[Federal Register Volume 66, Number 7 (Wednesday, January 10, 2001)]
[Rules and Regulations]
[Pages 1843-1859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 8928]
RIN 1545-AW94


Continuation Coverage Requirements Applicable to Group Health 
Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on certain issues that arise in connection with the COBRA continuation 
coverage requirements applicable to group health plans. The regulations 
in this document supplement final COBRA regulations published on 
February 3, 1999, in the Federal Register. The regulations will 
generally affect sponsors and administrators 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 January 10, 
2001.
    Applicability dates: For dates of applicability, see the discussion 
under the heading EFFECTIVE DATE in this preamble.

FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis at 202-622-6080 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 
imposes continuation coverage requirements on group health plans in 
certain situations. This document contains amendments to the COBRA 
health care continuation coverage regulations in 26 CFR part 54. 
Proposed regulations interpreting COBRA were published in the Federal 
Register on June 15, 1987 (52 FR 22716). On February 3, 1999, final 
COBRA regulations were published in the Federal Register (64 FR 5160) 
(the 1999 final regulations), and a notice of proposed rulemaking (REG-
121865-98) was published the same day (64 FR 5237) for certain issues 
not addressed in the final regulations (the 1999 proposed regulations). 
A public hearing was held on June 8, 1999. In addition, written 
comments responding to the notice of proposed rulemaking and to the 
final regulations were received. After consideration of all the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision. The revisions are discussed below.

Explanation and Summary of Comments

Small Employer Plan Exception

    Group health plans maintained by an employer that had fewer than 20 
employees on a typical business day in the previous calendar year are 
not subject to COBRA. The 1999 proposed regulations relating to plans 
maintained by an employer with fewer than 20 employees in the previous 
calendar year are adopted as final regulations without change. Unlike 
the 1987 proposed regulations, the 1999 proposed regulations use a 
full-time equivalency method in counting part-time employees for 
purposes of determining if an employer had fewer than 20 employees. 
Several commenters expressed disapproval of this approach or inquired 
why it was being considered.
    The 1987 proposed regulations contained rules about how to count 
part-time employees. An example can be used to illustrate how the 1987 
rules were proposed to apply. In a calendar year two employers each 
employ 15 full-time employees and 12 part-time employees. Each part-
time employee works 15 hours per week. Each employer has six typical 
business days each week. One employer schedules all 12 of the part-time 
employees to work two-and-a-half hours each typical business day per 
week. The other employer staggers the schedule of the part-time 
employees so that they each work seven-and-a-half hours on two typical 
business days per week, so that four part-time employees work on each 
typical business day. Under the 1987

[[Page 1844]]

proposed regulations, the part-time employees of the first employer 
counted as 12 employees whereas the part-time employees of the second 
employer counted only as four employees. In the following calendar 
year, a group health plan maintained by the first employer would have 
been subject to COBRA (because the first employer employed 27 employees 
on a typical business day in the preceding calendar year) but a group 
health plan maintained by the second employer would not have been 
subject to COBRA (because the second employer employed only 19 
employees on a typical business day in the preceding calendar year).
    The exception for employers with fewer than 20 employees reflects 
Congress' judgment that the costs and administrative burden associated 
with COBRA should not be imposed on small employers and that imposing 
such requirements on small employers may discourage them from providing 
group health coverage to their employees. There is no reason to 
distinguish, as the approach in the 1987 proposed regulations would 
have done, between two employers with identical numbers of full- and 
part-time employees based on the particular days that the part-time 
employees work.
    In contrast to the result under the 1987 proposed regulations, the 
1999 proposed regulations and these final regulations provide for the 
uniform treatment of employers employing the same number of part-time 
employees for equivalent periods, regardless of how the hours are 
scheduled. The full-time equivalency approach therefore avoids creating 
an incentive for employers to schedule the work of their part-time 
employees in a manner that is inconsistent with the convenience of the 
employees or the needs of the business.
    One commenter asked if it is permissible to count part-time 
employees on an aggregate basis rather than an individual basis. On an 
individual basis, the number of part-time employees is computed by 
dividing the hours worked by each part-time employee by the hours 
required to be considered working full-time and then by adding all the 
quotients together. On an aggregate basis, the number of part-time 
employees is computed by adding all the hours worked by part-time 
employees and dividing that sum by the number of hours required for one 
worker to be considered working full-time. Because the two methods 
produce identical results, both methods are permissible.

Determination of Number of Plans

    The 1999 proposed regulations relating to the determination of the 
number of plans that an employer or employee organization maintains are 
modified and reorganized. Under the 1999 proposed regulations, the 
number of plans is determined by the instruments governing the 
employer's or employee organization's arrangement or arrangements to 
provide health care benefits (the instruments rule). Another rule (the 
default rule) in the 1999 proposed regulations provides that if there 
are no instruments or if the instruments are unclear about whether 
there is one plan or more than one plan, all health care benefits 
(except benefits for long-term care) provided by a corporation, 
partnership, or other entity or trade or business, or by an employee 
organization, constitute one group health plan.
    Under these final regulations, these rules are reorganized so that 
the default rule, under which all health care benefits provided by one 
entity or trade or business are treated as one plan, is presented 
first. The default rule applies unless it is clear from the instruments 
governing an arrangement or arrangements to provide health care 
benefits that the benefits are being provided under separate plans and 
the arrangement or arrangements are operated pursuant to such 
instruments as separate plans. In effect, this rule revises the 
instruments rule in the 1999 proposed regulations by adding the 
requirement that the arrangement or arrangements must be operated 
pursuant to the instruments as separate plans to avoid the application 
of the default rule. These organizational and substantive changes from 
the 1999 proposed regulations were developed at the suggestion of and 
with substantial assistance from the U.S. Department of Labor, Pension 
and Welfare Benefits Administration.

Health Flexible Spending Arrangements

    The 1999 proposed regulations relating to health flexible spending 
arrangements (health FSAs) are adopted with one minor change and one 
addition. The minor change is the cross-reference in which a health FSA 
is defined. The 1999 proposed regulations cite the definition in 
proposed regulations under section 125. These final regulations cite 
the definition in section 106(c)(2) of the Internal Revenue Code. 
(Regulations published recently under section 125 also use the section 
106(c)(2) definition. See 65 FR 15548, 15553 (March 23, 2000).)
    The one addition is a clarification that, to the extent a health 
FSA is obligated to make COBRA continuation coverage available to a 
qualified beneficiary, all the general COBRA continuation coverage 
rules apply in the same way that they apply to coverage under other 
group health plans, including the rule for how plan limits on coverage 
apply to someone on COBRA continuation coverage. This addition was made 
in response to the request of one commenter and numerous inquiries 
about how the annual election of a certain dollar amount by an employee 
under a health FSA applies once there is a qualifying event.
    Several commenters were pleased with the limited exception from the 
COBRA rules for health FSAs under the 1999 proposed regulations and 
asked that the final regulations go even further. They requested that 
when participants under a health FSA experience a qualifying event (and 
the benefits under the health FSA are excepted benefits under sections 
9831 and 9832), the final regulations should allow the health FSA to 
compute the contributions made during that plan year on the 
participant's behalf, reduce that amount by reimbursements already made 
during the plan year, and--instead of requiring the health FSA to offer 
COBRA continuation coverage in those cases in which there is a positive 
balance--allow the participant to spend whatever balance remains during 
the remainder of the plan year without requiring or allowing additional 
contributions. However, such an approach is inconsistent with the 
requirements under sections 125 and 4980B and thus has not been 
adopted.
    One commenter requested that the final regulations clarify that the 
applicable premium includes any employer subsidy. The statute makes 
clear that the applicable premium is computed based on the total cost 
of coverage, regardless of whether paid by the employer or employee. 
The regulations generally do not address how to calculate the 
applicable premium. However, the example for the health FSA exception 
makes clear that the maximum amount a plan is permitted to charge for 
COBRA coverage under a health FSA includes any employer subsidy.
    One commenter requested that the final regulations clarify that a 
health FSA is obligated to make COBRA continuation coverage available 
only in connection with qualifying events that are a termination of 
employment or reduction of hours of employment. This suggestion is not 
adopted in the final

[[Page 1845]]

regulations because it is inconsistent with the statute. If health care 
expenses incurred for a spouse or dependent child of an active employee 
can be reimbursed under a health FSA, but, were it not for the COBRA 
continuation coverage rules, would not be reimbursed after the death of 
the employee, the divorce from the employee, or a dependent child's 
ceasing to be a dependent child under the generally applicable 
requirements under the health FSA, then the spouse or dependent child 
has experienced a qualifying event and is entitled to continue coverage 
under the health FSA to the same extent as they would following 
termination of the employee's employment.

Increase in Premium Loss of Coverage

    The 1999 final regulations provide, in describing what constitutes 
a loss of coverage for determining whether a qualifying event has 
occurred, that any increase in premium or contribution that must be 
paid for coverage as a result of one of the events that can be a 
qualifying event is a loss of coverage. Several commenters questioned 
why this rule was adopted and pointed out that it creates 
administrative burdens in two situations without apparently providing 
any advantage to the people whose premium is being increased. The two 
situations concern retiring employees and full-time employees reducing 
their work hours to become part-time employees. In both situations, 
often employers will grant the employees access to the same coverage 
but will require them to pay a premium that is higher than what active 
employees pay though still significantly less than the 102 percent rate 
permitted under COBRA. The commenters wondered why it is necessary to 
provide these individuals with a COBRA notice if it is always 
advantageous for the individual to take the other coverage. They 
suggested that a loss of coverage should not be considered to have 
occurred if employees (or other qualified beneficiaries) can get access 
to the same coverage for less than the applicable premium under COBRA.
    The IRS and Treasury were mindful of these situations before they 
adopted the rule in the 1999 final regulations. However, if a mere 
increase in premium were not considered a loss in coverage, the person 
whose premium is being increased would not be entitled by law to a 60-
day election period nor to a 45-day period after the election for 
making the first premium payment. Although in many cases a qualified 
beneficiary might prefer a lower premium over these procedural 
protections under COBRA, in some cases these procedural protections 
might be more valuable. The likelihood of the COBRA procedural 
protections being more valuable than the lower premium becomes 
substantial as the amount required to be paid for part-time or retiree 
coverage approaches the amount of the applicable premium. Accordingly, 
the final regulations retain the rule in the 1999 final regulations so 
as not to deprive qualified beneficiaries of potentially valuable 
rights.

Termination of Coverage in Anticipation of a Qualifying Event

    The 1999 final regulations provide that if coverage is reduced or 
eliminated in anticipation of an event, the elimination or reduction is 
disregarded in determining whether the event causes a loss of coverage. 
The regulations provide examples of an employer eliminating an 
employee's coverage in anticipation of a termination of employment and 
of an employee eliminating a spouse's coverage in anticipation of a 
divorce.
    One commenter requested a clarification that a reduction or 
elimination more than six months before an event could not be 
considered to be in anticipation of the event. However, in many cases 
where coverage is eliminated by an employee in anticipation of a 
divorce, the divorce will follow the elimination by more than six 
months. Whether a reduction or elimination of coverage is in 
anticipation of a qualifying event is a question to be resolved based 
on all the relevant facts and circumstances. Thus, these final 
regulations do not amend the rule in the 1999 final regulations to 
limit the window during which an anticipatory reduction or elimination 
can be considered to have occurred.
    The commenter also requested a clarification that the coverage the 
qualified beneficiary is entitled to in such a situation is the 
coverage the qualified beneficiary had before coverage was reduced or 
eliminated. The general rule in the 1999 final regulations for 
determining what is COBRA continuation coverage applies in this 
situation. Under the rule in the 1999 final regulations, the qualified 
beneficiary will generally be entitled to the coverage that the 
qualified beneficiary had before the qualifying event. However, if 
between the date of the elimination or reduction in coverage and the 
date of the qualifying event coverage is modified for similarly 
situated nonCOBRA beneficiaries, then the modified coverage must be 
made available to the qualified beneficiary.

