cafeteria 
plan. B and C are unmarried employees. B has chosen the life 
insurance coverage, and C has chosen the indemnity arrangement.
    (ii) B does not have to be offered COBRA continuation coverage 
upon terminating employment, nor is a subsequent open enrollment 
period for active employees required to be made available to B. 
However, if C terminates employment and the termination constitutes 
a qualifying event, C must be offered an opportunity to elect COBRA 
continuation coverage under the indemnity arrangement. If C makes 
such an election and an open enrollment period for active employees 
occurs while C is still receiving the COBRA continuation coverage, C 
must be offered the opportunity to switch from the indemnity 
arrangement to the HMO (but not to the life insurance coverage 
because that does not constitute coverage provided under a group 
health plan).

    Q-9: What is the effect of a group health plan's failure to comply 
with the requirements of section 4980B(f)?
    A-9: Under section 4980B(a), if a group health plan subject to 
COBRA fails to comply with section 4980B(f), an excise tax is imposed. 
Moreover, non-tax remedies may be available if the plan fails to comply 
with the parallel requirements in ERISA, which are administered by the 
Department of Labor.
    Q-10: Who is liable for the excise tax if a group health plan fails 
to comply with the requirements of section 4980B(f)?
    A-10: (a) In general, the excise tax is imposed on the employer 
maintaining the plan, except that in the case of a multiemployer plan 
the excise tax is imposed on the plan.
    (b) In certain circumstances, the excise tax is also imposed on a 
person involved with the provision of benefits under the plan (other 
than in the capacity of an employee), such as an insurer providing 
benefits under the plan or a third party administrator administering 
claims under the plan. In general, such a person will be liable for the 
excise tax if the person assumes, under a legally enforceable written 
agreement, the responsibility for performing the act to which the 
failure to comply with the COBRA continuation coverage requirements 
relates. Such a person will be liable for the excise tax 
notwithstanding the absence of a written agreement assuming 
responsibility for complying with COBRA if the person provides coverage 
under the plan to a similarly situated nonCOBRA beneficiary (see Q&A-3 
of Sec. 54.4980B-3 for a definition of similarly situated nonCOBRA 
beneficiaries) and the employer or plan administrator submits a written 
request to the person to provide to a qualified beneficiary the same 
coverage that the person provides to the similarly situated nonCOBRA 
beneficiary. If the person providing coverage under the plan to a 
similarly situated nonCOBRA beneficiary is the plan administrator and 
the qualifying event is a divorce or legal separation or a dependent 
child's ceasing to be covered under the generally applicable 
requirements of the plan, the plan administrator will also be liable 
for the excise tax if the qualified beneficiary submits a written 
request for coverage.


Sec. 54.4980B-3  Qualified beneficiaries.

    The determination of who is a qualified beneficiary, an employee, 
or a covered employee, and of who are the similarly situated nonCOBRA 
beneficiaries is addressed in the following questions-and-answers:
    Q-1: Who is a qualified beneficiary?
    A-1: (a)(1) Except as set forth in paragraphs (c) through (f) of 
this Q&A-1, a qualified beneficiary is--
    (i) Any individual who, on the day before a qualifying event, is 
covered under a group health plan by virtue of being on that day either 
a covered

[[Page 5177]]

employee, the spouse of a covered employee, or a dependent child of the 
covered employee; or
    (ii) Any child who is born to or placed for adoption with a covered 
employee during a period of COBRA continuation coverage.
    (2) In the case of a qualifying event that is the bankruptcy of the 
employer, a covered employee who had retired on or before the date of 
substantial elimination of group health plan coverage is also a 
qualified beneficiary, as is any spouse, surviving spouse, or dependent 
child of such a covered employee if, on the day before the bankruptcy 
qualifying event, the spouse, surviving spouse, or dependent child is a 
beneficiary under the plan.
    (3) In general, an individual (other than a child who is born to or 
placed for adoption with a covered employee during a period of COBRA 
continuation coverage) who is not covered under a plan on the day 
before the qualifying event cannot be a qualified beneficiary with 
respect to that qualifying event, and the reason for the individual's 
lack of actual coverage (such as the individual's having declined 
participation in the plan or failed to satisfy the plan's conditions 
for participation) is not relevant for this purpose. However, if the 
individual is denied or not offered coverage under a plan under 
circumstances in which the denial or failure to offer constitutes a 
violation of applicable law (such as the Americans with Disabilities 
Act, 42 U.S.C. 12101-12213, the special enrollment rules of section 
9801, or the requirements of section 9802 prohibiting discrimination in 
eligibility to enroll in a group health plan based on health status), 
then, for purposes of Secs. 54.4980B-1 through 54.4980B-8, the 
individual will be considered to have had the coverage that was 
wrongfully denied or not offered.
    (4) Paragraph (b) of this Q&A-1 describes how certain family 
members are not qualified beneficiaries even if they become covered 
under the plan; paragraphs (c), (d), and (e) of this Q&A-1 place limits 
on the general rules of this paragraph (a) concerning who is a 
qualified beneficiary; paragraph (f) of this Q&A-1 provides when an 
individual who has been a qualified beneficiary ceases to be a 
qualified beneficiary; paragraph (g) of this Q&A-1 defines placed for 
adoption; and paragraph (h) of this Q&A-1 contains examples.
    (b) In contrast to a child who is born to or placed for adoption 
with a covered employee during a period of COBRA continuation coverage, 
an individual who marries any qualified beneficiary on or after the 
date of the qualifying event and a newborn or adopted child (other than 
one born to or placed for adoption with a covered employee) are not 
qualified beneficiaries by virtue of the marriage, birth, or placement 
for adoption or by virtue of the individual's status as the spouse or 
the child's status as a dependent of the qualified beneficiary. These 
new family members do not themselves become qualified beneficiaries 
even if they become covered under the plan. (For situations in which a 
plan is required to make coverage available to new family members of a 
qualified beneficiary who is receiving COBRA continuation coverage, see 
Q&A-5 of Sec. 54.4980B-5, paragraph (c) in Q&A-4 of Sec. 54.4980B-5, 
section 9801(f)(2), and Sec. 54.9801-6T(b).)
    (c) An individual is not a qualified beneficiary if, on the day 
before the qualifying event referred to in paragraph (a) of this Q&A-1, 
the individual is covered under the group health plan by reason of 
another individual's election of COBRA continuation coverage and is not 
already a qualified beneficiary by reason of a prior qualifying event.
    (d) A covered employee can be a qualified beneficiary only in 
connection with a qualifying event that is the termination, or 
reduction of hours, of the covered employee's employment, or that is 
the bankruptcy of the employer.
    (e) An individual is not a qualified beneficiary if the 
individual's status as a covered employee is attributable to a period 
in which the individual was a nonresident alien who received from the 
individual's employer no earned income (within the meaning of section 
911(d)(2)) that constituted income from sources within the United 
States (within the meaning of section 861(a)(3)). If, pursuant to the 
preceding sentence, an individual is not a qualified beneficiary, then 
a spouse or dependent child of the individual is not considered a 
qualified beneficiary by virtue of the relationship to the individual.
    (f) A qualified beneficiary who does not elect COBRA continuation 
coverage in connection with a qualifying event ceases to be a qualified 
beneficiary at the end of the election period (see Q&A-1 of 
Sec. 54.4980B-6). Thus, for example, if such a former qualified 
beneficiary is later added to a covered employee's coverage (e.g., 
during an open enrollment period) and then another qualifying event 
occurs with respect to the covered employee, the former qualified 
beneficiary does not become a qualified beneficiary by reason of the 
second qualifying event. If a covered employee who is a qualified 
beneficiary does not elect COBRA continuation coverage during the 
election period, then any child born to or placed for adoption with the 
covered employee on or after the date of the qualifying event is not a 
qualified beneficiary. Once a plan's obligation to make COBRA 
continuation coverage available to an individual who has been a 
qualified beneficiary ceases under the rules of Sec. 54.4980B-7, the 
individual ceases to be a qualified beneficiary.
    (g) For purposes of Secs. 54.4980B-1 through 54.4980B-8, placement 
for adoption or being placed for adoption means the assumption and 
retention by the covered employee of a legal obligation for total or 
partial support of a child in anticipation of the adoption of the 
child. The child's placement for adoption with the covered employee 
terminates upon the termination of the legal obligation for total or 
partial support. A child who is immediately adopted by the covered 
employee without a preceding placement for adoption is considered to be 
placed for adoption on the date of the adoption.
    (h) The rules of this Q&A-1 are illustrated by the following 
examples:

    Example 1. (i) B is a single employee who voluntarily terminates 
employment and elects COBRA continuation coverage under a group 
health plan. To comply with the requirements of section 9801(f) and 
Sec. 54.9801-6T(b), the plan permits a covered employee who marries 
to have her or his spouse covered under the plan. One month after 
electing COBRA continuation coverage, B marries and chooses to have 
B's spouse covered under the plan.
    (ii) B's spouse is not a qualified beneficiary. Thus, if B dies 
during the period of COBRA continuation coverage, the plan does not 
have to offer B's surviving spouse an opportunity to elect COBRA 
continuation coverage.
    Example 2. (i) C is a married employee who terminates 
employment. C elects COBRA continuation coverage for C but not C's 
spouse, and C's spouse declines to elect such coverage. C's spouse 
thus ceases to be a qualified beneficiary. At the next open 
enrollment period, C adds the spouse as a beneficiary under the 
plan.
    (ii) The addition of the spouse during the open enrollment 
period does not make the spouse a qualified beneficiary. The plan 
thus will not have to offer the spouse an opportunity to elect COBRA 
continuation coverage upon a later divorce from or death of C.
    Example 3. (i) Under the terms of a group health plan, a covered 
employee's child, upon attaining age 19, ceases to be a dependent 
eligible for coverage.
    (ii) At that time, the child must be offered an opportunity to 
elect COBRA continuation coverage. If the child elects COBRA 
continuation coverage, the child marries during the period of the 
COBRA continuation coverage, and the child's spouse becomes covered 
under the group health plan, the child's spouse is not a qualified 
beneficiary.

