Continuation Coverage Requirements of Group Health Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG-209485-86]

RIN 1545-AI93

Continuation Coverage Requirements of Group Health Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide

guidance under section 4980B of the Internal Revenue Code on certain

changes made by the Health Insurance Portability and Accountability Act

of 1996, the Omnibus Budget Reconciliation Act of 1989, and the

Technical and Miscellaneous Revenue Act of 1988 relating to the

continuation coverage requirements applicable to group health plans.

The regulations will generally affect sponsors of and participants in

group health plans, and they provide plan sponsors and plan

administrators with guidance necessary to comply with the law.

DATES: Written comments and requests for a public hearing must be

received by April 7, 1998.

ADDRESSES: Send Submissions to: CC:DOM:CORP:R (REG-209485-86), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209485-86), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Russ

Weinheimer, 202-622-4695; concerning submissions or requests for a

hearing, LaNita VanDyke, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

(OMB) for review in accordance with the Paperwork Reduction Act of 1995

(44 U.S.C. 3507(d)). Comments on the collection of information should

be sent to the Office of Management and Budget, Attn: Desk Officer for

the Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of information should be received by

March 9, 1998. Comments are specifically requested concerning the

following:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information;

How to enhance the quality, utility, and clarity of the information

to be collected;

How to minimize the burden of complying with the proposed

collection of information, including the application of automated

collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

The collection of information is in proposed Sec. 54.4980B-

1(a)(1)(iii). This collection of information is required by statute.

The likely respondents are individuals. Responses to this collection of

information are required in order to obtain the benefit of an extended

period during which a group health plan must make COBRA continuation

coverage available.

Estimated total annual reporting burden: 440 hours.

The estimated annual burden per respondent: 1 minute.

Estimated number of respondents: 26,400.

Estimated annual frequency of responses: on occasion.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

Books or records relating to a collection of information must be

[[Page 709]]

retained as long as their contents may become material in the

administration of any internal revenue law. Generally tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

amended the Code to add health care continuation coverage requirements.

These provisions, now set forth in section 4980B of the Code,\1\

generally apply to a group health plan maintained by an employer with

at least 20 employees, and require such a plan to offer each qualified

beneficiary who would otherwise lose coverage as a result of a

qualifying event an opportunity to elect, within the applicable

election period, COBRA continuation coverage. The COBRA continuation

coverage requirements were amended on various occasions,\2\ most

recently under the Health Insurance Portability and Accountability Act

of 1996 (HIPAA).

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\1\ The COBRA continuation coverage requirements were initially

set forth under section 162(k) of the Code, but were moved to

section 4980B of the Code by the Technical and Miscellaneous Revenue

Act of 1988 (TAMRA). TAMRA changed the sanction for failure to

comply with the continuation coverage requirements of the Code from

a disallowance of certain employer deductions under section 162 (and

denial of the income exclusion under section 106(a) to certain

highly compensated employees of the employer) to an excise tax under

section 4980B.

\2\ Changes affecting the COBRA continuation coverage provisions

were made under the Omnibus Budget Reconciliation Act of 1986, the

Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act

of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus

Budget Reconciliation Act of 1990, the Small Business Job Protection

Act of 1996, and the Health Insurance Portability and Accountability

Act of 1996. The statutory continuation coverage requirements have

also been affected by an amendment made to the definition of group

health plan in section 5000(b)(1) by the Omnibus Budget

Reconciliation Act of 1993; that definition is incorporated by

reference in section 4980B(g)(2).

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Proposed regulations providing guidance under the continuation

coverage requirements as originally enacted by COBRA and as amended by

the Tax Reform Act of 1986, were published as proposed Treasury

Regulation Sec. 1.162-26 in the Federal Register of June 15, 1987 (52

FR 22716).

The new set of proposed regulations being published in this notice

of proposed rulemaking reflects principally the most recent set of

statutory changes--those made by HIPAA--but also reflects certain

changes made by the Technical and Miscellaneous Revenue Act of 1988

(TAMRA) and by the Omnibus Budget Reconciliation Act of 1989 (OBRA

'89).

Explanation of Provisions

Disability Extension; Permitted Premiums

As originally enacted, the COBRA continuation coverage provisions

required plans to make continuation coverage available for up to 18

months in the case of a qualifying event that is a termination of

employment or reduction in hours of employment and for up to 36 months

for all other qualifying events, such as death of the covered employee,

divorce from the covered employee, or a dependent child ceasing to be a

dependent under the generally applicable requirements of the plan. If

someone became entitled to the 18-month maximum period of coverage and

experienced a second qualifying event during that period of COBRA

continuation coverage, then the law provided an extended period of

coverage so that there would be a total of 36 months of COBRA

continuation coverage measured from the date of the first qualifying

event.