Moving Outside Region of Region-Specific Coverage

    The 1999 final regulations require employers and employee 
organizations to make alternative coverage available to qualified 
beneficiaries moving outside the service area of a region-specific 
benefit package. One commenter asked for a clarification that the 
alternative coverage must be made available immediately and cannot be 
deferred until the beginning of the plan's next open enrollment period. 
These final regulations clarify that the alternative coverage must be 
made available not later than the date of the qualified beneficiary's 
relocation, or, if later, the first day of the month following the 
month in which the qualified beneficiary requests the alternative 
coverage.
    Another commenter expressed concern that a plan might have to incur 
extraordinary costs (such as negotiating for a separate network of 
providers in an indemnity plan with a preferred provider organization, 
or establishing a separate schedule of usual, customary, and reasonable 
costs) to provide coverage in areas to which a qualified beneficiary 
might relocate but in which there were no active employees of the 
employer or employee organization. The rule in the 1999 final 
regulations does not require employers or employee organizations to 
incur extraordinary costs to extend coverage to qualified beneficiaries 
in areas in which the employer or employee organization does not have 
active employees. In the case of an indemnity plan with a preferred 
provider organization, the plan need only provide benefits at the 
standard rate (that is, not at the rate for preferred providers) to a 
qualified beneficiary who moves outside the service area of the 
preferred provider network. Similarly, a plan is not required to 
establish a separate schedule of usual, customary, and reasonable costs 
solely for qualified beneficiaries who reside in a region where no 
active employees work or reside (regardless of whether this is to the 
qualified beneficiary's benefit or detriment based on prevailing costs 
in the region where the qualified beneficiary resides). Accordingly, 
these final regulations do not modify the rule in the 1999 final 
regulations based on this commenter's concern.

When COBRA Continuation Coverage Must Become Effective

    The 1999 final regulations provide that, in the case of an 
indemnity or reimbursement arrangement, claims incurred during the 
election period do not have to be paid before the election

[[Page 1846]]

(and, if applicable, payment for the coverage) is made. In the case of 
indemnity or reimbursement arrangements that allow retroactive 
reinstatement of coverage, the 1999 final regulations provide that 
coverage for qualified beneficiaries can be terminated and then 
reinstated when the election is made. One commenter asked if these two 
rules mean that coverage must be reinstated at the time of the election 
even if payment is not made but that no claims need be paid under that 
coverage until payment for the coverage is made. The commenter pointed 
out that this would a pose a problem for employers and employee 
organizations maintaining insured plans in that they would have to pay 
the insurer premiums for the coverage even if payment for the coverage 
was never made (whereas the insurer would never have to pay any claim 
under the coverage). These final regulations clarify this rule by 
explicitly providing that in the case of indemnity plans and 
reimbursement arrangements that allow retroactive reinstatement of 
coverage, coverage can be terminated and later reinstated when the 
election (and, if applicable, payment for the coverage) is made. Thus, 
under these final regulations, the rules for when coverage must be 
reinstated and when claims must be paid are the same.

Maximum Coverage Period

    The 1999 proposed regulations relating to the maximum coverage 
period are adopted as final regulations with a minor change to a cross-
reference.

Insignificant Underpayments

    The 1999 final regulations prescribe how plans are to treat 
payments for COBRA continuation coverage that are short by an amount 
that is not significant. They require the plan to treat the payment as 
full payment unless the plan notifies the qualified beneficiary of the 
amount of the deficiency and grants a reasonable period for payment of 
the deficiency. The regulations provide as a safe harbor that a period 
of 30 days after the notice is provided is a reasonable period for this 
purpose.
    Many commenters requested that the regulations specify what is 
considered a significant amount. These final regulations provide that a 
shortfall is not significant if it is no greater than the lesser of $50 
(or another amount specified by the Commissioner in guidance of general 
applicability) or 10 percent of the required amount.
    Several commenters also requested that the regulations specify a 
period shorter than 30 days for payment of the deficiency to be 
considered timely, but these final regulations do not adopt this 
suggestion. The regulations require only that a plan grant a reasonable 
period for payment of the deficiency. In some circumstances, a period 
shorter than 30 days may be reasonable. However, in other 
circumstances, a shorter period might not be reasonable. The IRS and 
Treasury believe it is useful to provide the certainty of a safe 
harbor, but they do not believe that a period shorter than 30 days is 
sufficiently long in all cases.

Business Reorganizations

    The 1999 proposed regulations relating to business reorganizations 
are adopted as final regulations with two clarifications. The proposed 
regulations provide that, in an asset sale (which is defined as the 
sale of substantial assets such as a plant or division or substantially 
all the assets of a trade or business), a purchaser of assets is 
considered a successor employer if the seller ceases to provide any 
group health plan to any employee in connection with the sale and if 
the buyer continues the business operations associated with those 
assets without substantial change or interruption. Several inquiries 
raised the question whether this rule applies if the assets are 
purchased as part of a bankruptcy proceeding. The final regulations 
clarify this rule for assets purchased in bankruptcy by providing that 
a buying group does not fail to be a successor employer in connection 
with an asset sale merely because the sale takes place in connection 
with a bankruptcy proceeding. Thus, the general rule for determining 
whether a buyer is a successor employer applies in bankruptcy the same 
way that it does outside of bankruptcy.
    These final regulations also clarify that asset sale includes not 
only sales but other transfers as well.
    Comments were received about other aspects of the proposed rules 
for business reorganizations. Several commenters requested additional 
guidance on the amount of assets that would constitute ``substantial 
assets'' for purposes of the asset sale rules. The final regulations 
retain the definition in the proposed regulations. This definition is 
intended to be flexible enough to apply reasonably to the myriad 
situations in which this issue arises. The asset sale rules, including 
the definition of asset sale, are similar to the various formulations 
of successor employer rules that have been fashioned by the courts for 
various labor law purposes, adapted to the peculiar circumstances that 
the COBRA continuation coverage requirements create. In those cases, as 
in the final rule, a case-by-case approach is favored. See, for 
example, Golden State Bottling Co. v. NLRB, 414 U.S. 168 (1973); Howard 
Johnson Co. v. Detroit Local Joint Executive Board, Hotel & Restaurant 
Employees & Bartenders International Union, 417 U.S. 249 (1974); John 
Wiley & Sons, Inc. v. Livingston, 376 U.S. 543 (1964); NLRB v. Burns 
International Security Services, Inc., 406 U.S. 272 (1972); Fall River 
Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987); EEOC v. MacMillan 
Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974); In re National 
Airlines, Inc., 700 F.2d 695 (11th Cir. 1983); Upholsterers' 
International Union Pension Fund v. Artistic Furniture of Pontiac, 920 
F.2d 1323 (7th Cir. 1990); Central States, Southeast & Southwest Areas 
Pension Fund v. PYA/Monarch of Texas, Inc., 851 F.2d 780 (5th Cir. 
1988).
    One commenter requested clarification that the cessation of a plan 
shortly before an asset sale is in connection with the sale (and thus 
that the buying group would be responsible for making COBRA 
continuation coverage available to M&A qualified beneficiaries in 
connection with the sale if the buying group is a successor employer). 
The regulations have not been modified for this request. In many 
circumstances, cessation of a plan shortly before an asset sale would 
be considered to be in connection with the sale. However, there may be 
cases in which the plan was being terminated for an unrelated reason. 
The application of this rule in any particular case depends on all the 
relevant facts and circumstances.
    The preamble to the 1999 proposed regulations included a 
description of a potential rule that the IRS and Treasury were 
considering adopting and solicited comments on that potential rule. The 
rule would have provided that no loss of coverage occurs, and thus no 
qualifying event occurs, if a purchaser of assets maintains 
substantially the same plan for continuing employees for what would 
otherwise be the maximum coverage period (generally 18 months). The IRS 
and Treasury also acknowledged in the 1999 preamble concerns about 
protecting the rights of qualified beneficiaries in this situation. 
After consideration of the comments, the IRS and Treasury have 
determined not to adopt such a special rule. Thus, under these final 
regulations, in an asset sale, employees who terminate employment with 
the seller and who no longer get health coverage from the seller 
experience a qualifying event with respect to the seller's plan even 
though

[[Page 1847]]

they are employed by the buyer at the same jobs they had with the 
seller and have the same health coverage through the buyer.
    Like the 1999 proposed regulations, these final 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. However, it is intended that, in general, the 
principles reflected in the rules in the final regulations for 
transfers of ownership interests in corporate entities should apply in 
a similar fashion in analogous cases involving the transfer of 
ownership interests in noncorporate entities.