[[Page 5178]]

    Example 4. (i) D is a single employee who, upon retirement, is 
given the opportunity to elect COBRA continuation coverage but 
declines it in favor of an alternative offer of 12 months of 
employer-paid retiree health benefits. At the end of the election 
period, D ceases to be a qualified beneficiary and will not have to 
be given another opportunity to elect COBRA continuation coverage 
(at the end of those 12 months or at any other time). D marries E 
during the period of retiree health coverage and, under the terms of 
that coverage, E becomes covered under the plan.
    (ii) If a divorce from or death of D will result in E's losing 
coverage, E will be a qualified beneficiary because E's coverage 
under the plan on the day before the qualifying event (that is, the 
divorce or death) will have been by reason of D's acceptance of 12 
months of employer-paid coverage after the prior qualifying event 
(D's retirement) rather than by reason of an election of COBRA 
continuation coverage.
    Example 5. (i) The facts are the same as in Example 4, except 
that, under the terms of the plan, the divorce or death does not 
cause E to lose coverage so that E continues to be covered for the 
balance of the original 12-month period.
    (ii) E does not have to be allowed to elect COBRA continuation 
coverage because the loss of coverage at the end of the 12-month 
period is not caused by the divorce or death, and thus the divorce 
or death does not constitute a qualifying event. See Q&A-1 of 
Sec. 54.4980B-4.

    Q-2: Who is an employee and who is a covered employee?
    A-2: (a)(1) For purposes of Secs. 54.4980B-1 through 54.4980B-8 
(except for purposes of Q&A-5 in Sec. 54.4980B-2, relating to the 
exception from COBRA for plans maintained by an employer with fewer 
than 20 employees), an employee is any individual who is eligible to be 
covered under a group health plan by virtue of the performance of 
services for the employer maintaining the plan or by virtue of 
membership in the employee organization maintaining the plan. Thus, for 
purposes of Secs. 54.4980B-1 through 54.4980B-8 (except for purposes of 
Q&A-5 in Sec. 54.4980B-2), the following individuals are employees if 
their relationship to the employer maintaining the plan makes them 
eligible to be covered under the plan--
    (i) Self-employed individuals (within the meaning of section 
401(c)(1));
    (ii) Independent contractors (and their employees and independent 
contractors); and
    (iii) Directors (in the case of a corporation).
    (2) Similarly, whenever reference is made in Secs. 54.4980B-1 
through 54.4980B-8 (except in Q&A-5 of Sec. 54.4980B-2) to an 
employment relationship (such as by referring to the termination of 
employment of an employee or to an employee's being employed by an 
employer), the reference includes the relationship of those individuals 
who are employees within the meaning of this paragraph (a). See 
paragraph (c) in Q&A-5 of Sec. 54.4980B-2 for a narrower meaning of 
employee solely for purposes of Q&A-5 of Sec. 54.4980B-2.
    (b) For purposes of Secs. 54.4980B-1 through 54.4980B-8, a covered 
employee is any individual who is (or was) provided coverage under a 
group health plan (other than a plan that is excepted from COBRA on the 
date of the qualifying event; see Q&A-4 of Sec. 54.4980B-2) by virtue 
of being or having been an employee. For example, a retiree or former 
employee who is covered by a group health plan is a covered employee if 
the coverage results in whole or in part from her or his previous 
employment. An employee (or former employee) who is merely eligible for 
coverage under a group health plan is generally not a covered employee 
if the employee (or former employee) is not actually covered under the 
plan. In general, the reason for the employee's (or former employee's) 
lack of actual coverage (such as having declined participation in the 
plan or having failed to satisfy the plan's conditions for 
participation) is not relevant for this purpose. However, if the 
employee (or former employee) is denied or not offered coverage under 
circumstances in which the denial or failure to offer constitutes a 
violation of applicable law (such as the Americans with Disabilities 
Act, 42 U.S.C. 12101 through 12213, the special enrollment rules of 
section 9801, or the requirements of section 9802 prohibiting 
discrimination in eligibility to enroll in a group health plan based on 
health status), then, for purposes of Secs. 54.4980B-1 through 
54.4980B-8, the employee (or former employee) will be considered to 
have had the coverage that was wrongfully denied or not offered.
    Q-3: Who are the similarly situated non-COBRA beneficiaries?
    A-3: For purposes of Secs. 54.4980B-1 through 54.4980B-8, similarly 
situated non-COBRA beneficiaries means the group of covered employees, 
spouses of covered employees, or dependent children of covered 
employees receiving coverage under a group health plan maintained by 
the employer or employee organization who are receiving that coverage 
for a reason other than the rights provided under the COBRA 
continuation coverage requirements and who, based on all of the facts 
and circumstances, are most similarly situated to the situation of the 
qualified beneficiary immediately before the qualifying event.


Sec. 54.4980B-4  Qualifying events.

    The determination of what constitutes a qualifying event is 
addressed in the following questions and answers:
    Q-1: What is a qualifying event?
    A-1: (a) A qualifying event is an event that satisfies paragraphs 
(b), (c), and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further 
explains a reduction of hours of employment, paragraph (f) of this Q&A-
1 describes the treatment of children born to or placed for adoption 
with a covered employee during a period of COBRA continuation coverage, 
and paragraph (g) of this Q&A-1 contains examples.
    (b) An event satisfies this paragraph (b) if the event is any of 
the following--
    (1) The death of a covered employee;
    (2) The termination (other than by reason of the employee's gross 
misconduct), or reduction of hours, of a covered employee's employment;
    (3) The divorce or legal separation of a covered employee from the 
employee's spouse;
    (4) A covered employee's becoming entitled to Medicare benefits 
under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg);
    (5) A dependent child's ceasing to be a dependent child of a 
covered employee under the generally applicable requirements of the 
plan; or
    (6) A proceeding in bankruptcy under Title 11 of the United States 
Code with respect to an employer from whose employment a covered 
employee retired at any time.
    (c) An event satisfies this paragraph (c) if, under the terms of 
the group health plan, the event causes the covered employee, or the 
spouse or a dependent child of the covered employee, to lose coverage 
under the plan. For this purpose, to lose coverage means to cease to be 
covered under the same terms and conditions as in effect immediately 
before the qualifying event. Any increase in the premium or 
contribution that must be paid by a covered employee (or the spouse or 
dependent child of a covered employee) for coverage under a group 
health plan that results from the occurrence of one of the events 
listed in paragraph (b) of this Q&A-1 is a loss of coverage. In the 
case of an event that is the bankruptcy of the employer, lose coverage 
also means any substantial elimination of coverage under the plan, 
occurring within 12 months before or after the date the bankruptcy 
proceeding commences, for a covered employee who had retired on or 
before the date of the substantial elimination of group health plan 
coverage or for any spouse, surviving spouse, or dependent child of 
such a covered employee if, on the day

[[Page 5179]]

before the bankruptcy qualifying event, the spouse, surviving spouse, 
or dependent child is a beneficiary under the plan. For purposes of 
this paragraph (c), a loss of coverage need not occur immediately after 
the event, so long as the loss of coverage occurs before the end of the 
maximum coverage period (see Q&A-1 and Q&A-6 of Sec. 54.4980B-7). 
However, if neither the covered employee nor the spouse or a dependent 
child of the covered employee loses coverage before the end of what 
would be the maximum coverage period, the event does not satisfy this 
paragraph (c). 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.
    (d) An event satisfies this paragraph (d) if it occurs while the 
plan is subject to COBRA. Thus, an event will not satisfy this 
paragraph (d) if it occurs while the plan is excepted from COBRA (see 
Q&A-4 of Sec. 54.4980B-2). Even if the plan later becomes subject to 
COBRA, it is not required to make COBRA continuation coverage available 
to anyone whose coverage ends as a result of an event during a year in 
which the plan is excepted from COBRA. For example, if a group health 
plan is excepted from COBRA as a small-employer plan during the year 
2001 (see Q&A-5 of Sec. 54.4980B-2) and an employee terminates 
employment on December 31, 2001, the termination is not a qualifying 
event and the plan is not required to permit the employee to elect 
COBRA continuation coverage. This is the case even if the plan ceases 
to be a small-employer plan as of January 1, 2002. Also, the same 
result will follow even if the employee is given three months of 
coverage beyond December 31 (that is, through March of 2002), because 
there will be no qualifying event as of the termination of coverage in 
March. However, if the employee's spouse is initially provided with the 
three-month coverage through March 2002, but the spouse divorces the 
employee before the end of the three months and loses coverage as a 
result of the divorce, the divorce will constitute a qualifying event 
during 2002 and so entitle the spouse to elect COBRA continuation 
coverage. See Q&A-7 of Sec. 54.4980B-7 regarding the maximum coverage 
period in such a case.
    (e) A reduction of hours of a covered employee's employment occurs 
whenever there is a decrease in the hours that a covered employee is 
required to work or actually works, but only if the decrease is not 
accompanied by an immediate termination of employment. This is true 
regardless of whether the covered employee continues to perform 
services following the reduction of hours of employment. For example, 
an absence from work due to disability, a temporary layoff, or any 
other reason is a reduction of hours of a covered employee's employment 
if there is not an immediate termination of employment. If a group 
health plan measures eligibility for the coverage of employees by the 
number of hours worked in a given time period, such as the preceding 
month or quarter, and an employee covered under the plan fails to work 
the minimum number of hours during that time period, the failure to 
work the minimum number of required hours is a reduction of hours of 
that covered employee's employment.
    (f) The qualifying event of a qualified beneficiary who is a child 
born to or placed for adoption with a covered employee during a period 
of COBRA continuation coverage is the qualifying event giving rise to 
the period of COBRA continuation coverage during which the child is 
born or placed for adoption. If a second qualifying event has occurred 
before the child is born or placed for adoption (such as the death of 
the covered employee), then the second qualifying event also applies to 
the newborn or adopted child. See Q&A-6 of Sec. 54.4980B-7.
    (g) The rules of this Q&A-1 are illustrated by the following 
examples, in each of which the group health plan is subject to COBRA:

    Example 1. (i) An employee who is covered by a group health plan 
terminates employment (other than by reason of the employee's gross 
misconduct) and, beginning with the day after the last day of 
employment, is given 3 months of employer-paid coverage under the 
same terms and conditions as before that date. At the end of the 
three months, the coverage terminates.
    (ii) The loss of coverage at the end of the three months results 
from the termination of employment and, thus, the termination of 
employment is a qualifying event.
    Example 2. (i) An employee who is covered by a group health plan 
retires (which is a termination of employment other than by reason 
of the employee's gross misconduct) and, upon retirement, is 
required to pay an increased amount for the same group health 
coverage that the employee had before retirement.
    (ii) The increase in the premium or contribution required for 
coverage is a loss of coverage under paragraph (c) of this Q&A-1 
and, thus, the retirement is a qualifying event.
    Example 3. (i) An employee and the employee's spouse are covered 
under an employer's group health plan. The employee retires and is 
given identical coverage for life. However, the plan provides that 
the spousal coverage will not be continued beyond six months unless 
a higher premium for the spouse is paid to the plan.
    (ii) The requirement for the spouse to pay a higher premium at 
the end of the six months is a loss of coverage under paragraph (c) 
of this Q&A-1. Thus, the retirement is a qualifying event and the 
spouse must be given an opportunity to elect COBRA continuation 
coverage.
    Example 4. (i) F is a covered employee who is married to G, and 
both are covered under a group health plan maintained by F's 
employer. F and G are divorced. Under the terms of the plan, the 
divorce causes G to lose coverage. The divorce is a qualifying 
event, and G elects COBRA continuation coverage, remarries during 
the period of COBRA continuation coverage, and G's new spouse 
becomes covered under the plan. (See Q&A-5 in Sec. 54.4980B-5, 
paragraph (c) in Q&A-4 of Sec. 54.4980B-5, section 9801(f)(2), and 
Sec. 54.9801-6T(b).) G dies. Under the terms of the plan, the death 
causes G's new spouse to lose coverage under the plan.
    (ii) G's death is not a qualifying event because G is not a 
covered employee.
    Example 5. (i) An employer maintains a group health plan for 
both active employees and retired employees (and their families). 
The coverage for active employees and retired employees is 
identical, and the employer does not require retirees to pay more 
for coverage than active employees. The plan does not make COBRA 
continuation coverage available when an employee retires (and is not 
required to because the retired employee has not lost coverage under 
the plan). The employer amends the plan to eliminate coverage for 
retired employees effective January 1, 2002. On that date, several 
retired employees (and their spouses and dependent children) have 
been covered under the plan since their retirement for less than the 
maximum coverage period that would apply to them in connection with 
their retirement.
    (ii) The elimination of retiree coverage under these 
circumstances is a deferred loss of coverage for those retirees (and 
their spouses and dependent children) under paragraph (c) of this 
Q&A-1 and, thus, the retirement is a qualifying event. The plan must 
make COBRA continuation coverage available to them for the balance 
of the maximum coverage period that applies to them in connection 
with the retirement.

    Q-2: Are the facts surrounding a termination of employment (such as 
whether it was voluntary or involuntary) relevant in determining 
whether the termination of employment is a qualifying event?
    A-2: Apart from facts constituting gross misconduct, the facts 
surrounding the termination or reduction of hours are irrelevant in 
determining whether a qualifying event has occurred. Thus, it

[[Page 5180]]

does not matter whether the employee voluntarily terminated or was 
discharged. For example, a strike or a lockout is a termination or 
reduction of hours that constitutes a qualifying event if the strike or 
lockout results in a loss of coverage as described in paragraph (c) of 
Q&A-1 of this section. Similarly, a layoff that results in such a loss 
of coverage is a qualifying event.


Sec. 54.4980B-5  COBRA continuation coverage.

    The following questions-and-answers address the requirements for 
coverage to constitute COBRA continuation coverage:
    Q-1: What is COBRA continuation coverage?
    A-1: (a) If a qualifying event occurs, each qualified beneficiary 
(other than a qualified beneficiary for whom the qualifying event will 
not result in any immediate or deferred loss of coverage) must be 
offered an opportunity to elect to receive the group health plan 
coverage that is provided to similarly situated nonCOBRA beneficiaries 
(ordinarily, the same coverage that the qualified beneficiary had on 
the day before the qualifying event). See Q&A-3 of Sec. 54.4980B-3 for 
the definition of similarly situated nonCOBRA beneficiaries. This 
coverage is COBRA continuation coverage. If coverage under the plan is 
modified for similarly situated nonCOBRA beneficiaries, then the 
coverage made available to qualified beneficiaries is modified in the 
same way. If the continuation coverage offered differs in any way from 
the coverage made available to similarly situated nonCOBRA 
beneficiaries, the coverage offered does not constitute COBRA 
continuation coverage and the group health plan is not in compliance 
with COBRA unless other coverage that does constitute COBRA 
continuation coverage is also offered. Any elimination or reduction of 
coverage in anticipation of an event described in paragraph (b) of Q&A-
1 of Sec. 54.4980B-4 is disregarded for purposes of this Q&A-1 and for 
purposes of any other reference in Secs. 54.4980B-1 through 54.4980B-8 
to coverage in effect immediately before (or on the day before) a 
qualifying event. COBRA continuation coverage must not be conditioned 
upon, or discriminate on the basis of lack of, evidence of 
insurability.
    (b) In the case of a qualified beneficiary who is a child born to 
or placed for adoption with a covered employee during a period of COBRA 
continuation coverage, the child is generally entitled to elect 
immediately to have the same coverage that dependent children of active 
employees receive under the benefit packages under which the covered 
employee has coverage at the time of the birth or placement for 
adoption. Such a child would be entitled to elect coverage different 
from that elected by the covered employee during the next available 
open enrollment period under the plan. See Q&A-4 of this section.
    Q-2: What deductibles apply if COBRA continuation coverage is 
elected?
    A-2: (a) Qualified beneficiaries electing COBRA continuation 
coverage generally are subject to the same deductibles as similarly 
situated nonCOBRA beneficiaries. If a qualified beneficiary's COBRA 
continuation coverage begins before the end of a period prescribed for 
accumulating amounts toward deductibles, the qualified beneficiary must 
retain credit for expenses incurred toward those deductibles before the 
beginning of COBRA continuation coverage as though the qualifying event 
had not occurred. The specific application of this rule depends on the 
type of deductible, as set forth in paragraphs (b) through (d) of this 
Q&A-2. Special rules are set forth in paragraph (e) of this Q&A-2, and 
examples appear in paragraph (f) of this Q&A-2.
    (b) If a deductible is computed separately for each individual 
receiving coverage under the plan, each individual's remaining 
deductible amount (if any) on the date COBRA continuation coverage 
begins is equal to that individual's remaining deductible amount 
immediately before that date.
    (c) If a deductible is computed on a family basis, the remaining 
deductible for the family on the date that COBRA continuation coverage 
begins depends on the members of the family electing COBRA continuation 
coverage. In computing the family deductible that remains on the date 
COBRA continuation coverage begins, only the expenses of those family 
members receiving COBRA continuation coverage need be taken into 
account. If the qualifying event results in there being more than one 
family unit (for example, because of a divorce), the family deductible 
may be computed separately for each resulting family unit based on the 
members in each unit. These rules apply regardless of whether the plan 
provides that the family deductible is an alternative to individual 
deductibles or an additional requirement.
    (d) Deductibles that are not described in paragraph (b) or (c) of 
this Q&A-2 must be treated in a manner consistent with the principles 
set forth in those paragraphs.
    (e) If a deductible is computed on the basis of a covered 
employee's compensation instead of being a fixed dollar amount and the 
employee remains employed during the period of COBRA continuation 
coverage, the plan is permitted to choose whether to apply the 
deductible by treating the employee's compensation as continuing 
without change for the duration of the COBRA continuation coverage at 
the level that was used to compute the deductible in effect immediately 
before the COBRA continuation coverage began, or to apply the 
deductible by taking the employee's actual compensation into account. 
In applying a deductible that is computed on the basis of the covered 
employee's compensation instead of being a fixed dollar amount, for 
periods of COBRA continuation coverage in which the employee is not 
employed by the employer, the plan is required to compute the 
deductible by treating the employee's compensation as continuing 
without change for the duration of the COBRA continuation coverage 
either at the level that was used to compute the deductible in effect 
immediately before the COBRA continuation coverage began or at the 
level that was used to compute the deductible in effect immediately 
before the employee's employment was terminated.
    (f) The rules of this Q&A-2 are illustrated by the following 
examples; in each example, deductibles under the plan are determined on 
a calendar year basis:

    Example 1. (i) A group health plan applies a separate $100 
annual deductible to each individual it covers. The plan provides 
that the spouse and dependent children of a covered employee will 
lose coverage on the last day of the month after the month of the 
covered employee's death. A covered employee dies on June 11, 2001. 
The spouse and the two dependent children elect COBRA continuation 
coverage, which will begin on August 1, 2001. As of July 31, 2001, 
the spouse has incurred $80 of covered expenses, the older child has 
incurred no covered expenses, and the younger one has incurred $120 
of covered expenses (and therefore has already satisfied the 
deductible).
    (ii) At the beginning of COBRA continuation coverage on August 
1, the spouse has a remaining deductible of $20, the older child 
still has the full $100 deductible, and the younger one has no 
further deductible.
    Example 2. (i) A group health plan applies a separate $200 
annual deductible to each individual it covers, except that each 
family member is treated as having satisfied the individual 
deductible once the family has incurred $500 of covered expenses 
during the year. The plan provides that upon the divorce of a 
covered employee, coverage will

[[Page 5181]]

end immediately for the employee's spouse and any children who do 
not remain in the employee's custody. A covered employee with four 
dependent children is divorced, the spouse obtains custody of the 
two oldest children, and the spouse and those children all elect 
COBRA continuation coverage to begin immediately. The family had 
accumulated $420 of covered expenses before the divorce, as follows: 
$70 by each parent, $200 by the oldest child, $80 by the youngest 
child, and none by the other two children.
    (ii) The resulting family consisting of the spouse and the two 
oldest children accumulated a total of $270 of covered expenses, and 
thus the remaining deductible for that family could be as high as 
$230 (because the plan would not have to count the incurred expenses 
of the covered employee and the youngest child). The remaining 
deductible for the resulting family consisting of the covered 
employee and the two youngest children is not subject to the rules 
of this Q&A-2 because their coverage is not COBRA continuation 
coverage.
    Example 3. Each year a group health plan pays 70 percent of the 
cost of an individual's psychotherapy after that individual's first 
three visits during the year. A qualified beneficiary whose election 
of COBRA continuation coverage takes effect beginning August 1, 2001 
and who has already made two visits as of that date need only pay 
for one more visit before the plan must begin to pay 70 percent of 
the cost of the remaining visits during 2001.
    Example 4. (i) A group health plan has a $250 annual deductible 
per covered individual. The plan provides that if the deductible is 
not satisfied in a particular year, expenses incurred during October 
through December of that year are credited toward satisfaction of 
the deductible in the next year. A qualified beneficiary who has 
incurred covered expenses of $150 from January through September of 
2001 and $40 during October elects COBRA continuation coverage 
beginning November 1, 2001.
    (ii) The remaining deductible amount for this qualified 
beneficiary is $60 at the beginning of the COBRA continuation 
coverage. If this individual incurs covered expenses of $50 in 
November and December of 2001 combined (so that the $250 deductible 
for 2001 is not satisfied), the $90 incurred from October through 
December of 2001 are credited toward satisfaction of the deductible 
amount for 2002.

    Q-3: How do a plan's limits apply to COBRA continuation coverage?
    A-3: (a) Limits are treated in the same way as deductibles (see 
Q&A-2 of this section).
    This rule applies both to limits on plan benefits (such as a 
maximum number of hospital days or dollar amount of reimbursable 
expenses) and limits on out-of-pocket expenses (such as a limit on 
copayments, a limit on deductibles plus copayments, or a catastrophic 
limit). This rule applies equally to annual and lifetime limits and 
applies equally to limits on specific benefits and limits on benefits 
in the aggregate under the plan.
    (b) The rule of this Q&A-3 is illustrated by the following 
examples; in each example limits are determined on a calendar year 
basis:

    Example 1. (i) A group health plan pays for a maximum of 150 
days of hospital confinement per individual per year. A covered 
employee who has had 20 days of hospital confinement as of May 1, 
2001 terminates employment and elects COBRA continuation coverage as 
of that date.
    (ii) During the remainder of the year 2001 the plan need only 
pay for a maximum of 130 days of hospital confinement for this 
individual.
    Example 2. (i) A group health plan reimburses a maximum of 
$20,000 of covered expenses per family per year, and the same 
$20,000 limit applies to unmarried covered employees. A covered 
employee and spouse who have no children divorce on May 1, 2001, and 
the spouse elects COBRA continuation coverage as of that date. In 
2001, the employee had incurred $5,000 of expenses and the spouse 
had incurred $8,000 before May 1.
    (ii) The plan can limit its reimbursement of the amount of 
expenses incurred by the spouse on and after May 1 for the remainder 
of the year to $12,000 ($20,000-$8,000 = $12,000). The remaining 
limit for the employee is not subject to the rules of this Q&A-3 
because the employee's coverage is not COBRA continuation coverage.
    Example 3. (i) A group health plan pays for 80 percent of 
covered expenses after satisfaction of a $100-per-individual 
deductible, and the plan pays for 100 percent of covered expenses 
after a family has incurred out-of-pocket costs of $2,000. The plan 
provides that upon the divorce of a covered employee, coverage will 
end immediately for the employee's spouse and any children who do 
not remain in the employee's custody. An employee and spouse with 
three dependent children divorce on June 1, 2001, and one of the 
children remains with the employee. The spouse elects COBRA 
continuation coverage as of that date for the spouse and the other 
two children. During January through May of 2001, the spouse 
incurred $600 of covered expenses and each of the two children in 
the spouse's custody after the divorce incurred covered expenses of 
$1,100. This resulted in total out-of-pocket costs for these three 
individuals of $800 ($300 total for the three deductibles, plus $500 
for 20 percent of the other $2,500 in incurred expenses [$600 + 
$1,100 + $1,100 = $2,800; $2,800-$300 = $2,500]).
    (ii) For the remainder of 2001, the resulting family consisting 
of the spouse and two children has an out-of-pocket limit of $1,200 
($2,000-$800 = $1,200) . The remaining out-of-pocket limit for the 
resulting family consisting of the employee and one child is not 
subject to the rules of this Q&A-3 because their coverage is not 
COBRA continuation coverage.

    Q-4: Can a qualified beneficiary who elects COBRA continuation 
coverage ever change from the coverage received by that individual 
immediately before the qualifying event?
    A-4: (a) In general, a qualified beneficiary need only be given an 
opportunity to continue the coverage that she or he was receiving 
immediately before the qualifying event. This is true regardless of 
whether the coverage received by the qualified beneficiary before the 
qualifying event ceases to be of value to the qualified beneficiary, 
such as in the case of a qualified beneficiary covered under a region-
specific health maintenance organization (HMO) who leaves the HMO's 
service region. The only situations in which a qualified beneficiary 
must be allowed to change from the coverage received immediately before 
the qualifying event are as set forth in paragraphs (b) and (c) of this 
Q&A-4 and in Q&A-1 of this section (regarding changes to or elimination 
of the coverage provided to similarly situated nonCOBRA beneficiaries).
    (b) If a qualified beneficiary participates in a region-specific 
benefit package (such as an HMO or an on-site clinic) that will not 
service her or his health needs in the area to which she or he is 
relocating (regardless of the reason for the relocation), the qualified 
beneficiary must be given an opportunity to elect alternative coverage 
that the employer or employee organization makes available to active 
employees. If the employer or employee organization makes group health 
plan coverage available to similarly situated nonCOBRA beneficiaries 
that can be extended in the area to which the qualified beneficiary is 
relocating, then that coverage is the alternative coverage that must be 
made available to the relocating qualified beneficiary. If the employer 
or employee organization does not make group health plan coverage 
available to similarly situated nonCOBRA beneficiaries that can be 
extended in the area to which the qualified beneficiary is relocating 
but makes coverage available to other employees that can be extended in 
that area, then the coverage made available to those other employees 
must be made available to the relocating qualified beneficiary. 
However, the employer or employee organization is not required to make 
any other coverage available to the relocating qualified beneficiary if 
the only coverage the employer or employee organization makes available 
to active employees is not available in the area to which the qualified 
beneficiary relocates (because all such coverage is region-specific and 
does not service individuals in that area).
    (c) If an employer or employee organization makes an open 
enrollment period available to similarly situated active employees with 
respect to whom a qualifying event has not occurred, the same open 
enrollment period rights

[[Page 5182]]

must be made available to each qualified beneficiary receiving COBRA 
continuation coverage. An open enrollment period means a period during 
which an employee covered under a plan can choose to be covered under 
another group health plan or under another benefit package within the 
same plan, or to add or eliminate coverage of family members.
    (d) The rules of this Q&A-4 are illustrated by the following 
examples:

    Example 1. (i) E is an employee who works for an employer that 
maintains several group health plans. Under the terms of the plans, 
if an employee chooses to cover any family members under a plan, all 
family members must be covered by the same plan and that plan must 
be the same as the plan covering the employee. Immediately before 
E's termination of employment (for reasons other than gross 
misconduct), E is covered along with E's spouse and children by a 
plan. The coverage under that plan will end as a result of the 
termination of employment.
    (ii) Upon E's termination of employment, each of the four family 
members is a qualified beneficiary. Even though the employer 
maintains various other plans and options, it is not necessary for 
the qualified beneficiaries to be allowed to switch to a new plan 
when E terminates employment.
    (iii) COBRA continuation coverage is elected for each of the 
four family members. Three months after E's termination of 
employment there is an open enrollment period during which similarly 
situated active employees are offered an opportunity to choose to be 
covered under a new plan or to add or eliminate family coverage.
    (iv) During the open enrollment period, each of the four 
qualified beneficiaries must be offered the opportunity to switch to 
another plan (as though each qualified beneficiary were an 
individual employee). For example, each member of E's family could 
choose coverage under a separate plan, even though the family 
members of employed individuals could not choose coverage under 
separate plans. Of course, if each family member chooses COBRA 
continuation coverage under a separate plan, the plan can require 
payment for each family member that is based on the applicable 
premium for individual coverage under that separate plan. See Q&A-1 
of Sec. 54.4980B-8.
    Example 2. (i) The facts are the same as in Example 1, except 
that E's family members are not covered under E's group health plan 
when E terminates employment.
    (ii) Although the family members do not have to be given an 
opportunity to elect COBRA continuation coverage, E must be allowed 
to add them to E's COBRA continuation coverage during the open 
enrollment period. This is true even though the family members are 
not, and cannot become, qualified beneficiaries (see Q&A-1 of 
Sec. 54.4980B-3).