Under OBRA '89, provisions were added allowing the 18-month period

to be extended to 29 months if a qualified beneficiary was disabled at

the time of the qualifying event. Section 421 of HIPAA changed these

provisions by requiring plans to allow the disability extension if a

qualified beneficiary is disabled within the first 60 days of COBRA

continuation coverage and by clarifying that nondisabled qualified

beneficiaries with respect to the same qualifying event are also

entitled to the disability extension.

Thus, under the current provisions in the Code, all qualified

beneficiaries with respect to the same qualifying event are entitled to

an extension of the maximum period of COBRA continuation coverage from

18 to 29 months, if three conditions are satisfied. First, each

qualified beneficiary must be a qualified beneficiary in connection

with a qualifying event that is a termination of employment or

reduction in hours of employment. Second, a qualified beneficiary must

be determined to have been disabled (within the meaning of title II or

title XVI of the Social Security Act) within the first 60 days of COBRA

continuation coverage. Third, the plan administrator must be provided

with a copy of the determination of disability on a date that is both

within 60 days after the determination is issued and before the end of

the initial 18-month period of COBRA continuation coverage. In the case

of a disability extension, for any period after the end of the 18th

month of COBRA continuation coverage, the plan may generally require

payment for COBRA continuation coverage in an amount that does not

exceed 150 percent of the applicable premium.

These proposed regulations clarify the statutory disability

extension requirements in several respects. For example, the first 60

days of COBRA continuation coverage are generally measured from the

date of the termination of employment or reduction in hours of

employment. An exception applies if coverage would be lost (in the

absence of an election for COBRA continuation coverage) after the date

of the qualifying event and if the plan has elected to measure both the

maximum coverage period and the period for providing notice upon the

occurrence of a qualifying event from the date that coverage would be

lost rather than from the date of the qualifying event. In such a case,

the first 60 days of COBRA continuation coverage are also measured from

the date that coverage would be lost.

In addition, these proposed regulations make clear that the

disability extension applies to each qualified beneficiary, whether or

not disabled, that each qualified beneficiary has an independent right

to the disability extension, and that any of the qualified

beneficiaries may provide the plan administrator with a copy of the

determination of disability.

Another clarification relates to the period during which the plan

may charge 150 percent of the applicable premium. These proposed

regulations make clear that the plan may require payment equal to 150

percent of the applicable premium if a disabled qualified beneficiary

experiences a second qualifying event during the disability extension.

In such a case (that is, where the disabled qualified beneficiary is

entitled to a 36-month maximum coverage period only because a second

qualifying event occurs during the disability extension), the plan may

require payment of 150 percent of the applicable premium until the end

of the 36-month maximum coverage period.

HIPAA also added provisions to the Code, in section 9802(b), that

generally prohibit discrimination in premiums on the basis of health

status, including on the basis of disability. These proposed

regulations clarify that a plan that requires a disabled qualified

beneficiary entitled to the disability extension to pay 150 percent of

the applicable premium (as permitted by the proposed regulations) does

not for that reason fail to comply with the nondiscrimination

requirements of section 9802(b).

These proposed regulations do not address the extent to which a

plan can charge 150 percent of the applicable

[[Page 710]]

premium to a qualified beneficiary who is not disabled. Comments are

requested on this issue.

Newborn and Adopted Children Treated as Qualified Beneficiaries

Section 421 of HIPAA also provides that a child born to or placed

for adoption with the covered employee during a period of COBRA

continuation coverage is a qualified beneficiary. Such a child

generally is eligible to be enrolled immediately for COBRA continuation

coverage under the plan. These proposed regulations clarify that the

maximum coverage period for such a child is measured from the date of

the qualifying event that gives rise to the period of COBRA

continuation coverage during which the child is born or adopted and not

from the date of birth or placement for adoption. Thus, the child's

maximum period of COBRA continuation coverage would end at the same

time as the maximum period for other family members. In addition, the

statutory term placement for adoption is clarified to include an

adoption that is not preceded by a placement for adoption.

Long-Term Care; MSAs

Section 321(d) of HIPAA amended section 4980B of the Code to

provide that a plan does not constitute a group health plan subject to

the COBRA continuation coverage requirements if substantially all of

the coverage provided under the plan is for qualified long-term care

services, as defined in section 7702B(c). These proposed regulations

permit a plan to use any reasonable method in determining whether

substantially all of the coverage is for qualified long-term care

services. Further, the proposed regulations reflect section 106(b)(5),

added by HIPAA, which provides that COBRA continuation coverage is not

required to be made available with respect to medical savings accounts

(MSAs), as defined under section 220.