Employer Withdrawals From Multiemployer Plans

    The 1999 proposed regulations relating to employer withdrawals from 
a multiemployer plan are adopted with two changes and two additional 
examples to illustrate the rules as changed. The general approach of 
the 1999 proposed regulations is retained. However, the proposed rule 
renders an employer who stops contributing to a multiemployer plan 
responsible for making COBRA continuation coverage available to 
qualified beneficiaries associated with that employer only if the 
employer establishes a new plan to cover active employees formerly 
covered under the multiemployer plan. Several commenters suggested that 
the employer should also be responsible for COBRA if the coverage 
provided to employees formerly covered under the multiemployer plan 
comes from an existing plan of the employer (rather than from a new 
plan). The final rules have been revised to apply the general approach 
to existing plans as well as to new plans.
    The 1999 proposed regulations also place a threshold condition on 
the obligation of an employer or subsequent multiemployer plan to make 
COBRA coverage available to existing qualified beneficiaries associated 
with the withdrawing employer. That threshold is that the employer or 
subsequent multiemployer plan must cover a significant number of the 
employer's employees formerly covered under the multiemployer plan. 
Several commenters requested further guidance on what a significant 
number was in this context. Some of them also wanted to know what 
purpose this threshold condition serves. The intent in imposing this 
threshold condition in the proposed regulations was to leave 
responsibility for COBRA compliance with the existing multiemployer 
plan in a case where, for example, only one or two of the employees 
formerly covered under the multiemployer plan were transferred into 
management and became covered under a plan of the employer for which 
union employees were not eligible. The final rule has been revised to 
more clearly accomplish this intent. This threshold condition has been 
revised so that the employer plan or subsequent multiemployer plan has 
responsibility for COBRA compliance once coverage under the plan is 
available to a class of employees formerly covered under the 
multiemployer plan. New examples illustrate the application of this 
standard.
    Several commenters expressed concern that the proposed regulations 
would require multiemployer plans to begin investigating why an 
employer stops contributing to the multiemployer plan and to determine 
whether the withdrawing employer subsequently covered union (or former 
union) employees under a single employer plan. Concern was also 
expressed that the proposed regulations would require the multiemployer 
plan to keep employer-by-employer data for qualified beneficiaries 
receiving COBRA continuation coverage. The IRS and Treasury recognized 
when they proposed these rules that in many industries it is 
impracticable for multiemployer plans to determine whether an employer 
that stops contributing to a multiemployer plan covers union employees 
under its own plan and that it is impracticable to maintain employer-
specific data on employees and qualified beneficiaries. If a 
multiemployer plan finds it easier to make COBRA coverage available for 
the maximum coverage period, these final regulations do not require the 
plan to start gathering information that is difficult to assemble. Such 
a plan can comply with the COBRA continuation coverage requirements by 
making COBRA continuation coverage available to existing qualified 
beneficiaries in accordance with the general rules for the duration of 
COBRA continuation coverage (in Sec. 54.4980B-7).
    One commenter requested clarification of the proposed rules if an 
employer establishes a plan for employees formerly covered under the 
multiemployer plan but applies a waiting period before the employees 
are eligible for coverage under that plan. These final regulations 
clarify that the employer's obligation does not arise until the 
employer makes coverage available. Thus, the multiemployer plan would 
be responsible for COBRA coverage until the waiting period under the 
employer's plan had expired for a class of employees formerly covered 
under the multiemployer plan.
    Several commenters submitted substantially similar comments 
requesting that the rules be revised so that a multiemployer plan no 
longer receiving contributions from a certain employer would not be 
required to make COBRA continuation coverage available to any qualified 
beneficiaries affiliated with that employer. Such an approach, however, 
would not resolve the problem of qualified beneficiaries not having 
access to COBRA coverage, and the statutory basis for such a position 
is questionable in situations in which none of the statutory reasons 
for ending a plan's obligation to make COBRA coverage available to a 
particular qualified beneficiary is present. The final regulations do 
not adopt this suggestion.
    The IRS and Treasury received an inquiry about who has the 
obligation to make COBRA continuation coverage available to existing 
qualified beneficiaries in a situation that reverses the situation 
addressed in the proposed rules, one in which employees cease to be 
covered under a plan maintained by their employer and commence to be 
covered under a multiemployer plan. In such a situation, the existing 
qualified beneficiaries should get the same coverage that similarly 
situated nonCOBRA beneficiaries are receiving, that is, the coverage 
under the multiemployer plan. The 1999 final regulations suggest this 
result in describing what COBRA continuation coverage is. However, the 
language used in the 1999 final regulations can be read to suggest that 
this is the result only when coverage is under the same plan: ``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.'' (Q&A-1(a) of 
Sec. 54.4980B-5; emphasis added.) These final regulations delete the 
phrase ``under the plan'' from the quoted language to make clear that 
if coverage for the similarly situated nonCOBRA beneficiaries is 
modified by switching from one plan to another, then coverage for the 
qualified beneficiaries is modified by switching to the other plan too. 
Although this amendment is being made due to an inquiry about a switch 
from a single-employer plan to a multiemployer plan, it applies in any 
situation in which coverage for nonCOBRA beneficiaries is terminated 
under one plan and commences under another, including those situations 
in which a single employer maintains both plans.

[[Page 1848]]

COBRA and FMLA

    The 1999 proposed regulations relating to how COBRA applies in 
connection with leave taken under the Family and Medical Leave Act of 
1993 (FMLA) are adopted as final regulations with one minor addition. 
One commenter observed that the 1999 proposed regulations suggest by 
way of cross reference in an example that the Labor regulations in 29 
CFR part 825, not the COBRA regulations, determine when FMLA leave 
ends. This commenter requested that this suggestion in an example be 
made express in the text of the rules. The final regulations add in the 
text of the rules (preceding the examples) that the end of FMLA leave 
is not determined under these regulations but under the regulations in 
29 CFR part 825.

Effective Date

    This Treasury decision applies with respect to qualifying events 
occurring on or after January 1, 2002, except as provided in the 
following paragraphs.
    Paragraphs (d), (e), and (f) in Q&A-5 of Sec. 54.4980B-2 (relating 
to the counting of employees for purposes of the small employer plan 
exception) are applicable beginning January 1, 2002 for determinations 
made with reference to the number of employees in calendar year 2001 or 
later.
    Q&A-4 of Sec. 54.4980B-7 (describing the maximum coverage period) 
is applicable with respect to individuals who are qualified 
beneficiaries on or after January 1, 2002. (See Q&A-1(f) of 
Sec. 54.4980B-3, under which an individual ceases to be a qualified 
beneficiary once the plan's obligation to provide COBRA continuation 
coverage to the individual has ended.)
    Q&A-1 through Q&A-8 of Sec. 54.4980B-9 (containing rules for 
business reorganizations) are applicable with respect to business 
reorganizations that take effect on or after January 1, 2002.
    Q&A-9 and Q&A-10 of Sec. 54.4980B-9 (containing rules for employer 
withdrawals from a multiemployer plan) are applicable with respect to 
cessations of contributions that occur on or after January 1, 2002. For 
this purpose, a cessation of contributions occurs on or after January 
1, 2002 if the employer's last contribution to the plan is made on or 
after January 1, 2002.
    Section 54.4980B-10 (relating to the interaction of COBRA and FMLA 
leave) is applicable with respect to FMLA leave that begins on or after 
January 1, 2002.

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 also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information requirement on 
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking preceding these regulations was submitted to 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 Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 54

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

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 54 is amended as follows:

PART 54--PENSION EXCISE TAXES

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

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

    Section 54.4980B-9 also issued under 26 U.S.C. 4980B.
    Section 54.4980B-10 also issued under 26 U.S.C. 4980B.
* * * * *

    Par. 2. Section 54.4980B-0 is amended by:
    1. Revising the introductory text.
    2. Adding entries for Secs. 54.4980B-9 and 54.4980B-10 at the end 
of the ``List of Sections''.
    3. Revising the entry for Q-2 of Sec. 54.4980B-1 in the ``List of 
Questions''.
    4. Revising the entries for Q-3 and Q-6 of Sec. 54.4980B-2 in the 
``List of Questions''.
    5. Revising the entry for Q-4 of Sec. 54.4980B-7 in the ``List of 
Questions''.
    6. Adding entries for the section headings for Secs. 54.4980B-9 and 
54.4980B-10 in the ``List of Questions''.
    The additions and revisions 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-10.

List of Sections

* * * * *

Sec. 54.4980B-9  Business reorganizations and employer withdrawals from 
multiemployer plans.

Sec. 54.4980B-10  Interaction of FMLA and COBRA.

List of Questions

Sec. 54.4980B-1  COBRA in general.

* * * * *
    Q-2: What standard applies for topics not addressed in 
Secs. 54.4980B-1 through 54.4980B-10?
* * * * *

Sec. 54.4980B-2  Plans that must comply.

* * * * *
    Q-3: What is a multiemployer plan?
* * * * *
    Q-6: How is the number of group health plans that an employer or 
employee organization maintains determined?
* * * * *

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

* * * * *
    Q-4: When does the maximum coverage period end?
* * * * *

Sec. 54.4980B-9  Business reorganizations and employer withdrawals from 
multiemployer plans.

    Q-1: For purposes of this section, what are a business 
reorganization, a stock sale, and an asset sale?
    Q-2: In the case of a stock sale, what are the selling group, the 
acquired organization, and the buying group?
    Q-3: In the case of an asset sale, what are the selling group and 
the buying group?
    Q-4: Who is an M&A qualified beneficiary?
    Q-5: In the case of a stock sale, is the sale a qualifying event 
with respect to a covered employee who is employed by the acquired 
organization before the sale and who continues to be employed by the 
acquired organization after the sale, or with respect to the spouse or 
dependent children of such a covered employee?
    Q-6: In the case of an asset sale, is the sale a qualifying event 
with respect to

[[Page 1849]]

a covered employee whose employment immediately before the sale was 
associated with the purchased assets, or with respect to the spouse or 
dependent children of such a covered employee who are covered under a 
group health plan of the selling group immediately before the sale?
    Q-7: In a business reorganization, are the buying group and the 
selling group permitted to allocate by contract the responsibility to 
make COBRA continuation coverage available to M&A qualified 
beneficiaries?
    Q-8: Which group health plan has the obligation to make COBRA 
continuation coverage available to M&A qualified beneficiaries in a 
business reorganization?
    Q-9: Can the cessation of contributions by an employer to a 
multiemployer group health plan be a qualifying event?
    Q-10: If an employer stops contributing to a multiemployer group 
health plan, does the multiemployer plan have the obligation to make 
COBRA continuation coverage available to a qualified beneficiary who 
was receiving coverage under the multiemployer plan on the day before 
the cessation of contributions and who is, or whose qualifying event 
occurred in connection with, a covered employee whose last employment 
prior to the qualifying event was with the employer that has stopped 
contributing to the multiemployer plan?

Sec. 54.4980B-10  Interaction of FMLA and COBRA.

    Q-1: In what circumstances does a qualifying event occur if an 
employee does not return from leave taken under FMLA?
    Q-2: If a qualifying event described in Q&A-1 of this section 
occurs, when does it occur, and how is the maximum coverage period 
measured?
    Q-3: If an employee fails to pay the employee portion of premiums 
for coverage under a group health plan during FMLA leave or declines 
coverage under a group health plan during FMLA leave, does this affect 
the determination of whether or when the employee has experienced a 
qualifying event?
    Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this 
section affected by a requirement of state or local law to provide a 
period of coverage longer than that required under FMLA?
    Q-5: May COBRA continuation coverage be conditioned upon 
reimbursement of the premiums paid by the employer for coverage under a 
group health plan during FMLA leave?

    Par. 3. Section 54.4980B-1 is amended by:
    1. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the last sentence of paragraph (a) in A-1.
    2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the third sentence and the last sentence of paragraph 
(b) in A-1.
    3. Removing the last sentence of paragraph (c) in A-1 and adding 
two sentences in its place.
    4. Revising Q&A-2.
    The addition and revision read as follows:


Sec. 54.4980B-1  COBRA in general.

* * * * *
    A-1: * * *
    (c) * * * Section 54.4980B-9 contains special rules for how COBRA 
applies in connection with business reorganizations and employer 
withdrawals from a multiemployer plan, and Sec. 54.4980B-10 addresses 
how COBRA applies for individuals who take leave under the Family and 
Medical Leave Act of 1993. Unless the context indicates otherwise, any 
reference in Secs. 54.4980B-1 through 54.4980B-10 to COBRA refers to 
section 4980B (as amended) and to the parallel provisions of ERISA.
    Q-2: What standard applies for topics not addressed in 
Secs. 54.4980B-1 through 54.4980B-10?
    A-2: For purposes of section 4980B, for topics relating to the 
COBRA continuation coverage requirements of section 4980B that are not 
addressed in Secs. 54.4980B-1 through 54.4980B-10 (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.

    Par. 4. Section 54.4980B-2 is amended by:
    1. Revising paragraph (a) in A-1.
    2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the first sentence of paragraph (b) in A-1.
    3. Revising A-2.
    4. Adding Q&A-3.
    5. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the last sentence of paragraph (a) in A-4.
    6. Adding a sentence immediately before the last sentence of the 
introductory text of paragraph (a) in A-5.
    7. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the last sentence of the introductory text of paragraph 
(c) in A-5.
    8. Adding paragraphs (d), (e), and (f) in A-5.
    9. Adding Q&A-6.
    10. Revising A-8.
    11. Revising paragraph (a) in A-10.
    The additions and revisions read as follows:


Sec. 54.4980B-2  Plans that must comply.