    Q-5: Aside from open enrollment periods, can a qualified 
beneficiary who has elected COBRA continuation coverage choose to cover 
individuals (such as newborn children, adopted children, or new 
spouses) who join the qualified beneficiary's family on or after the 
date of the qualifying event?
    A-5: (a) Yes. Under section 9801 and Sec. 54.9801-6T, employees 
eligible to participate in a group health plan (whether or not 
participating), as well as former employees participating in a plan 
(referred to in those rules as participants), are entitled to special 
enrollment rights for certain family members upon the loss of other 
group health plan coverage or upon the acquisition by the employee or 
participant of a new spouse or of a new dependent through birth, 
adoption, or placement for adoption, if certain requirements are 
satisfied. Employees not participating in the plan also can obtain 
rights for self-enrollment under those rules. Once a qualified 
beneficiary is receiving COBRA continuation coverage (that is, has 
timely elected and made timely payment for COBRA continuation 
coverage), the qualified beneficiary has the same right to enroll 
family members under those special enrollment rules as if the qualified 
beneficiary were an employee or participant within the meaning of those 
rules. However, neither a qualified beneficiary who is not receiving 
COBRA continuation coverage nor a former qualified beneficiary has any 
special enrollment rights under those rules.
    (b) In addition to the special enrollment rights described in 
paragraph (a) of this Q&A-5, if the plan covering the qualified 
beneficiary provides that new family members of active employees can 
become covered (either automatically or upon an appropriate election) 
before the next open enrollment period, then the same right must be 
extended to the new family members of a qualified beneficiary.
    (c) If the addition of a new family member will result in a higher 
applicable premium (for example, if the qualified beneficiary was 
previously receiving COBRA continuation coverage as an individual, or 
if the applicable premium for family coverage depends on family size), 
the plan can require the payment of a correspondingly higher amount for 
the COBRA continuation coverage. See Q&A-1 of Sec. 54.4980B-8.
    (d) The right to add new family members under this Q&A-5 is in 
addition to the rights that newborn and adopted children of covered 
employees may have as qualified beneficiaries; see Q&A-1 in 
Sec. 54.4980B-3.


Sec. 54.4980B-6  Electing COBRA continuation coverage.

    The following questions-and-answers address the manner in which 
COBRA continuation coverage is elected:
    Q-1: What is the election period and how long must it last?
    A-1: (a) A group health plan can condition the availability of 
COBRA continuation coverage upon the timely election of such coverage. 
An election of COBRA continuation coverage is a timely election if it 
is made during the election period. The election period must begin not 
later than the date the qualified beneficiary would lose coverage on 
account of the qualifying event. (See paragraph (c) of Q&A-1 of 
Sec. 54.4980B-4 for the meaning of lose coverage.) The election period 
must not end before the date that is 60 days after the later of--
    (1) The date the qualified beneficiary would lose coverage on 
account of the qualifying event; or
    (2) The date notice is provided to the qualified beneficiary of her 
or his right to elect COBRA continuation coverage.
    (b) An election is considered to be made on the date it is sent to 
the plan administrator.
    (c) The rules of this Q&A-1 are illustrated by the following 
example:

    Example. (i) An unmarried employee without children who is 
receiving employer-paid coverage under a group health plan 
voluntarily terminates employment on June 1, 2001. The employee is 
not disabled at the time of the termination of employment nor at any 
time thereafter, and the plan does not provide for the extension of 
the required periods (as is permitted under section 4980B(f)(8)).
    (ii) Case 1: If the plan provides that the employer-paid 
coverage ends immediately upon the termination of employment, the 
election period must begin not later than June 1, 2001, and must not 
end earlier than July 31, 2001. If notice of the right to elect 
COBRA continuation coverage is not provided to the employee until 
June 15, 2001, the election period must not end earlier than August 
14, 2001.
    (iii) Case 2: If the plan provides that the employer-paid 
coverage does not end until 6 months after the termination of 
employment, the employee does not lose coverage until December 1, 
2001. The election period can therefore begin as late as December 1, 
2001, and must not end before January 30, 2002.
    (iv) Case 3: If employer-paid coverage for 6 months after the 
termination of employment is offered only to those qualified 
beneficiaries who waive COBRA continuation coverage, the employee 
loses coverage on June 1, 2001, so the election period is the same 
as in Case 1. The difference between Case 2 and Case 3 is that in 
Case 2 the employee can receive 6 months of employer-paid coverage 
and then elect to pay for up to an additional 12 months of COBRA 
continuation coverage, while in Case

[[Page 5183]]

3 the employee must choose between 6 months of employer-paid 
coverage and paying for up to 18 months of COBRA continuation 
coverage. In all three cases, COBRA continuation coverage need not 
be provided for more than 18 months after the termination of 
employment, and in certain circumstances might be provided for a 
shorter period (see Q&A-1 of Sec. 54.4980B-7).

    Q-2: Is a covered employee or qualified beneficiary responsible for 
informing the plan administrator of the occurrence of a qualifying 
event?
    A-2: (a) In general, the employer or plan administrator must 
determine when a qualifying event has occurred. However, each covered 
employee or qualified beneficiary is responsible for notifying the plan 
administrator of the occurrence of a qualifying event that is either a 
dependent child's ceasing to be a dependent child under the generally 
applicable requirements of the plan or a divorce or legal separation of 
a covered employee. The group health plan is not required to offer the 
qualified beneficiary an opportunity to elect COBRA continuation 
coverage if the notice is not provided to the plan administrator within 
60 days after the later of--
    (1) The date of the qualifying event; or
    (2) The date the qualified beneficiary would lose coverage on 
account of the qualifying event.
    (b) For purposes of this Q&A-2, if more than one qualified 
beneficiary would lose coverage on account of a divorce or legal 
separation of a covered employee, a timely notice of the divorce or 
legal separation that is provided by the covered employee or any one of 
those qualified beneficiaries will be sufficient to preserve the 
election rights of all of the qualified beneficiaries.
    Q-3: During the election period and before the qualified 
beneficiary has made an election, must coverage be provided?
    A-3: (a) In general, each qualified beneficiary has until 60 days 
after the later of the date the qualifying event would cause her or him 
to lose coverage or the date notice is provided to the qualified 
beneficiary of her or his right to elect COBRA continuation coverage to 
decide whether to elect COBRA continuation coverage. If the election is 
made during that period, coverage must be provided from the date that 
coverage would otherwise have been lost (but see Q&A-4 of this 
section). This can be accomplished as described in paragraph (b) or (c) 
of this Q&A-3.
    (b) In the case of an indemnity or reimbursement arrangement, the 
employer or employee organization can provide for plan coverage during 
the election period or, if the plan allows retroactive reinstatement, 
the employer or employee organization can terminate the coverage of the 
qualified beneficiary and reinstate her or him when the election is 
made. Claims incurred by a qualified beneficiary during the election 
period do not have to be paid before the election (and, if applicable, 
payment for the coverage) is made. If a provider of health care (such 
as a physician, hospital, or pharmacy) contacts the plan to confirm 
coverage of a qualified beneficiary during the election period, the 
plan must give a complete response to the health care provider about 
the qualified beneficiary's COBRA continuation coverage rights during 
the election period. For example, if the plan provides coverage during 
the election period but cancels coverage retroactively if COBRA 
continuation coverage is not elected, then the plan must inform a 
provider that a qualified beneficiary for whom coverage has not been 
elected is covered but that the coverage is subject to retroactive 
termination. Similarly, if the plan cancels coverage but then 
retroactively reinstates it once COBRA continuation coverage is 
elected, then the plan must inform the provider that the qualified 
beneficiary currently does not have coverage but will have coverage 
retroactively to the date coverage was lost if COBRA continuation 
coverage is elected. (See paragraph (c) of Q&A-5 in Sec. 54.4980B-8 for 
similar rules that a plan must follow in confirming coverage during a 
period when the plan has not received payment but that is still within 
the grace period for a qualified beneficiary for whom COBRA 
continuation coverage has been elected.)
    (c)(1) In the case of a group health plan that provides health 
services (such as a health maintenance organization or a walk-in 
clinic), the plan can require with respect to a qualified beneficiary 
who has not elected and paid for COBRA continuation coverage that the 
qualified beneficiary choose between--
    (i) Electing and paying for the coverage; or
    (ii) Paying the reasonable and customary charge for the plan's 
services, but only if a qualified beneficiary who chooses to pay for 
the services will be reimbursed for that payment within 30 days after 
the election of COBRA continuation coverage (and, if applicable, the 
payment of any balance due for the coverage).
    (2) In the alternative, the plan can provide continued coverage and 
treat the qualified beneficiary's use of the facility as a constructive 
election. In such a case, the qualified beneficiary is obligated to pay 
any applicable charge for the coverage, but only if the qualified 
beneficiary is informed that use of the facility will be a constructive 
election before using the facility.
    Q-4: Is a waiver before the end of the election period effective to 
end a qualified beneficiary's election rights?
    A-4: If, during the election period, a qualified beneficiary waives 
COBRA continuation coverage, the waiver can be revoked at any time 
before the end of the election period. Revocation of the waiver is an 
election of COBRA continuation coverage. However, if a waiver of COBRA 
continuation coverage is later revoked, coverage need not be provided 
retroactively (that is, from the date of the loss of coverage until the 
waiver is revoked). Waivers and revocations of waivers are considered 
made on the date they are sent to the employer, employee organization, 
or plan administrator, as applicable.
    Q-5: Can an employer or employee organization withhold money or 
other benefits owed to a qualified beneficiary until the qualified 
beneficiary either waives COBRA continuation coverage, elects and pays 
for such coverage, or allows the election period to expire?
    A-5: No. An employer, and an employee organization, must not 
withhold anything to which a qualified beneficiary is otherwise 
entitled (by operation of law or other agreement) in order to compel 
payment for COBRA continuation coverage or to coerce the qualified 
beneficiary to give up rights to COBRA continuation coverage (including 
the right to use the full election period to decide whether to elect 
such coverage). Such a withholding constitutes a failure to comply with 
the COBRA continuation coverage requirements. Furthermore, any 
purported waiver obtained by means of such a withholding is invalid.
    Q-6: Can each qualified beneficiary make an independent election 
under COBRA?
    A-6: Yes. Each qualified beneficiary (including a child who is born 
to or placed for adoption with a covered employee during a period of 
COBRA continuation coverage) must be offered the opportunity to make an 
independent election to receive COBRA continuation coverage. If the 
plan allows similarly situated active employees with respect to whom a 
qualifying event has not occurred to choose among several options 
during an open enrollment period (for example, to switch to another 
group health plan or to another benefit package under the same group 
health plan), then each qualified beneficiary must also be offered an 
independent election to choose during an open enrollment period among 
the