Good Faith/Reasonable Interpretations

The effective date of these regulations, when made final, will not

be earlier than the date of publication of final regulations in the

Federal Register. For the period before the effective date of final

regulations, plans and employers are required to operate in good faith

compliance with a reasonable interpretation of the statutory

requirements. Compliance with the terms of the proposed regulations

concerning the matters addressed is deemed to be good faith compliance

with a reasonable interpretation of the statutory requirements. Actions

inconsistent with the terms of the proposed regulations will not

necessarily constitute a lack of good faith compliance with a

reasonable interpretation of the statutory requirements; whether there

has been good faith compliance with a reasonable interpretation of the

statutory requirements will depend on all the facts and circumstances

of each case. Plans and employers may also continue to rely on proposed

Treasury Regulation Sec. 1.162-26 (published on June 15, 1987 in 52 FR

22716), except to the extent that that proposed regulation is

inconsistent with statutory amendments made after its date of

publication.

Future Guidance Concerning COBRA Obligations in Certain Stock and Asset

Sales

Treasury and the IRS are currently considering the issuance of

guidance concerning COBRA obligations in cases involving a sale of

stock in an employer that causes the employer to become a member of

another controlled group of corporations (a ``stock sale''), or a sale

of substantial assets by an employer (such as a plant or division) to

another employer outside the controlled group (an ``asset sale'').

The approach under consideration generally would provide, in the

case of a stock sale to a buyer maintaining a group health plan, that

the buyer's group health plan (and not a plan maintained by the seller)

would be responsible, after the date of the sale, for complying with

the COBRA continuation coverage requirements with respect to any

covered employee (and associated qualified beneficiary) whose last

employment was with the sold corporation. Thus, for example, the

buyer's group health plan would have the obligation, after the date of

the sale, to comply with the COBRA continuation coverage requirements

with respect to those individuals regardless of whether their

qualifying events were connected to the sale of stock or were in

advance of and not connected to the sale. If the buyer did not maintain

a group health plan, then a group health plan of the seller would

continue to be responsible for complying with the COBRA continuation

coverage requirements with respect to qualified beneficiaries

associated with the sold corporation.

In the case of an asset sale, the approach under consideration

generally would provide that a group health plan maintained by the

seller (and not a plan maintained by the buyer) would be responsible

for complying with the COBRA continuation coverage requirements with

respect to any covered employee (and associated qualified beneficiary)

whose last employment was associated with the purchased assets.

However, an exception would be provided if the buyer were a ``successor

employer,'' in which case a group health plan of the buyer would be

responsible for complying with the COBRA continuation coverage

requirements with respect to qualified beneficiaries associated with

the purchased assets. Consideration is being given to treating a buyer

as a successor employer in connection with an asset sale only if the

buyer acquires substantial assets (such as a plant or division, or

substantially all of the assets of a trade or business) and continues

the business operations associated with those assets without

interruption or substantial change, and only if, in connection with the

sale, the selling employer ceases to maintain any group health plan.

The approach might also include a presumption that the cessation is in

connection with the sale if it occurs within 6 months of the sale.

Comments are requested on this possible approach to assigning

responsibility for compliance with the COBRA continuation coverage

requirements in the context of stock sales and asset sales and on any

related issues that should be addressed.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. It is hereby

certified that the collection-of-information requirement in these

regulations will not have a significant economic impact on a

substantial number of small entities. This certification is based on

the fact that the collection-of-information requirement is imposed on

individual qualified beneficiaries and not on small businesses or other

small entities. Therefore, a Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, this notice

of proposed rulemaking will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on its impact

on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments that are submitted

timely (a signed original and eight (8)

[[Page 711]]

copies) to the IRS. All comments will be available for public

inspection and copying. A public hearing may be scheduled if requested

in writing by a person that timely submits written comments. If a

public hearing is scheduled, notice of the date, time, and place for

the hearing will be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Russ

Weinheimer, Office of the Associate Chief Counsel (Employee Benefits

and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 54

Excise taxes, Health insurance, Pensions, Reporting and

recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 54 is proposed to be amended as follows:

Paragraph 1. The authority citation for Part 54 is amended in part

by adding an entry in numerical order to read as follows:

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

Section 54.4980B-1 also issued under 26 U.S.C. 4980B. * * *

Par. 2. A new section 54.4980B-1 is added to read as follows:

Sec. 54.4980B-1 Certain changes to the continuation coverage

requirements of group health plans.

(a) Disability extension--(1) In general. Paragraphs (a)(2), (3),

and (4) of this section (describing qualified beneficiaries entitled to

a disability extension, the length of the extension, and the amount

that a plan can require qualified beneficiaries to pay during the

extension) apply to a group health plan only if all three of the

conditions of this paragraph (a)(1) are satisfied.