* * * * *
    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. (See paragraphs (b) through (e) in Q&A-8 of this section 
for rules regarding the application of the COBRA continuation coverage 
requirements to certain health flexible spending arrangements.) 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. See Q&A-6 of this 
section for rules to determine the number of group health plans that an 
employer or employee organization maintains.
* * * * *

[[Page 1850]]

    A-2: (a) For purposes of section 4980B, employer refers to--
    (1) A person for whom services are performed;
    (2) 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)(1) of this Q&A-2 and
    (3) Any successor of a person described in paragraph (a)(1) or (2) 
of this Q&A-2.
    (b) An employer is a successor employer if it results from a 
consolidation, merger, or similar restructuring of the employer or if 
it is a mere continuation of the employer. See paragraph (c) in Q&A-8 
of Sec. 54.4980B-9 for rules describing the circumstances in which a 
purchaser of substantial assets is a successor employer to the employer 
selling the assets.
    Q-3: What is a multiemployer plan?
    A-3: For purposes of Secs. 54.4980B-1 through 54.4980B-10, a 
multiemployer plan is a plan to which more than one employer is 
required to contribute, that is maintained pursuant to one or more 
collective bargaining agreements between one or more employee 
organizations and more than one employer, and that satisfies such other 
requirements as the Secretary of Labor may prescribe by regulation. 
Whenever reference is made in Secs. 54.4980B-1 through 54.4980B-10 to a 
plan of or maintained by an employer or employee organization, the 
reference includes a multiemployer plan.
* * * * *
    A-5: (a) * * * See Q&A-6 of this section for rules to determine the 
number of plans that an employer or employee organization maintains. * 
* *
* * * * *
    (d) In determining the number of the employees of an employer, each 
full-time employee is counted as one employee and each part-time 
employee is counted as a fraction of an employee, determined in 
accordance with paragraph (e) of this Q&A-5.
    (e) An employer may determine the number of its employees on a 
daily basis or a pay period basis. The basis used by the employer must 
be used with respect to all employees of the employer and must be used 
for the entire year for which the number of employees is being 
determined. If an employer determines the number of its employees on a 
daily basis, it must determine the actual number of full-time employees 
on each typical business day and the actual number of part-time 
employees and the hours worked by each of those part-time employees on 
each typical business day. Each full-time employee counts as one 
employee on each typical business day and each part-time employee 
counts as a fraction, with the numerator of the fraction equal to the 
number of hours worked by that employee and the denominator equal to 
the number of hours that must be worked on a typical business day in 
order to be considered a full-time employee. If an employer determines 
the number of its employees on a pay period basis, it must determine 
the actual number of full-time employees employed during that pay 
period and the actual number of part-time employees employed and the 
hours worked by each of those part-time employees during the pay 
period. For each day of that pay period, each full-time employee counts 
as one employee and each part-time employee counts as a fraction, with 
the numerator of the fraction equal to the number of hours worked by 
that employee during that pay period and the denominator equal to the 
number of hours that must be worked during that pay period in order to 
be considered a full-time employee. The determination of the number of 
hours required to be considered a full-time employee is based upon the 
employer's employment practices, except that in no event may the hours 
required to be considered a full-time employee exceed eight hours for 
any day or 40 hours for any week.
    (f) In the case of a multiemployer plan, the determination of 
whether the plan is a small-employer plan on any particular date 
depends on which employers are contributing to the plan on that date 
and on the workforce of those employers during the preceding calendar 
year. If a plan that is otherwise subject to COBRA ceases to be a 
small-employer plan because of the addition during a calendar year of 
an employer that did not normally employ fewer than 20 employees on a 
typical business day during the preceding calendar year, the plan 
ceases to be excepted from COBRA immediately upon the addition of the 
new employer. In contrast, if the plan ceases to be a small-employer 
plan by reason of an increase during a calendar year in the workforce 
of an employer contributing to the plan, the plan ceases to be excepted 
from COBRA on the January 1 immediately following the calendar year in 
which the employer's workforce increased.
* * * * *
    Q-6: How is the number of group health plans that an employer or 
employee organization maintains determined?
    A-6: (a) The rules of this Q&A-6 apply in determining the number of 
group health plans that an employer or employee organization maintains. 
All references elsewhere in Secs. 54.4980B-1 through 54.4980B-10 to a 
group health plan are references to a group health plan as determined 
under Q&A-1 of this section and this Q&A-6. Except as provided in 
paragraph (b) or (c) of this Q&A-6, all health care benefits, other 
than benefits for qualified long-term care services (as defined in 
section 7702B(c)), provided by a corporation, partnership, or other 
entity or trade or business, or by an employee organization, constitute 
one group health plan, unless--
    (1) It is clear from the instruments governing an arrangement or 
arrangements to provide health care benefits that the benefits are 
being provided under separate plans; and
    (2) The arrangement or arrangements are operated pursuant to such 
instruments as separate plans.
    (b) A multiemployer plan and a nonmultiemployer plan are always 
separate plans.
    (c) If a principal purpose of establishing separate plans is to 
evade any requirement of law, then the separate plans will be 
considered a single plan to the extent necessary to prevent the 
evasion.
    (d) The significance of treating an arrangement as two or more 
separate group health plans is illustrated by the following examples:

    Example 1. (i) Employer X maintains a single group health plan, 
which provides major medical and prescription drug benefits. 
Employer Y maintains two group health plans; one provides major 
medical benefits and the other provides prescription drug benefits.
    (ii) X's plan could comply with the COBRA continuation coverage 
requirements by giving a qualified beneficiary experiencing a 
qualifying event with respect to X's plan the choice of either 
electing both major medical and prescription drug benefits or not 
receiving any COBRA continuation coverage under X's plan. By 
contrast, for Y's plans to comply with the COBRA continuation 
coverage requirements, a qualified beneficiary experiencing a 
qualifying event with respect to each of Y's plans must be given the 
choice of electing COBRA continuation coverage under either the 
major medical plan or the prescription drug plan or both.
    Example 2. If a joint board of trustees administers one 
multiemployer plan, that plan will fail to qualify for the small-
employer plan exception if any one of the employers whose employees 
are covered under the plan normally employed 20 or more employees 
during the preceding calendar year. However, if the joint board of 
trustees maintains two or more multiemployer plans, then the 
exception would be available with respect to each of those plans in 
which each of the employers

[[Page 1851]]

whose employees are covered under the plan normally employed fewer 
than 20 employees during the preceding calendar year.
* * * * *
    A-8: (a)(1) 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. See paragraphs (b) through (e) of this 
Q&A-8 for rules limiting the obligations of certain health flexible 
spending arrangements.
    (2) The rules of this paragraph (a) 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).

    (b) If a health flexible spending arrangement (health FSA), within 
the meaning of section 106(c)(2), satisfies the two conditions in 
paragraph (c) of this Q&A-8 for a plan year, the obligation of the 
health FSA to make COBRA continuation coverage available to a qualified 
beneficiary who experiences a qualifying event in that plan year is 
limited in accordance with paragraphs (d) and (e) of this Q&A-8, as 
illustrated by an example in paragraph (f) of this Q&A-8. To the extent 
that a health FSA is obligated to make COBRA continuation coverage 
available to a qualified beneficiary, the health FSA must comply with 
all the applicable rules of Secs. 54.4980B-1 through 54.4980B-10, 
including the rules of Q&A-3 in Sec. 54.4980B-5 (relating to limits).
    (c) The conditions of this paragraph (c) are satisfied if--
    (1) Benefits provided under the health FSA are excepted benefits 
within the meaning of sections 9831 and 9832; and
    (2) The maximum amount that the health FSA can require to be paid 
for a year of COBRA continuation coverage under Q&A-1 of Sec. 54.4980B-
8 equals or exceeds the maximum benefit available under the health FSA 
for the year.
    (d) If the conditions in paragraph (c) of this Q&A-8 are satisfied 
for a plan year, then the health FSA is not obligated to make COBRA 
continuation coverage available for any subsequent plan year to any 
qualified beneficiary who experiences a qualifying event during that 
plan year.
    (e) If the conditions in paragraph (c) of this Q&A-8 are satisfied 
for a plan year, the health FSA is not obligated to make COBRA 
continuation coverage available for that plan year to any qualified 
beneficiary who experiences a qualifying event during that plan year 
unless, as of the date of the qualifying event, the qualified 
beneficiary can become entitled to receive during the remainder of the 
plan year a benefit that exceeds the maximum amount that the health FSA 
is permitted to require to be paid for COBRA continuation coverage for 
the remainder of the plan year. In determining the amount of the 
benefit that a qualified beneficiary can become entitled to receive 
during the remainder of the plan year, the health FSA may deduct from 
the maximum benefit available to that qualified beneficiary for the 
year (based on the election made under the health FSA for that 
qualified beneficiary before the date of the qualifying event) any 
reimbursable claims submitted to the health FSA for that plan year 
before the date of the qualifying event.
    (f) The rules of paragraphs (b), (c), (d), and (e) of this Q&A-8 
are illustrated by the following example:

    Example. (i) An employer maintains a group health plan providing 
major medical benefits and a group health plan that is a health FSA, 
and the plan year for each plan is the calendar year. Both the plan 
providing major medical benefits and the health FSA are subject to 
COBRA. Under the health FSA, during an open season before the 
beginning of each calendar year, employees can elect to reduce their 
compensation during the upcoming year by up to $1200 per year and 
have that same amount contributed to a health flexible spending 
account. The employer contributes an additional amount to the 
account equal to the employee's salary reduction election for the 
year. Thus, the maximum amount available to an employee under the 
health FSA for a year is two times the amount of the employee's 
salary reduction election for the year. This amount may be paid to 
the employee during the year as reimbursement for health expenses 
not covered by the employer's major medical plan (such as 
deductibles, copayments, prescription drugs, or eyeglasses). The 
employer determined, in accordance with section 4980B(f)(4), that a 
reasonable estimate of the cost of providing coverage for similarly 
situated nonCOBRA beneficiaries for 2002 under this health FSA is 
equal to two times their salary reduction election for 2002 and, 
thus, that two times the salary reduction election is the applicable 
premium for 2002.
    (ii) Because the employer provides major medical benefits under 
another group health plan, and because the maximum benefit that any 
employee can receive under the health FSA is not greater than two 
times the employee's salary reduction election for the plan year, 
benefits under this health FSA are excepted benefits within the 
meaning of sections 9831 and 9832. Thus, the first condition of 
paragraph (c) of this Q&A-8 is satisfied for the year. The maximum 
amount that a plan can require to be paid for coverage (outside of 
coverage required to be made available due to a disability 
extension) under Q&A-1 of Sec. 54.4980B-8 is 102 percent of the 
applicable premium. Thus, the maximum amount that the health FSA can 
require to be paid for coverage for the 2002 plan year is 2.04 times 
the employee's salary reduction election for the plan year. Because 
the maximum benefit available under the health FSA is 2.0 times the 
employee's salary reduction election for the year, the maximum 
benefit available under the health FSA for the year is less than the 
maximum amount that the health FSA can require to be paid for 
coverage for the year. Thus, the second condition in paragraph (c) 
of this Q&A-8 is also satisfied for the 2002 plan year. Because both 
conditions in paragraph (c) of this Q&A-8 are satisfied for 2002, 
with respect to any qualifying event occurring in 2002, the health 
FSA is not obligated to make COBRA continuation coverage available 
for any year after 2002.
    (iii) Whether the health FSA is obligated to make COBRA 
continuation coverage available in 2002 to a qualified beneficiary 
with respect to a qualifying event that occurs in 2002 depends upon 
the maximum benefit that would be available to the qualified 
beneficiary under COBRA continuation coverage for that plan year. 
Case 1: Employee B has elected to reduce B's salary by $1200 for 
2002. Thus, the maximum benefit that B can become entitled to 
receive under the health FSA during the entire year is $2400. B 
experiences a qualifying event that is the termination of B's 
employment on May 31, 2002. As of that date, B had submitted $300 of 
reimbursable expenses under the health