[[Page 5184]]

options made available to similarly situated active employees with 
respect to whom a qualifying event has not occurred. If a qualified 
beneficiary who is either a covered employee or the spouse of a covered 
employee elects COBRA continuation coverage and the election does not 
specify whether the election is for self-only coverage, the election is 
deemed to include an election of COBRA continuation coverage on behalf 
of all other qualified beneficiaries with respect to that qualifying 
event. An election on behalf of a minor child can be made by the 
child's parent or legal guardian. An election on behalf of a qualified 
beneficiary who is incapacitated or dies can be made by the legal 
representative of the qualified beneficiary or the qualified 
beneficiary's estate, as determined under applicable state law, or by 
the spouse of the qualified beneficiary. (See also Q&A-5 of 
Sec. 54.4980B-7 relating to the independent right of each qualified 
beneficiary with respect to the same qualifying event to receive COBRA 
continuation coverage during the disability extension.) The rules of 
this Q&A-6 are illustrated by the following examples; in each example 
each group health plan is subject to COBRA:

    Example 1. (i) Employee H and H 's spouse are covered under a 
group health plan immediately before H 's termination of employment 
(for reasons other than gross misconduct). Coverage under the plan 
will end as a result of the termination of employment.
    (ii) Upon H 's termination of employment, both H and H 's spouse 
are qualified beneficiaries and each must be allowed to elect COBRA 
continuation coverage. Thus, H might elect COBRA continuation 
coverage while the spouse declines to elect such coverage, or H 
might elect COBRA continuation coverage for both of them. In 
contrast, H cannot decline COBRA continuation coverage on behalf of 
H 's spouse. Thus, if H does not elect COBRA continuation coverage 
on behalf of the spouse, the spouse must still be allowed to elect 
COBRA continuation coverage.
    Example 2. (i) An employer maintains a group health plan under 
which all employees receive employer-paid coverage. Employees can 
arrange to cover their families by paying an additional amount. The 
employer also maintains a cafeteria plan, under which one of the 
options is to pay part or all of the employee share of the cost for 
family coverage under the group health plan. Thus, an employee might 
pay for family coverage under the group health plan partly with 
before-tax dollars and partly with after-tax dollars.
    (ii) If an employee's family is receiving coverage under the 
group health plan when a qualifying event occurs, each of the 
qualified beneficiaries must be offered an opportunity to elect 
COBRA continuation coverage, regardless of how that qualified 
beneficiary's coverage was paid for before the qualifying event.


Sec. 54.4980B-7  Duration of COBRA continuation coverage.

    The following questions-and-answers address the duration of COBRA 
continuation coverage:
    Q-1: How long must COBRA continuation coverage be made available to 
a qualified beneficiary?
    A-1: (a) Except for an interruption of coverage in connection with 
a waiver, as described in Q&A-4 of Sec. 54.4980B-6, COBRA continuation 
coverage that has been elected for a qualified beneficiary must extend 
for at least the period beginning on the date of the qualifying event 
and ending not before the earliest of the following dates--
    (1) The last day of the maximum required period under section 
4980B(f)(2)(B)(i) (the maximum coverage period) and, if applicable, 
section 4980B(f)(8) (relating to the optional extension of required 
periods in a case where coverage is lost after the date of, instead of 
on the date of, the qualifying event);
    (2) The first day for which timely payment is not made to the plan 
with respect to the qualified beneficiary (see Q&A-5 in Sec. 54.4980B-
8);
    (3) The date upon which the employer or employee organization 
ceases to provide any group health plan (including successor plans) to 
any employee;
    (4) The date, after the date of the election, upon which the 
qualified beneficiary first becomes covered under any other group 
health plan, as described in Q&A-2 of this section; and
    (5) The date, after the date of the election, upon which the 
qualified beneficiary first becomes entitled to Medicare benefits, as 
described in Q&A-3 of this section.
    (b) However, a group health plan can terminate for cause the 
coverage of a qualified beneficiary receiving COBRA continuation 
coverage on the same basis that the plan terminates for cause the 
coverage of similarly situated nonCOBRA beneficiaries. For example, if 
a group health plan terminates the coverage of active employees for the 
submission of a fraudulent claim, then the coverage of a qualified 
beneficiary can also be terminated for the submission of a fraudulent 
claim. Notwithstanding the preceding two sentences, the coverage of a 
qualified beneficiary can be terminated for failure to make timely 
payment to the plan only if payment is not timely under the rules of 
Q&A-5 in Sec. 54.4980B-8.
    (c) In the case of an individual who is not a qualified beneficiary 
and who is receiving coverage under a group health plan solely because 
of the individual's relationship to a qualified beneficiary, if the 
plan's obligation to make COBRA continuation coverage available to the 
qualified beneficiary ceases under this section, the plan is not 
obligated to make coverage available to the individual who is not a 
qualified beneficiary.
    Q-2: When may a plan terminate a qualified beneficiary's COBRA 
continuation coverage due to coverage under another group health plan?
    A-2: (a) If a qualified beneficiary first becomes covered under 
another group health plan (including for this purpose any group health 
plan of a governmental employer or employee organization) after the 
date on which COBRA continuation coverage is elected for the qualified 
beneficiary and the other coverage satisfies the requirements of 
paragraphs (b), (c), and (d) of this Q&A-2, then the plan may terminate 
the qualified beneficiary's COBRA continuation coverage upon the date 
on which the qualified beneficiary first becomes covered under the 
other group health plan (even if the other coverage is less valuable to 
the qualified beneficiary). By contrast, if a qualified beneficiary 
first becomes covered under another group health plan on or before the 
date on which COBRA continuation coverage is elected, then the other 
coverage cannot be a basis for terminating the qualified beneficiary's 
COBRA continuation coverage.
    (b) The requirement of this paragraph (b) is satisfied if the 
qualified beneficiary is actually covered, rather than merely eligible 
to be covered, under the other group health plan.
    (c) The requirement of this paragraph (c) is satisfied if the other 
group health plan is a plan that is not maintained by the employer or 
employee organization that maintains the plan under which COBRA 
continuation coverage must otherwise be made available.
    (d) The requirement of this paragraph (d) is satisfied if the other 
group health plan does not contain any exclusion or limitation with 
respect to any preexisting condition of the qualified beneficiary 
(other than such an exclusion or limitation that does not apply to, or 
is satisfied by, the qualified beneficiary by reason of the provisions 
in section 9801 (relating to limitations on preexisting condition 
exclusion periods in group health plans)).
    (e) The rules of this Q&A-2 are illustrated by the following 
examples:

    Example 1. (i) Employer X maintains a group health plan subject 
to COBRA. C is an employee covered under the plan. C is also covered 
under a group health plan

[[Page 5185]]

maintained by Employer Y, the employer of C 's spouse. C terminates 
employment (for reasons other than gross misconduct), and the 
termination of employment causes C to lose coverage under X 's plan 
(and, thus, is a qualifying event). C elects to receive COBRA 
continuation coverage under X 's plan.
    (ii) Under these facts, X 's plan cannot terminate C 's COBRA 
continuation coverage on the basis of C 's coverage under Y 's plan.
    Example 2. (i) Employer W maintains a group health plan subject 
to COBRA. D is an employee covered under the plan. D terminates 
employment (for reasons other than gross misconduct), and the 
termination of employment causes D to lose coverage under W 's plan 
(and, thus, is a qualifying event). D elects to receive COBRA 
continuation coverage under W 's plan. Later D becomes employed by 
Employer V and is covered under V 's group health plan. D 's 
coverage under V 's plan is not subject to any exclusion or 
limitation with respect to any preexisting condition of D.
    (ii) Under these facts, W can terminate D 's COBRA continuation 
coverage on the date D becomes covered under V 's plan.
    Example 3. (i) The facts are the same as in Example 2, except 
that D becomes employed by V and becomes covered under V 's group 
health plan before D elects COBRA continuation coverage under W 's 
plan.
    (ii) Because the termination of employment is a qualifying 
event, D must be offered COBRA continuation coverage under W 's 
plan, and W is not permitted to terminate D 's COBRA continuation 
coverage on account of D 's coverage under V 's plan because D first 
became covered under V 's plan before COBRA continuation coverage 
was elected for D.