[[Page 1852]]

FSA. Thus, the maximum benefit that B could become entitled to 
receive for the remainder of 2002 is $2100. The maximum amount that 
the health FSA can require to be paid for COBRA continuation 
coverage for the remainder of 2002 is 102 percent times 1/12 of the 
applicable premium for 2002 times the number of months remaining in 
2002 after the date of the qualifying event. In B's case, the 
maximum amount that the health FSA can require to be paid for COBRA 
continuation coverage for 2002 is 2.04 times $1200, or $2448. One-
twelfth of $2448 is $204. Because seven months remain in the plan 
year, the maximum amount that the health FSA can require to be paid 
for B's coverage for the remainder of the year is seven times $204, 
or $1428. Because $1428 is less than the maximum benefit that B 
could become entitled to receive for the remainder of the year 
($2100), the health FSA is required to make COBRA continuation 
coverage available to B for the remainder of 2002 (but not for any 
subsequent year).
    (iv) Case 2: The facts are the same as in Case 1 except that B 
had submitted $1000 of reimbursable expenses as of the date of the 
qualifying event. In that case, the maximum benefit available to B 
for the remainder of the year would be $1400 instead of $2100. 
Because the maximum amount that the health FSA can require to be 
paid for B's coverage is $1428, and because the $1400 maximum 
benefit for the remainder of the year does not exceed $1428, the 
health FSA is not obligated to make COBRA continuation coverage 
available to B in 2002 (or any later year). (Of course, the 
administrator of the health FSA is permitted to make COBRA 
continuation coverage available to every qualified beneficiary in 
the year that the qualified beneficiary's qualifying event occurs in 
order to avoid having to determine the maximum benefit available for 
each qualified beneficiary for the remainder of the plan year.)
* * * * *
    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 
(see Q&A-3 of this section for a definition of multiemployer plan) the 
excise tax is imposed on the plan.
* * * * *


Sec. 54.4980B-3  [Amended]

    Par. 5. Section 54.4980B-3 is amended by:
    1. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the last sentence of paragraph (a)(3) in A-1.
    2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the first sentence of paragraph (g) in A-1.
    3. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the first and second sentences of paragraph (a)(1) in 
A-2.
    4. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the first sentence of paragraph (a)(2) in A-2.
    5. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in the first and last sentences in paragraph (b) in A-2.
    6. Removing the language ``54.4980B-8'' and adding ``54.4980B-10'' 
in its place in A-3.
    7. Removing the language ``section 9801(f)(2), and Sec. 54.9801-
6T(b)'' and adding ``and section 9801(f)(2)'' in its place in the last 
sentence of paragraph (b) in A-1.
    8. Removing the language ``and Sec. 54.9801-6T(b)'' in the second 
sentence of paragraph (i) in Example 1 of paragraph (h) of A-1.

    Par. 6. Section 54.4980B-4 is amended by:
    1. Adding a sentence at the end of paragraph (a) in A-1.
    2. Removing the language ``Q&A-1'' and adding ``Q&A-4'' in its 
place in the fifth sentence of paragraph (c) of A-1.
    3. Revising the third sentence in paragraph (e) of A-1.
    4. Removing the language ``section 9801(f)(2), and Sec. 54.9801-
6T(b)'' and adding ``and section 9801(f)(2)'' in its place in paragraph 
(i) in Example 4 of paragraph (g) in A-1.
    The addition and revision read as follows:


Sec. 54.4980B-4  Qualifying events.

* * * * *
    A-1: (a) * * * See Q&A-1 through Q&A-3 of Sec. 54.4980B-10 for 
special rules in the case of leave taken under the Family and Medical 
Leave Act of 1993 (29 U.S.C. 2601-2619).
* * * * *
    (e) * * * For example, an absence from work due to disability, a 
temporary layoff, or any other reason (other than due to leave that is 
FMLA leave; see Sec. 54.4980B-10) is a reduction of hours of a covered 
employee's employment if there is not an immediate termination of 
employment. * * *
* * * * *

    Par. 7. Section 54.4980B-5 is amended by:
    1. Revising paragraph (a) of A-1.
    2. Revising paragraph (b) in A-4.
    3. Removing the language ``and Sec. 54.9801-6T'' in the second 
sentence of paragraph (a) in A-5.
    The revisions read as follows:


Sec. 54.4980B-5  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 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-10 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.
* * * * *
    A-4: * * *
    (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, within a reasonable period after requesting 
other coverage, 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

[[Page 1853]]

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. The effective date of the alternative 
coverage must be not later than the date of the qualified beneficiary's 
relocation, or, if later, the first day of the month following the 
month in which the qualified beneficiary requests the alternative 
coverage. 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).
* * * * *

    Par. 8. Section 54.4980B-6 is amended by:
    1. Revising the Example in paragraph (c) of A-1.
    2. Revising the first sentence in paragraph (b) of A-3.
    The revisions read as follows:


Sec. 54.4980B-6  Electing COBRA continuation coverage.

* * * * *
    A-1: * * *
    (c) * * *
    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 paragraph (b) of Q&A-4 
of Sec. 54.4980B-7).
    (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 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 (see Q&A-4 of Sec. 54.4980B-7), 
and in certain circumstances might be provided for a shorter period 
(see Q&A-1 of Sec. 54.4980B-7).
* * * * *
    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 (and, 
if applicable, payment for the coverage) is made. * * *
* * * * *

    Par. 9. Section 54.4980B-7 is amended by:
    1. Revising paragraph (a) of A-1.
    2. Adding Q&A-4.
    3. Revising the second sentence in paragraph (c) of A-5.
    4. Revising paragraph (b) of Q&A-6.
    5. Removing the language ``Q&A-1'' and adding ``Q&A-4'' in its 
place in paragraph (a) of A-7.
    The addition and revisions read as follows:


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

* * * * *
    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 coverage period (see Q&A-4 of this 
section);
    (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;
    (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; and
    (6) In the case of a qualified beneficiary entitled to a disability 
extension (see Q&A-5 of this section), the later of --
    (i) Either 29 months after the date of the qualifying event, or the 
first day of the month that is more than 30 days after the date of a 
final determination under Title II or XVI of the Social Security Act 
(42 U.S.C. 401-433 or 1381-1385) that the disabled qualified 
beneficiary whose disability resulted in the qualified beneficiary's 
being entitled to the disability extension is no longer disabled, 
whichever is earlier; or
    (ii) The end of the maximum coverage period that applies to the 
qualified beneficiary without regard to the disability extension.
* * * * *
    Q-4: When does the maximum coverage period end?
    A-4: (a) Except as otherwise provided in this Q&A-4, the maximum 
coverage period ends 36 months after the qualifying event. The maximum 
coverage period for 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 maximum coverage period for the qualifying 
event giving rise to the period of COBRA continuation coverage during 
which the child was born or placed for adoption. Paragraph (b) of this 
Q&A-4 describes the starting point from which the end of the maximum 
coverage period is measured. The date that the maximum coverage period 
ends is described in paragraph (c) of this Q&A-4 in a case where the 
qualifying event is a termination of employment or reduction of hours 
of employment, in paragraph (d) of this Q&A-4 in a case where a covered 
employee becomes entitled to Medicare benefits under Title XVIII of the 
Social Security Act (42 U.S.C. 1395-1395ggg) before experiencing a 
qualifying event that is a termination of employment or reduction of 
hours of employment, and in paragraph (e) of this Q&A-4 in the case of 
a qualifying event that is the bankruptcy of the employer. See Q&A-8 of 
Sec. 54.4980B-2 for limitations that apply to certain health flexible 
spending arrangements. See also Q&A-6 of this section in the case of 
multiple qualifying events. Nothing in Secs. 54.4980B-1 through 
54.4980B-10 prohibits a group health plan from providing coverage that 
continues beyond the end of the maximum coverage period.

[[Page 1854]]

    (b)(1) The end of the maximum coverage period is measured from the 
date of the qualifying event even if the qualifying event does not 
result in a loss of coverage under the plan until a later date. If, 
however, coverage under the plan is lost at a later date and the plan 
provides for the extension of the required periods, then the maximum 
coverage period is measured from the date when coverage is lost. A plan 
provides for the extension of the required periods if it provides 
both--
    (i) That the 30-day notice period (during which the employer is 
required to notify the plan administrator of the occurrence of certain 
qualifying events such as the death of the covered employee or the 
termination of employment or reduction of hours of employment of the 
covered employee) begins on the date of the loss of coverage rather 
than on the date of the qualifying event; and
    (ii) That the end of the maximum coverage period is measured from 
the date of the loss of coverage rather than from the date of the 
qualifying event.
    (2) In the case of a plan that provides for the extension of the 
required periods, whenever the rules of Secs. 54.4980B-1 through 
54.4980B-10 refer to the measurement of a period from the date of the 
qualifying event, those rules apply in such a case by measuring the 
period instead from the date of the loss of coverage.
    (c) In the case of a qualifying event that is a termination of 
employment or reduction of hours of employment, the maximum coverage 
period ends 18 months after the qualifying event if there is no 
disability extension, and 29 months after the qualifying event if there 
is a disability extension. See Q&A-5 of this section for rules to 
determine if there is a disability extension. If there is a disability 
extension and the disabled qualified beneficiary is later determined to 
no longer be disabled, then a plan may terminate the COBRA continuation 
coverage of an affected qualified beneficiary before the end of the 
disability extension; see paragraph (a)(6) in Q&A-1 of this section.
    (d)(1) If a covered employee becomes entitled to Medicare benefits 
under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg) 
before experiencing a qualifying event that is a termination of 
employment or reduction of hours of employment, the maximum coverage 
period for qualified beneficiaries other than the covered employee ends 
on the later of--
    (i) 36 months after the date the covered employee became entitled 
to Medicare benefits; or
    (ii) 18 months (or 29 months, if there is a disability extension) 
after the date of the covered employee's termination of employment or 
reduction of hours of employment.
    (2) See paragraph (b) of Q&A-3 of this section regarding the 
determination of when a covered employee becomes entitled to Medicare 
benefits.
    (e) In the case of a qualifying event that is the bankruptcy of the 
employer, the maximum coverage period for a qualified beneficiary who 
is the retired covered employee ends on the date of the retired covered 
employee's death. The maximum coverage period for a qualified 
beneficiary who is the spouse, surviving spouse, or dependent child of 
the retired covered employee ends on the earlier of--
    (1) The date of the qualified beneficiary's death; or
    (2) The date that is 36 months after the death of the retired 
covered employee.
* * * * *
    A-5: * * *
    (c) * * * 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 (as described in paragraph (b) of 
Q&A-4 of this section) then the period of the first 60 days of COBRA 
continuation coverage is measured from the date on which the coverage 
would be lost). * * *
* * * * *
    A-6: * * *
    (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 an 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; see 
paragraph (b) in Q&A-4 of this section). For example, if an 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. See Q&A-8(b) of Sec. 54.4980B-2 for a 
special rule that applies to certain health flexible spending 
arrangements.
* * * * *

    Par. 10. Section 54.4980B-8 is amended by:
    1. Revising paragraph (c) in A-1.
    2. Adding a new sentence at the end of paragraph (d) and paragraphs 
(d)(1) and (2) in A-5.
    The revision and addition read as follows:


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

* * * * *
    A-1: * * *
* * * * *
    (c) A group health plan does not fail to comply with section 
9802(b) (which generally prohibits 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.
* * * * *
    A-5: * * *

[[Page 1855]]

    (d) * * * An amount is not significantly less than the amount the 
plan requires to be paid for a period of coverage if and only if the 
shortfall is no greater than the lesser of the following two amounts:
    (1) Fifty dollars (or such other amount as the Commissioner may 
provide in a revenue ruling, notice, or other guidance published in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii) of this 
chapter)); or
    (2) 10 percent of the amount the plan requires to be paid.
* * * * *

    Par. 11. Sections 54.4980B-9 and 54.4980B-10 are added to read as 
follows:


Sec. 54.4980B-9  Business reorganizations and employer withdrawals from 
multiemployer plans.