    Q-3: When may a plan terminate a qualified beneficiary's COBRA 
continuation coverage due to the qualified beneficiary's entitlement to 
Medicare benefits?
    A-3: (a) If a qualified beneficiary first becomes entitled to 
Medicare benefits under Title XVIII of the Social Security Act (42 
U.S.C. 1395-1395ggg) after the date on which COBRA continuation 
coverage is elected for the qualified beneficiary, then the plan may 
terminate the qualified beneficiary's COBRA continuation coverage upon 
the date on which the qualified beneficiary becomes so entitled. By 
contrast, if a qualified beneficiary first becomes entitled to Medicare 
benefits on or before the date that COBRA continuation coverage is 
elected, then the qualified beneficiary's entitlement to Medicare 
benefits cannot be a basis for terminating the qualified beneficiary's 
COBRA continuation coverage.
    (b) A qualified beneficiary becomes entitled to Medicare benefits 
upon the effective date of enrollment in either part A or B, whichever 
occurs earlier. Thus, merely being eligible to enroll in Medicare does 
not constitute being entitled to Medicare benefits.
    Q-4: [Reserved]
    A-4: [Reserved]
    Q-5: How does a qualified beneficiary become entitled to a 
disability extension?
    A-5: (a) A qualified beneficiary becomes entitled to a disability 
extension if the requirements of paragraphs (b), (c), and (d) of this 
Q&A-5 are satisfied with respect to the qualified beneficiary. If the 
disability extension applies with respect to a qualifying event, it 
applies with respect to each qualified beneficiary entitled to COBRA 
continuation coverage because of that qualifying event. Thus, for 
example, the 29-month maximum coverage period applies to each qualified 
beneficiary who is not disabled as well as to the qualified beneficiary 
who is disabled, and it applies independently with respect to each of 
the qualified beneficiaries. See Q&A-1 in Sec. 54.4980B-8, which 
permits a plan to require payment of an increased amount during the 
disability extension.
    (b) The requirement of this paragraph (b) is satisfied if a 
qualifying event occurs that is a termination, or reduction of hours, 
of a covered employee's employment.
    (c) The requirement of this paragraph (c) is satisfied if an 
individual (whether or not the covered employee) who is a qualified 
beneficiary in connection with the qualifying event described in 
paragraph (b) of this Q&A-5 is determined under Title II or XVI of the 
Social Security Act (42 U.S.C. 401-433 or 1381-1385) to have been 
disabled at any time during the first 60 days of COBRA continuation 
coverage. For this purpose, the period of the first 60 days of COBRA 
continuation coverage is measured from the date of the qualifying event 
described in paragraph (b) of this Q&A-5 (except that if a loss of 
coverage would occur at a later date in the absence of an election for 
COBRA continuation coverage and if the plan provides for the extension 
of the required periods in accordance with section 4980B(f)(8), then 
the period of the first 60 days of COBRA continuation coverage is 
measured from the date on which the coverage would be lost). However, 
in the case of a qualified beneficiary who is a child born to or placed 
for adoption with a covered employee during a period of COBRA 
continuation coverage, the period of the first 60 days of COBRA 
continuation coverage is measured from the date of birth or placement 
for adoption. For purposes of this paragraph (c), an individual is 
determined to be disabled within the first 60 days of COBRA 
continuation coverage if the individual has been determined under Title 
II or XVI of the Social Security Act to have been disabled before the 
first day of COBRA continuation coverage and has not been determined to 
be no longer disabled at any time between the date of that disability 
determination and the first day of COBRA continuation coverage.
    (d) The requirement of this paragraph (d) is satisfied if any of 
the qualified beneficiaries affected by the qualifying event described 
in paragraph (b) of this Q&A-5 provides notice to the plan 
administrator of the disability determination on a date that is both 
within 60 days after the date the determination is issued and before 
the end of the original 18-month maximum coverage period that applies 
to the qualifying event.
    Q-6: Under what circumstances can the maximum coverage period be 
expanded?
    A-6: (a) The maximum coverage period can be expanded if the 
requirements of Q&A-5 of this section (relating to the disability 
extension) or paragraph (b) of this Q&A-6 are satisfied.
    (b) The requirements of this paragraph (b) are satisfied if a 
qualifying event that gives rise to an 18-month maximum coverage period 
(or a 29-month maximum coverage period in the case of a disability 
extension) is followed, within that 18-month period (or within that 29-
month period, in the case of a disability extension), by a second 
qualifying event (for example, a death or a divorce) that gives rise to 
a 36-month maximum coverage period. (Thus, a termination of employment 
following a qualifying event that is a reduction of hours of employment 
cannot be a second qualifying event that expands the maximum coverage 
period; the bankruptcy of the employer also cannot be a second 
qualifying event that expands the maximum coverage period.) In such a 
case, the original 18-month period (or 29-month period, in the case of 
a disability extension) is expanded to 36 months, but only for those 
individuals who were qualified beneficiaries under the group health 
plan in connection with the first qualifying event and who are still 
qualified beneficiaries at the time of the second qualifying event. No 
qualifying event (other than a qualifying event that is the bankruptcy 
of the employer) can give rise to a maximum coverage period that ends 
more than 36 months after the date of the first qualifying event (or 
more than 36 months after the date of the loss of coverage, in the case 
of a plan that provides for the extension of the required periods). For 
example, if an

[[Page 5186]]

employee covered by a group health plan that is subject to COBRA 
terminates employment (for reasons other than gross misconduct) on 
December 31, 2000, the termination is a qualifying event giving rise to 
a maximum coverage period that extends for 18 months to June 30, 2002. 
If the employee dies after the employee and the employee's spouse and 
dependent children have elected COBRA continuation coverage and on or 
before June 30, 2002, the spouse and dependent children (except anyone 
among them whose COBRA continuation coverage had already ended for some 
other reason) will be able to receive COBRA continuation coverage 
through December 31, 2003.
    Q-7: If health coverage is provided to a qualified beneficiary 
after a qualifying event without regard to COBRA continuation coverage 
(for example, as a result of state or local law, the Uniformed Services 
Employment and Reemployment Rights Act of 1994 (38 U.S.C. 4315), 
industry practice, a collective bargaining agreement, severance 
agreement, or plan procedure), will such alternative coverage extend 
the maximum coverage period?
    A-7: (a) No. The end of the maximum coverage period is measured 
solely as described in Q&A-1 and Q&A-6 of this section, which is 
generally from the date of the qualifying event.
    (b) If the alternative coverage does not satisfy all the 
requirements for COBRA continuation coverage, or if the amount that the 
group health plan requires to be paid for the alternative coverage is 
greater than the amount required to be paid by similarly situated 
nonCOBRA beneficiaries for the coverage that the qualified beneficiary 
can elect to receive as COBRA continuation coverage, the plan covering 
the qualified beneficiary immediately before the qualifying event must 
offer the qualified beneficiary receiving the alternative coverage the 
opportunity to elect COBRA continuation coverage. See Q&A-1 of 
Sec. 54.4980B-6.
    (c) If an individual rejects COBRA continuation coverage in favor 
of alternative coverage, then, at the expiration of the alternative 
coverage period, the individual need not be offered a COBRA election. 
However, if the individual receiving alternative coverage is a covered 
employee and the spouse or a dependent child of the individual would 
lose that alternative coverage as a result of a qualifying event (such 
as the death of the covered employee), the spouse or dependent child 
must be given an opportunity to elect to continue that alternative 
coverage, with a maximum coverage period of 36 months measured from the 
date of that qualifying event.
    Q-8: Must a qualified beneficiary be given the right to enroll in a 
conversion health plan at the end of the maximum coverage period for 
COBRA continuation coverage?
    A-8: If a qualified beneficiary's COBRA continuation coverage under 
a group health plan ends as a result of the expiration of the maximum 
coverage period, the group health plan must, during the 180-day period 
that ends on that expiration date, provide the qualified beneficiary 
the option of enrolling under a conversion health plan if such an 
option is otherwise generally available to similarly situated nonCOBRA 
beneficiaries under the group health plan. If such a conversion option 
is not otherwise generally available, it need not be made available to 
qualified beneficiaries.


Sec. 54.4980B-8  Paying for COBRA continuation coverage.

    The following questions-and-answers address paying for COBRA 
continuation coverage:
    Q-1: Can a group health plan require payment for COBRA continuation 
coverage?
    A-1: (a) Yes. For any period of COBRA continuation coverage, a 
group health plan can require the payment of an amount that does not 
exceed 102 percent of the applicable premium for that period. (See 
paragraph (b) of this Q&A-1 for a rule permitting a plan to require 
payment of an increased amount due to the disability extension.) The 
applicable premium is defined in section 4980B(f)(4). A group health 
plan can terminate a qualified beneficiary's COBRA continuation 
coverage as of the first day of any period for which timely payment is 
not made to the plan with respect to that qualified beneficiary (see 
Q&A-1 of Sec. 54.4980B-7). For the meaning of timely payment, see Q&A-5 
of this section.
    (b) A group health plan is permitted to require the payment of an 
amount that does not exceed 150 percent of the applicable premium for 
any period of COBRA continuation coverage covering a disabled qualified 
beneficiary (for example, whether single or family coverage) if the 
coverage would not be required to be made available in the absence of a 
disability extension. (See Q&A-5 of Sec. 54.4980B-7 for rules to 
determine whether a qualified beneficiary is entitled to a disability 
extension.) A plan is not permitted to require the payment of an amount 
that exceeds 102 percent of the applicable premium for any period of 
COBRA continuation coverage to which a qualified beneficiary is 
entitled without regard to the disability extension. Thus, if a 
qualified beneficiary entitled to a disability extension experiences a 
second qualifying event within the original 18-month maximum coverage 
period, then the plan is not permitted to require the payment of an 
amount that exceeds 102 percent of the applicable premium for any 
period of COBRA continuation coverage. By contrast, if a qualified 
beneficiary entitled to a disability extension experiences a second 
qualifying event after the end of the original 18-month maximum 
coverage period, then the plan may require the payment of an amount 
that is up to 150 percent of the applicable premium for the remainder 
of the period of COBRA continuation coverage (that is, from the 
beginning of the 19th month through the end of the 36th month) as long 
as the disabled qualified beneficiary is included in that coverage. The 
rules of this paragraph (b) are illustrated by the following examples; 
in each example the group health plan is subject to COBRA:

    Example 1. (i) An employer maintains a group health plan. The 
plan determines the cost of covering individuals under the plan by 
reference to two categories, individual coverage and family 
coverage, and the applicable premium is determined for those two 
categories. An employee and members of the employee's family are 
covered under the plan. The employee experiences a qualifying event 
that is the termination of the employee's employment. The employee's 
family qualifies for the disability extension because of the 
disability of the employee's spouse. (Timely notice of the 
disability is provided to the plan administrator.) Timely payment of 
the amount required by the plan for COBRA continuation coverage for 
the family (which does not exceed 102 percent of the cost of family 
coverage under the plan) was made to the plan with respect to the 
employee's family for the first 18 months of COBRA continuation 
coverage, and the disabled spouse and the rest of the family 
continue to receive COBRA continuation coverage through the 29th 
month.
    (ii) Under these facts, the plan may require payment of up to 
150 percent of the applicable premium for family coverage in order 
for the family to receive COBRA continuation coverage from the 19th 
month through the 29th month. If the plan determined the cost of 
coverage by reference to three categories (such as employee, 
employee-plus-one-dependent, employee-plus-two-or-more-dependents) 
or more than three categories, instead of two categories, the plan 
could still require, from the 19th month through the 29th month of 
COBRA continuation coverage, the payment of 150 percent of the cost 
of coverage for the category of coverage that included the disabled 
spouse.
    Example 2. (i) The facts are the same as in Example 1, except 
that only the covered

[[Page 5187]]

employee elects and pays for the first 18 months of COBRA 
continuation coverage.
    (ii) Even though the employee's disabled spouse does not elect 
or pay for COBRA continuation coverage, the employee satisfies the 
requirements for the disability extension to apply with respect to 
the employee's qualifying event. Under these facts, the plan may not 
require the payment of more than 102 percent of the applicable 
premium for individual coverage for the entire period of the 
employee's COBRA continuation coverage, including the period from 
the 19th month through the 29th month. If COBRA continuation 
coverage had been elected and paid for with respect to other 
nondisabled members of the employee's family, then the plan could 
not require the payment of more than 102 percent of the applicable 
premium for family coverage (or for any other appropriate category 
of coverage that might apply to that group of qualified 
beneficiaries under the plan, such as employee-plus-one-dependent or 
employee-plus-two-or-more-dependents) for those family members to 
continue their coverage from the 19th month through the 29th month.

    (c) A group health plan does not fail to comply with section 
9802(b) and Sec. 54.9802-1T(b) (which generally prohibit an individual 
from being charged, on the basis of health status, a higher premium 
than that charged for similarly situated individuals enrolled in the 
plan) with respect to a qualified beneficiary entitled to the 
disability extension merely because the plan requires payment of an 
amount permitted under paragraph (b) of this Q&A-1.
    Q-2: When is the applicable premium determined and when can a group 
health plan increase the amount it requires to be paid for COBRA 
continuation coverage?
    A-2: (a) The applicable premium for each determination period must 
be computed and fixed by a group health plan before the determination 
period begins. A determination period is any 12-month period selected 
by the plan, but it must be applied consistently from year to year. The 
determination period is a single period for any benefit package. Thus, 
each qualified beneficiary does not have a separate determination 
period beginning on the date (or anniversaries of the date) that COBRA 
continuation coverage begins for that qualified beneficiary.
    (b) During a determination period, a plan can increase the amount 
it requires to be paid for a qualified beneficiary's COBRA continuation 
coverage only in the following three cases:
    (1) The plan has previously charged less than the maximum amount 
permitted under Q&A-1 of this section and the increased amount required 
to be paid does not exceed the maximum amount permitted under Q&A-1 of 
this section;
    (2) The increase occurs during the disability extension and the 
increased amount required to be paid does not exceed the maximum amount 
permitted under paragraph (b) of Q&A-1 of this section; or
    (3) A qualified beneficiary changes the coverage being received 
(see paragraph (c) of this Q&A-2 for rules on how the amount the plan 
requires to be paid may or must change when a qualified beneficiary 
changes the coverage being received).
    (c) If a plan allows similarly situated active employees who have 
not experienced a qualifying event to change the coverage they are 
receiving, then the plan must also allow each qualified beneficiary to 
change the coverage being received on the same terms as the similarly 
situated active employees. (See Q&A-4 in Sec. 54.4980B-5.) If a 
qualified beneficiary changes coverage from one benefit package (or a 
group of benefit packages) to another benefit package (or another group 
of benefit packages), or adds or eliminates coverage for family 
members, then the following rules apply. If the change in coverage is 
to a benefit package, group of benefit packages, or coverage unit (such 
as family coverage, self-plus-one-dependent, or self-plus-two-or-more-
dependents) for which the applicable premium is higher, then the plan 
may increase the amount that it requires to be paid for COBRA 
continuation coverage to an amount that does not exceed the amount 
permitted under Q&A-1 of this section as applied to the new coverage. 
If the change in coverage is to a benefit package, group of benefit 
packages, or coverage unit (such as individual or self-plus-one-
dependent) for which the applicable premium is lower, then the plan 
cannot require the payment of an amount that exceeds the amount 
permitted under Q&A-1 of this section as applied to the new coverage.
    Q-3: Must a plan allow payment for COBRA continuation coverage to 
be made in monthly installments?
    A-3: Yes. A group health plan must allow payment for COBRA 
continuation coverage to be made in monthly installments. A group 
health plan is permitted to also allow the alternative of payment for 
COBRA continuation coverage being made at other intervals (for example, 
weekly, quarterly, or semiannually).
    Q-4: Is a plan required to allow a qualified beneficiary to choose 
to have the first payment for COBRA continuation coverage applied 
prospectively only?
    A-4: No. A plan is permitted to apply the first payment for COBRA 
continuation coverage to the period of coverage beginning immediately 
after the date on which coverage under the plan would have been lost on 
account of the qualifying event. Of course, if the group health plan 
allows a qualified beneficiary to waive COBRA continuation coverage for 
any period before electing to receive COBRA continuation coverage, the 
first payment is not applied to the period of the waiver.
    Q-5: What is timely payment for COBRA continuation coverage?
    A-5: (a) Except as provided in this paragraph (a) or in paragraph 
(b) or (d) of this Q&A-5, timely payment for a period of COBRA 
continuation coverage under a group health plan means payment that is 
made to the plan by the date that is 30 days after the first day of 
that period. Payment that is made to the plan by a later date is also 
considered timely payment if either--
    (1) Under the terms of the plan, covered employees or qualified 
beneficiaries are allowed until that later date to pay for their 
coverage for the period; or
    (2) Under the terms of an arrangement between the employer or 
employee organization and an insurance company, health maintenance 
organization, or other entity that provides plan benefits on the 
employer's or employee organization's behalf, the employer or employee 
organization is allowed until that later date to pay for coverage of 
similarly situated nonCOBRA beneficiaries for the period.
    (b) Notwithstanding paragraph (a) of this Q&A-5, a plan cannot 
require payment for any period of COBRA continuation coverage for a 
qualified beneficiary earlier than 45 days after the date on which the 
election of COBRA continuation coverage is made for that qualified 
beneficiary.
    (c) If, after COBRA continuation coverage has been elected for a 
qualified beneficiary, a provider of health care (such as a physician, 
hospital, or pharmacy) contacts the plan to confirm coverage of a 
qualified beneficiary for a period for which the plan has not yet 
received payment, the plan must give a complete response to the health 
care provider about the qualified beneficiary's COBRA continuation 
coverage rights, if any, described in paragraphs (a), (b), and (d) of 
this Q&A-5. For example, if the plan provides coverage during the 30- 
and 45-day grace periods described in paragraphs (a) and (b) of this 
Q&A-5 but cancels coverage retroactively if payment is not made by the 
end of the applicable grace

[[Page 5188]]

period, then the plan must inform a provider with respect to a 
qualified beneficiary for whom payment has not been received that the 
qualified beneficiary is covered but that the coverage is subject to 
retroactive termination if timely payment is not made. Similarly, if 
the plan cancels coverage if it has not received payment by the first 
day of a period of coverage but retroactively reinstates coverage if 
payment is made by the end of the grace period for that period of 
coverage, then the plan must inform the provider that the qualified 
beneficiary currently does not have coverage but will have coverage 
retroactively to the first date of the period if timely payment is 
made. (See paragraph (b) of Q&A-3 in Sec. 54.4980B-6 for similar rules 
that the plan must follow in confirming coverage during the election 
period.)
    (d) If timely payment is made to the plan in an amount that is not 
significantly less than the amount the plan requires to be paid for a 
period of coverage, then the amount paid is deemed to satisfy the 
plan's requirement for the amount that must be paid, unless the plan 
notifies the qualified beneficiary of the amount of the deficiency and 
grants a reasonable period of time for payment of the deficiency to be 
made. For this purpose, as a safe harbor, 30 days after the date the 
notice is provided is deemed to be a reasonable period of time.
    (e) Payment is considered made on the date on which it is sent to 
the plan.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.
    Par. 4. In Sec. 602.101, paragraph (c) is amended by adding entries 
in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

 
                                                             Current OMB
     CFR part or section where identified and described      control No.
 
 
                  *        *        *        *        *
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
 
                  *        *        *        *        *
 

    Approved: December 28, 1998.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

Donald C. Lubick,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 99-1520 Filed 2-2-99; 8:45 am]
BILLING CODE 4830-01-P