    The following questions-and-answers address who has the obligation 
to make COBRA continuation coverage available to affected qualified 
beneficiaries in the context of business reorganizations and employer 
withdrawals from multiemployer plans:
    Q-1: For purposes of this section, what are a business 
reorganization, a stock sale, and an asset sale?
    A-1: For purposes of this section:
    (a) A business reorganization is a stock sale or an asset sale.
    (b) A stock sale is a transfer of stock in a corporation that 
causes the corporation to become a different employer or a member of a 
different employer. (See Q&A-2 of Sec. 54.4980B-2, which defines 
employer to include all members of a controlled group of corporations.) 
Thus, for example, a sale or distribution of stock in a corporation 
that causes the corporation to cease to be a member of one controlled 
group of corporations, whether or not it becomes a member of another 
controlled group of corporations, is a stock sale.
    (c) An asset sale is a transfer of substantial assets, such as a 
plant or division or substantially all the assets of a trade or 
business.
    (d) The rules of Sec. 1.414(b)-1 of this chapter apply in 
determining what constitutes a controlled group of corporations, and 
the rules of Secs. 1.414(c)-1 through 1.414(c)-5 of this chapter apply 
in determining what constitutes a group of trades or businesses under 
common control.
    Q-2: In the case of a stock sale, what are the selling group, the 
acquired organization, and the buying group?
    A-2: In the case of a stock sale--
    (a) The selling group is the controlled group of corporations, or 
the group of trades or businesses under common control, of which a 
corporation ceases to be a member as a result of the stock sale;
    (b) The acquired organization is the corporation that ceases to be 
a member of the selling group as a result of the stock sale; and
    (c) The buying group is the controlled group of corporations, or 
the group of trades or businesses under common control, of which the 
acquired organization becomes a member as a result of the stock sale. 
If the acquired organization does not become a member of such a group, 
the buying group is the acquired organization.
    Q-3: In the case of an asset sale, what are the selling group and 
the buying group?
    A-3: In the case of an asset sale--
    (a) The selling group is the controlled group of corporations or 
the group of trades or businesses under common control that includes 
the corporation or other trade or business that is selling the assets; 
and
    (b) The buying group is the controlled group of corporations or the 
group of trades or businesses under common control that includes the 
corporation or other trade or business that is buying the assets.
    Q-4: Who is an M&A qualified beneficiary?
    A-4: (a) Asset sales: In the case of an asset sale, an individual 
is an M&A qualified beneficiary if the individual is a qualified 
beneficiary whose qualifying event occurred prior to or in connection 
with the sale and who is, or whose qualifying event occurred in 
connection with, a covered employee whose last employment prior to the 
qualifying event was associated with the assets being sold.
    (b) Stock sales: In the case of a stock sale, an individual is an 
M&A qualified beneficiary if the individual is a qualified beneficiary 
whose qualifying event occurred prior to or in connection with the sale 
and who is, or whose qualifying event occurred in connection with, a 
covered employee whose last employment prior to the qualifying event 
was with the acquired organization.
    (c) In the case of a qualified beneficiary who has experienced more 
than one qualifying event with respect to her or his current right to 
COBRA continuation coverage, the qualifying event referred to in 
paragraphs (a) and (b) of this Q&A-4 is the first qualifying event.
    Q-5: In the case of a stock sale, is the sale a qualifying event 
with respect to a covered employee who is employed by the acquired 
organization before the sale and who continues to be employed by the 
acquired organization after the sale, or with respect to the spouse or 
dependent children of such a covered employee?
    A-5: No. A covered employee who continues to be employed by the 
acquired organization after the sale does not experience a termination 
of employment as a result of the sale. Accordingly, the sale is not a 
qualifying event with respect to the covered employee, or with respect 
to the covered employee's spouse or dependent children, regardless of 
whether they are provided with group health coverage after the sale, 
and neither the covered employee, nor the covered employee's spouse or 
dependent children, become qualified beneficiaries as a result of the 
sale.
    Q-6: In the case of an asset sale, is the sale a qualifying event 
with respect to a covered employee whose employment immediately before 
the sale was associated with the purchased assets, or with respect to 
the spouse or dependent children of such a covered employee who are 
covered under a group health plan of the selling group immediately 
before the sale?
    A-6: (a) Yes, unless--
    (1) The buying group is a successor employer under paragraph (c) of 
Q&A-8 of this section or Q&A-2 of Sec. 54.4980B-2, and the covered 
employee is employed by the buying group immediately after the sale; or
    (2) The covered employee (or the spouse or any dependent child of 
the covered employee) does not lose coverage (within the meaning of 
paragraph (c) in Q&A-1 of Sec. 54.4980B-4) under a group health plan of 
the selling group after the sale.
    (b) Unless the conditions in paragraph (a)(1) or (2) of this Q&A-6 
are satisfied, such a covered employee experiences a termination of 
employment with the selling group as a result of the asset sale, 
regardless of whether the covered employee is employed by the buying 
group or whether the covered employee's employment is associated with 
the purchased assets after the sale. Accordingly, the covered employee, 
and the spouse and dependent children of the covered employee who lose 
coverage under a plan of the selling group in connection with the sale, 
are M&A qualified beneficiaries in connection with the sale.
    Q-7: In a business reorganization, are the buying group and the 
selling group permitted to allocate by contract the responsibility to 
make COBRA continuation coverage available to M&A qualified 
beneficiaries?
    A-7: Yes. Nothing in this section prohibits a selling group and a 
buying group from allocating to one or the other

[[Page 1856]]

of the parties in a purchase agreement the responsibility to provide 
the coverage required under Secs. 54.4980B-1 through 54.4980B-10. 
However, if and to the extent that the party assigned this 
responsibility under the terms of the contract fails to perform, the 
party who has the obligation under Q&A-8 of this section to make COBRA 
continuation coverage available to M&A qualified beneficiaries 
continues to have that obligation.
    Q-8: Which group health plan has the obligation to make COBRA 
continuation coverage available to M&A qualified beneficiaries in a 
business reorganization?
    A-8: (a) In the case of a business reorganization (whether a stock 
sale or an asset sale), so long as the selling group maintains a group 
health plan after the sale, a group health plan maintained by the 
selling group has the obligation to make COBRA continuation coverage 
available to M&A qualified beneficiaries with respect to that sale. 
This Q&A-8 prescribes rules for cases in which the selling group ceases 
to provide any group health plan to any employee in connection with the 
sale. Paragraph (b) of this Q&A-8 contains these rules for stock sales, 
and paragraph (c) of this Q&A-8 contains these rules for asset sales. 
Neither a stock sale nor an asset sale has any effect on the COBRA 
continuation coverage requirements applicable to any group health plan 
for any period before the sale.
    (b)(1) In the case of a stock sale, if the selling group ceases to 
provide any group health plan to any employee in connection with the 
sale, a group health plan maintained by the buying group has the 
obligation to make COBRA continuation coverage available to M&A 
qualified beneficiaries with respect to that stock sale. A group health 
plan of the buying group has this obligation beginning on the later of 
the following two dates and continuing as long as the buying group 
continues to maintain a group health plan (but subject to the rules in 
Sec. 54.4980B-7, relating to the duration of COBRA continuation 
coverage)--
    (i) The date the selling group ceases to provide any group health 
plan to any employee; or
    (ii) The date of the stock sale.
    (2) The determination of whether the selling group's cessation of 
providing any group health plan to any employee is in connection with 
the stock sale is based on all of the relevant facts and circumstances. 
A group health plan of the buying group does not, as a result of the 
stock sale, have an obligation to make COBRA continuation coverage 
available to those qualified beneficiaries of the selling group who are 
not M&A qualified beneficiaries with respect to that sale.
    (c)(1) In the case of an asset sale, if the selling group ceases to 
provide any group health plan to any employee in connection with the 
sale and if the buying group continues the business operations 
associated with the assets purchased from the selling group without 
interruption or substantial change, then the buying group is a 
successor employer to the selling group in connection with that asset 
sale. A buying group does not fail to be a successor employer in 
connection with an asset sale merely because the asset sale takes place 
in connection with a proceeding in bankruptcy under Title 11 of the 
United States Code. If the buying group is a successor employer, a 
group health plan maintained by the buying group has the obligation to 
make COBRA continuation coverage available to M&A qualified 
beneficiaries with respect to that asset sale. A group health plan of 
the buying group has this obligation beginning on the later of the 
following two dates and continuing as long as the buying group 
continues to maintain a group health plan (but subject to the rules in 
Sec. 54.4980B-7, relating to the duration of COBRA continuation 
coverage)--
    (i) The date the selling group ceases to provide any group health 
plan to any employee; or
    (ii) The date of the asset sale.
    (2) The determination of whether the selling group's cessation of 
providing any group health plan to any employee is in connection with 
the asset sale is based on all of the relevant facts and circumstances. 
A group health plan of the buying group does not, as a result of the 
asset sale, have an obligation to make COBRA continuation coverage 
available to those qualified beneficiaries of the selling group who are 
not M&A qualified beneficiaries with respect to that sale.
    (d) The rules of Q&A-1 through Q&A-7 of this section and this Q&A-8 
are illustrated by the following examples; in each example, each group 
health plan is subject to COBRA:

Stock Sale Examples

    Example 1. (i) Selling Group S consists of three corporations, 
A, B, and C. Buying Group P consists of two corporations, D and E. P 
enters into a contract to purchase all the stock of C from S 
effective July 1, 2002. Before the sale of C, S maintains a single 
group health plan for the employees of A, B, and C (and their 
families). P maintains a single group health plan for the employees 
of D and E (and their families). Effective July 1, 2002, the 
employees of C (and their families) become covered under P's plan. 
On June 30, 2002, there are 48 qualified beneficiaries receiving 
COBRA continuation coverage under S's plan, 15 of whom are M&A 
qualified beneficiaries with respect to the sale of C. (The other 33 
qualified beneficiaries had qualifying events in connection with a 
covered employee whose last employment before the qualifying event 
was with either A or B.)
    (ii) Under these facts, S's plan continues to have the 
obligation to make COBRA continuation coverage available to the 15 
M&A qualified beneficiaries under S's plan after the sale of C to P. 
The employees who continue in employment with C do not experience a 
qualifying event by virtue of P's acquisition of C. If they 
experience a qualifying event after the sale, then the group health 
plan of P has the obligation to make COBRA continuation coverage 
available to them.
    Example 2. (i) Selling Group S consists of three corporations, 
A, B, and C. Each of A, B, and C maintains a group health plan for 
its employees (and their families). Buying Group P consists of two 
corporations, D and E. P enters into a contract to purchase all of 
the stock of C from S effective July 1, 2002. As of June 30, 2002, 
there are 14 qualified beneficiaries receiving COBRA continuation 
coverage under C's plan. C continues to employ all of its employees 
and continues to maintain its group health plan after being acquired 
by P on July 1, 2002.
    (ii) Under these facts, C is an acquired organization and the 14 
qualified beneficiaries under C's plan are M&A qualified 
beneficiaries. A group health plan of S (that is, either the plan 
maintained by A or the plan maintained by B) has the obligation to 
make COBRA continuation coverage available to the 14 M&A qualified 
beneficiaries. S and P could negotiate to have C's plan continue to 
make COBRA continuation coverage available to the 14 M&A qualified 
beneficiaries. In such a case, neither A's plan nor B's plan would 
make COBRA continuation coverage available to the 14 M&A qualified 
beneficiaries unless C's plan failed to fulfill its contractual 
responsibility to make COBRA continuation coverage available to the 
M&A qualified beneficiaries. C's employees (and their spouses and 
dependent children) do not experience a qualifying event in 
connection with P's acquisition of C, and consequently no plan 
maintained by either P or S has any obligation to make COBRA 
continuation coverage available to C's employees (or their spouses 
or dependent children) in connection with the transfer of stock in C 
from S to P.
    Example 3. (i) The facts are the same as in Example 2, except 
that C ceases to employ two employees on June 30, 2002, and those 
two employees never become covered under P's plan.
    (ii) Under these facts, the two employees experience a 
qualifying event on June 30, 2002 because their termination of 
employment causes a loss of group health coverage. A group health 
plan of S (that is, either the plan maintained by A or the plan 
maintained by B) has the obligation to make COBRA continuation 
coverage available to

[[Page 1857]]

the two employees (and to any spouse or dependent child of the two 
employees who loses coverage under C's plan in connection with the 
termination of employment of the two employees) because they are M&A 
qualified beneficiaries with respect to the sale of C.
    Example 4. (i) Selling Group S consists of three corporations, 
A, B, and C. Buying Group P consists of two corporations, D and E. P 
enters into a contract to purchase all of the stock of C from S 
effective July 1, 2002. Before the sale of C, S maintains a single 
group health plan for the employees of A, B, and C (and their 
families). P maintains a single group health plan for the employees 
of D and E (and their families). Effective July 1, 2002, the 
employees of C (and their families) become covered under P's plan. 
On June 30, 2002, there are 25 qualified beneficiaries receiving 
COBRA continuation coverage under S's plan, 20 of whom are M&A 
qualified beneficiaries with respect to the sale of C. (The other 
five qualified beneficiaries had qualifying events in connection 
with a covered employee whose last employment before the qualifying 
event was with either A or B.) S terminates its group health plan 
effective June 30, 2002 and begins to liquidate the assets of A and 
B and to lay off the employees of A and B.
    (ii) Under these facts, S ceases to provide a group health plan 
to any employee in connection with the sale of C to P. Thus, 
beginning July 1, 2002 P's plan has the obligation to make COBRA 
continuation coverage available to the 20 M&A qualified 
beneficiaries, but P is not obligated to make COBRA continuation 
coverage available to the other 5 qualified beneficiaries with 
respect to S's plan as of June 30, 2002 or to any of the employees 
of A or B whose employment is terminated by S (or to any of those 
employees' spouses or dependent children).

Asset Sale Examples

    Example 5. (i) Selling Group S provides group health plan 
coverage to employees at each of its operating divisions. S sells 
the assets of one of its divisions to Buying Group P. Under the 
terms of the group health plan covering the employees at the 
division being sold, their coverage will end on the date of the 
sale. P hires all but one of those employees, gives them the same 
positions that they had with S before the sale, and provides them 
with coverage under a group health plan. Immediately before the 
sale, there are two qualified beneficiaries receiving COBRA 
continuation coverage under a group health plan of S whose 
qualifying events occurred in connection with a covered employee 
whose last employment prior to the qualifying event was associated 
with the assets sold to P.
    (ii) These two qualified beneficiaries are M&A qualified 
beneficiaries with respect to the asset sale to P. Under these 
facts, a group health plan of S retains the obligation to make COBRA 
continuation coverage available to these two M&A qualified 
beneficiaries. In addition, the one employee P does not hire as well 
as all of the employees P hires (and the spouses and dependent 
children of these employees) who were covered under a group health 
plan of S on the day before the sale are M&A qualified beneficiaries 
with respect to the sale. A group health plan of S also has the 
obligation to make COBRA continuation coverage available to these 
M&A qualified beneficiaries.
    Example 6. (i) Selling Group S provides group health plan 
coverage to employees at each of its operating divisions. S sells 
substantially all of the assets of all of its divisions to Buying 
Group P, and S ceases to provide any group health plan to any 
employee on the date of the sale. P hires all but one of S's 
employees on the date of the asset sale by S, gives those employees 
the same positions that they had with S before the sale, and 
continues the business operations of those divisions without 
substantial change or interruption. P provides these employees with 
coverage under a group health plan. Immediately before the sale, 
there are 10 qualified beneficiaries receiving COBRA continuation 
coverage under a group health plan of S whose qualifying events 
occurred in connection with a covered employee whose last employment 
prior to the qualifying event was associated with the assets sold to 
P.
    (ii) These 10 qualified beneficiaries are M&A qualified 
beneficiaries with respect to the asset sale to P. Under these 
facts, P is a successor employer described in paragraph (c) of this 
Q&A-8. Thus, a group health plan of P has the obligation to make 
COBRA continuation coverage available to these 10 M&A qualified 
beneficiaries.
    (iii) The one employee that P does not hire and the family 
members of that employee are also M&A qualified beneficiaries with 
respect to the sale. A group health plan of P also has the 
obligation to make COBRA continuation coverage available to these 
M&A qualified beneficiaries.
    (iv) The employees who continue in employment in connection with 
the asset sale (and their family members) and who were covered under 
a group health plan of S on the day before the sale are not M&A 
qualified beneficiaries because P is a successor employer to S in 
connection with the asset sale. Thus, no group health plan of P has 
any obligation to make COBRA continuation coverage available to 
these continuing employees with respect to the qualifying event that 
resulted from their losing coverage under S's plan in connection 
with the asset sale.
    Example 7. (i) Selling Group S provides group health plan 
coverage to employees at each of its two operating divisions. S 
sells the assets of one of its divisions to Buying Group P1. Under 
the terms of the group health plan covering the employees at the 
division being sold, their coverage will end on the date of the 
sale. P1 hires all but one of those employees, gives them the same 
positions that they had with S before the sale, and provides them 
with coverage under a group health plan.
    (ii) Under these facts, a group health plan of S has the 
obligation to make COBRA continuation coverage available to M&A 
qualified beneficiaries with respect to the sale to P1. (If an M&A 
qualified beneficiary first became covered under P1's plan after 
electing COBRA continuation coverage under S's plan, then S's plan 
could terminate the COBRA continuation coverage once the M&A 
qualified beneficiary became covered under P1's plan, provided that 
the remaining conditions of Q&A-2 of Sec. 54.4980B-7 were 
satisfied.)
    (iii) Several months after the sale to P1, S sells the assets of 
its remaining division to Buying Group P2, and S ceases to provide 
any group health plan to any employee on the date of that sale. 
Thus, under Q&A-1 of Sec. 54.4980B-7, S ceases to have an obligation 
to make COBRA continuation coverage available to any qualified 
beneficiary on the date of the sale to P2. P1 and P2 are unrelated 
organizations.
    (iv) Even if it was foreseeable that S would sell its remaining 
division to an unrelated third party after the sale to P1, under 
these facts the cessation of S to provide any group health plan to 
any employee on the date of the sale to P2 is not in connection with 
the asset sale to P1. Thus, even after the date S ceases to provide 
any group health plan to any employee, no group health plan of P1 
has any obligation to make COBRA continuation coverage available to 
M&A qualified beneficiaries with respect to the asset sale to P1 by 
S. If P2 is a successor employer under the rules of paragraph (c) of 
this Q&A-8 and maintains one or more group health plans after the 
sale, then a group health plan of P2 would have an obligation to 
make COBRA continuation coverage available to M&A qualified 
beneficiaries with respect to the asset sale to P2 by S (but in such 
a case employees of S before the sale who continued working for P2 
after the sale would not be M&A qualified beneficiaries). However, 
even in such a case, no group health plan of P2 would have an 
obligation to make COBRA continuation coverage available to M&A 
qualified beneficiaries with respect to the asset sale to P1 by S. 
Thus, under these facts, after S has ceased to provide any group 
health plan to any employee, no plan has an obligation to make COBRA 
continuation coverage available to M&A qualified beneficiaries with 
respect to the asset sale to P1.
    Example 8. (i) Selling Group S provides group health plan 
coverage to employees at each of its operating divisions. S sells 
substantially all of the assets of all of its divisions to Buying 
Group P. P hires most of S's employees on the date of the purchase 
of S's assets, retains those employees in the same positions that 
they had with S before the purchase, and continues the business 
operations of those divisions without substantial change or 
interruption. P provides these employees with coverage under a group 
health plan. S continues to employ a few employees for the principal 
purpose of winding up the affairs of S in preparation for 
liquidation. S continues to provide coverage under a group health 
plan to these few remaining employees for several weeks after the 
date of the sale and then ceases to provide any group health plan to 
any employee.
    (ii) Under these facts, the cessation by S to provide any group 
health plan to any employee is in connection with the asset sale to 
P. Because of this, and because P

[[Page 1858]]

continued the business operations associated with those assets 
without substantial change or interruption, P is a successor 
employer to S with respect to the asset sale. Thus, a group health 
plan of P has the obligation to make COBRA continuation coverage 
available to M&A qualified beneficiaries with respect to the sale 
beginning on the date that S ceases to provide any group health plan 
to any employee. (A group health plan of S retains this obligation 
for the several weeks after the date of the sale until S ceases to 
provide any group health plan to any employee.)
    Q-9: Can the cessation of contributions by an employer to a 
multiemployer group health plan be a qualifying event?
    A-9: The cessation of contributions by an employer to a 
multiemployer group health plan is not itself a qualifying event, even 
though the cessation of contributions may cause current employees (and 
their spouses and dependent children) to lose coverage under the 
multiemployer plan. An event coinciding with the employer's cessation 
of contributions (such as a reduction of hours of employment in the 
case of striking employees) will constitute a qualifying event if it 
otherwise satisfies the requirements of Q&A-1 of Sec. 54.4980B-4.
    Q-10: If an employer stops contributing to a multiemployer group 
health plan, does the multiemployer plan have the obligation to make 
COBRA continuation coverage available to a qualified beneficiary who 
was receiving coverage under the multiemployer plan on the day before 
the cessation of contributions and who is, or whose qualifying event 
occurred in connection with, a covered employee whose last employment 
prior to the qualifying event was with the employer that has stopped 
contributing to the multiemployer plan?
    A-10: (a) In general, yes. (See Q&A-3 of Sec. 54.4980B-2 for a 
definition of multiemployer plan.) If, however, the employer that stops 
contributing to the multiemployer plan makes group health plan coverage 
available to (or starts contributing to another multiemployer plan that 
is a group health plan with respect to) a class of the employer's 
employees formerly covered under the multiemployer plan, the plan 
maintained by the employer (or the other multiemployer plan), from that 
date forward, has the obligation to make COBRA continuation coverage 
available to any qualified beneficiary who was receiving coverage under 
the multiemployer plan on the day before the cessation of contributions 
and who is, or whose qualifying event occurred in connection with, a 
covered employee whose last employment prior to the qualifying event 
was with the employer.
    (b) The rules of Q&A-9 of this section and this Q&A-10 are 
illustrated by the following examples; in each example, each group 
health plan is subject to COBRA:

    Example 1. (i) Employer Z employs a class of employees covered 
by a collective bargaining agreement and participating in 
multiemployer group health plan M. As required by the collective 
bargaining agreement, Z has been making contributions to M. Z 
experiences financial difficulties and stops making contributions to 
M but continues to employ all of the employees covered by the 
collective bargaining agreement. Z's cessation of contributions to M 
causes those employees (and their spouses and dependent children) to 
lose coverage under M. Z does not make group health plan coverage 
available to any of the employees covered by the collective 
bargaining agreement.
    (ii) After Z stops contributing to M, M continues to have the 
obligation to make COBRA continuation coverage available to any 
qualified beneficiary who experienced a qualifying event that 
preceded or coincided with the cessation of contributions to M and 
whose coverage under M on the day before the qualifying event was 
due to an employment affiliation with Z. The loss of coverage under 
M for those employees of Z who continue in employment (and the loss 
of coverage for their spouses and dependent children) does not 
constitute a qualifying event.
    Example 2. (i) The facts are the same as in Example 1 except 
that B, one of the employees covered under M before Z stops 
contributing to M, is transferred into management. Z maintains a 
group health plan for managers and B becomes eligible for coverage 
under the plan on the day of B's transfer.
    (ii) Under these facts, Z does not make group health plan 
coverage available to a class of employees formerly covered under M 
after B becomes eligible under Z's group health plan for managers. 
Accordingly, M continues to have the obligation to make COBRA 
continuation coverage available to any qualified beneficiary who 
experienced a qualifying event that preceded or coincided with the 
cessation of contributions to M and whose coverage under M on the 
day before the qualifying event was due to an employment affiliation 
with Z.
    Example 3. (i) Employer Y employs two classes of employees 
skilled and unskilled laborers covered by a collective bargaining 
agreement and participating in multiemployer group health plan M. As 
required by the collective bargaining agreement, Y has been making 
contributions to M. Y stops making contributions to M but continues 
to employ all the employees covered by the collective bargaining 
agreement. Y's cessation of contributions to M causes those 
employees (and their spouses and dependent children) to lose 
coverage under M. Y makes group health plan coverage available to 
the skilled laborers immediately after their coverage ceases under 
M, but Y does not make group health plan coverage available to any 
of the unskilled laborers.
    (ii) Under these facts, because Y makes group health plan 
coverage available to a class of employees previously covered under 
M immediately after both classes of employees lose coverage under M, 
Y alone has the obligation to make COBRA continuation coverage 
available to any qualified beneficiary who experienced a qualifying 
event that preceded or coincided with the cessation of contributions 
to M and whose coverage under M on the day before the qualifying 
event was due to an employment affiliation with Y, regardless of 
whether the employment affiliation was as a skilled or unskilled 
laborer. However, the loss of coverage under M for those employees 
of Y who continue in employment (and the loss of coverage for their 
spouses and dependent children) does not constitute a qualifying 
event.
    Example 4. (i) Employer X employs a class of employees covered 
by a collective bargaining agreement and participating in 
multiemployer group health plan M. As required by the collective 
bargaining agreement, X has been making contributions to M. X 
experiences financial difficulties and is forced into bankruptcy by 
its creditors. X continues to employ all of the employees covered by 
the collective bargaining agreement. X also continues to make 
contributions to M until the current collective bargaining agreement 
expires, on June 30, 2001, and then X stops making contributions to 
M. X's employees (and their spouses and dependent children) lose 
coverage under M effective July 1, 2001. X does not enter into 
another collective bargaining agreement covering the class of 
employees covered by the expired collective bargaining agreement. 
Effective September 1, 2001, X establishes a group health plan 
covering the class of employees formerly covered by the collective 
bargaining agreement. The group health plan also covers their 
spouses and dependent children.
    (ii) Under these facts, M has the obligation to make COBRA 
continuation coverage available from July 1, 2001 until August 31, 
2001, and the group health plan established by X has the obligation 
to make COBRA continuation coverage available from September 1, 2001 
until the obligation ends (see Q&A-1 of Sec. 54.4980B-7) to any 
qualified beneficiary who experienced a qualifying event that 
preceded or coincided with the cessation of contributions to M and 
whose coverage under M on the day before the qualifying event was 
due to an employment affiliation with X. The loss of coverage under 
M for those employees of X who continue in employment (and the loss 
of coverage for their spouses and dependent children) does not 
constitute a qualifying event.
    Example 5. (i) Employer W employs a class of employees covered 
by a collective bargaining agreement and participating in 
multiemployer group health plan M. As required by the collective 
bargaining agreement, W has been making contributions to M. The 
employees covered by the collective bargaining agreement vote to 
decertify their current employee

[[Page 1859]]

representative effective January 1, 2002 and vote to certify a new 
employee representative effective the same date. As a consequence, 
on January 1, 2002 they cease to be covered under M and commence to 
be covered under multiemployer group health plan N.
    (ii) Effective January 1, 2002, N has the obligation to make 
COBRA continuation coverage available to any qualified beneficiary 
who experienced a qualifying event that preceded or coincided with 
the cessation of contributions to M and whose coverage under M on 
the day before the qualifying event was due to an employment 
affiliation with W. The loss of coverage under M for those employees 
of W who continue in employment (and the loss of coverage for their 
spouses and dependent children) does not constitute a qualifying 
event.


Sec. 54.4980B-10  Interaction of FMLA and COBRA.

    The following questions-and-answers address how the taking of leave 
under the Family and Medical Leave Act of 1993 (FMLA) (29 U.S.C. 2601-
2619) affects the COBRA continuation coverage requirements:
    Q-1: In what circumstances does a qualifying event occur if an 
employee does not return from leave taken under FMLA?
    A-1: (a) The taking of leave under FMLA does not constitute a 
qualifying event. A qualifying event under Q&A-1 of Sec. 54.4980B-4 
occurs, however, if--
    (1) An employee (or the spouse or a dependent child of the 
employee) is covered on the day before the first day of FMLA leave (or 
becomes covered during the FMLA leave) under a group health plan of the 
employee's employer;
    (2) The employee does not return to employment with the employer at 
the end of the FMLA leave; and
    (3) The employee (or the spouse or a dependent child of the 
employee) would, in the absence of COBRA continuation coverage, lose 
coverage under the group health plan before the end of the maximum 
coverage period.
    (b) However, the satisfaction of the three conditions in paragraph 
(a) of this Q&A-1 does not constitute a qualifying event if the 
employer eliminates, on or before the last day of the employee's FMLA 
leave, coverage under a group health plan for the class of employees 
(while continuing to employ that class of employees) to which the 
employee would have belonged if the employee had not taken FMLA leave.
    Q-2: If a qualifying event described in Q&A-1 of this section 
occurs, when does it occur, and how is the maximum coverage period 
measured?
    A-2: A qualifying event described in Q&A-1 of this section occurs 
on the last day of FMLA leave. (The determination of when FMLA leave 
ends is not made under the rules of this section. See the FMLA 
regulations, 29 CFR Part 825 (Secs. 825.100-825.800).) The maximum 
coverage period (see Q&A-4 of Sec. 54.4980B-7) is measured from the 
date of the qualifying event (that is, the last day of FMLA leave). If, 
however, coverage under the group health plan is lost at a later date 
and the plan provides for the extension of the required periods (see 
paragraph (b) of Q&A-4 of Sec. 54.4980B-7), then the maximum coverage 
period is measured from the date when coverage is lost. The rules of 
this Q&A-2 are illustrated by the following examples:

    Example 1. (i) Employee B is covered under the group health plan 
of Employer X on January 31, 2001. B takes FMLA leave beginning 
February 1, 2001. B's last day of FMLA leave is 12 weeks later, on 
April 25, 2001, and B does not return to work with X at the end of 
the FMLA leave. If B does not elect COBRA continuation coverage, B 
will not be covered under the group health plan of X as of April 26, 
2001.
    (ii) B experiences a qualifying event on April 25, 2001, and the 
maximum coverage period is measured from that date. (This is the 
case even if, for part or all of the FMLA leave, B fails to pay the 
employee portion of premiums for coverage under the group health 
plan of X and is not covered under X's plan. See Q&A-3 of this 
section.)
    Example 2. (i) Employee C and C's spouse are covered under the 
group health plan of Employer Y on August 15, 2001. C takes FMLA 
leave beginning August 16, 2001. C informs Y less than 12 weeks 
later, on September 28, 2001, that C will not be returning to work. 
Under the FMLA regulations, 29 CFR Part 825 (Secs. 825.100-825.800), 
C's last day of FMLA leave is September 28, 2001. C does not return 
to work with Y at the end of the FMLA leave. If C and C's spouse do 
not elect COBRA continuation coverage, they will not be covered 
under the group health plan of Y as of September 29, 2001.
    (ii) C and C's spouse experience a qualifying event on September 
28, 2001, and the maximum coverage period (generally 18 months) is 
measured from that date. (This is the case even if, for part or all 
of the FMLA leave, C fails to pay the employee portion of premiums 
for coverage under the group health plan of Y and C or C's spouse is 
not covered under Y's plan. See Q&A-3 of this section.)

    Q-3: If an employee fails to pay the employee portion of premiums 
for coverage under a group health plan during FMLA leave or declines 
coverage under a group health plan during FMLA leave, does this affect 
the determination of whether or when the employee has experienced a 
qualifying event?
    A-3: No. Any lapse of coverage under a group health plan during 
FMLA leave is irrelevant in determining whether a set of circumstances 
constitutes a qualifying event under Q&A-1 of this section or when such 
a qualifying event occurs under Q&A-2 of this section.
    Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this 
section affected by a requirement of state or local law to provide a 
period of coverage longer than that required under FMLA?
    A-4: No. Any state or local law that requires coverage under a 
group health plan to be maintained during a leave of absence for a 
period longer than that required under FMLA (for example, for 16 weeks 
of leave rather than for the 12 weeks required under FMLA) is 
disregarded for purposes of determining when a qualifying event occurs 
under Q&A-1 through Q&A-3 of this section.
    Q-5: May COBRA continuation coverage be conditioned upon 
reimbursement of the premiums paid by the employer for coverage under a 
group health plan during FMLA leave?
    A-5: No. The U.S. Department of Labor has published rules 
describing the circumstances in which an employer may recover premiums 
it pays to maintain coverage, including family coverage, under a group 
health plan during FMLA leave from an employee who fails to return from 
leave. See 29 CFR 825.213. Even if recovery of premiums is permitted 
under 29 CFR 825.213, the right to COBRA continuation coverage cannot 
be conditioned upon the employee's reimbursement of the employer for 
premiums the employer paid to maintain coverage under a group health 
plan during FMLA leave.

    Approved: December 18, 2000.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-5 Filed 1-9-01; 8:45 am]
BILLING CODE 4830-01-U