(i) A termination-of-employment qualifying event occurs.

(ii) An individual (whether or not the covered employee) who is a

qualified beneficiary in connection with the termination-of-employment

qualifying event is determined under title II or XVI of the Social

Security Act to have been disabled at any time during the first 60 days

of COBRA continuation coverage. For this purpose, the first 60 days of

COBRA continuation coverage are measured from the date of the

termination-of-employment qualifying event, 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 required periods (as permitted under section 4980B(f)(8)), then the

first 60 days of COBRA continuation coverage are measured from the date

on which the coverage would be lost.

(iii) Any of the qualified beneficiaries affected by the

termination-of-employment qualifying event provides notice to the plan

administrator of the disability determination on a date that is both

within 60 days after the date the determination is issued and before

the end of the original 18-month maximum coverage period that applies

to the termination-of-employment qualifying event.

(2) Maximum coverage period--(i) The maximum coverage period ends--

(A) 29 months after the date of the termination-of-employment

qualifying event; or

(B) 36 months after the date of the termination-of-employment

qualifying event if a qualifying event (other than a bankruptcy

qualifying event) occurs during the 29-month period that begins on the

date of the termination-of-employment qualifying event.

(ii) If, in the absence of an election for COBRA continuation

coverage, coverage under the group health plan would be lost after the

date of the termination-of-employment qualifying event and the plan

provides for the extension of the required periods, as permitted under

section 4980B(f)(8), then the dates or periods in paragraph (a)(2)(i)

of this section are measured from the date on which coverage would be

lost and not from the date of the termination-of-employment qualifying

event.

(iii) Nothing in section 4980B or this section prohibits a group

health plan from providing coverage that continues beyond the end of

the maximum coverage period.

(3) Application to all qualified beneficiaries. Paragraph (a)(2) of

this section applies to all qualified beneficiaries entitled to COBRA

continuation coverage because of the same termination-of-employment

qualifying event. Thus, for example, the 29-month period applies to

each qualified beneficiary who is not disabled as well as to the

qualified beneficiary who is disabled, and it applies independently

with respect to each of the qualified beneficiaries.

(4) Payment during disability extension--(i) Disabled qualified

beneficiaries--(A) A group health plan is permitted to require a

disabled qualified beneficiary described in paragraph (a)(1) of this

section, for any period of COBRA continuation coverage after the end of

the 18th month, to pay an amount that does not exceed 150 percent of

the applicable premium. However, the plan is not permitted to require a

disabled qualified beneficiary described in paragraph (a)(1) of this

section to pay an amount that exceeds 102 percent of the applicable

premium for any period of COBRA continuation coverage to which the

qualified beneficiary is entitled without regard to the application of

this paragraph (a). Thus, if a disabled qualified beneficiary described

in paragraph (a)(1) of this section experiences a second qualifying

event within the original 18-month period of COBRA continuation

coverage, then the plan is not permitted to require the qualified

beneficiary to pay an amount that exceeds 102 percent of the applicable

premium for any period of COBRA continuation coverage. By contrast, if

a disabled qualified beneficiary described in paragraph (a)(1) of this

section experiences a second qualifying event after the end of the 18th

month of original COBRA continuation coverage, the plan may require the

qualified beneficiary to pay an amount that is up to 150 percent of the

applicable premium for the remainder of the period of COBRA

continuation coverage (that is, from the beginning of the 19th month

through the end of the 36th month).

(B) A group health plan does not fail to comply with section

9802(b) and Sec. 54.9802-1T(b) (which generally prohibit an individual

from being charged, on the basis of health status, a higher premium

than that charged for similarly situated individuals enrolled in the

plan) with respect to a disabled qualified beneficiary described in

paragraph (a)(1) of this section merely because the plan requires

payment of a premium in an amount permitted under paragraph

(a)(4)(i)(A) of this section.

(ii) Nondisabled qualified beneficiaries. [Reserved].

(b) Newborns and adopted children. A child who is born to or placed

for adoption with a covered employee during a period of COBRA

continuation coverage is a qualified beneficiary and generally is

eligible to be enrolled immediately for COBRA continuation coverage

under the plan. See section 4980B(g)(1)(A), section 9801(f)(2) and

Sec. 54.9801-6T(b) (relating to special enrollment rights of dependents

of employees), and Q&A-31 of Sec. 1.162-26 of this chapter (relating to

the right of qualified beneficiaries to have new family members covered

to the same extent that similarly situated active employees can have

new family members covered under the plan). Such a child has the same

open-enrollment-period rights as other qualified

[[Page 712]]

beneficiaries with respect to the same qualifying event (see Q&A-30(c)

of Sec. 1.162-26 of this chapter) and would be entitled to a 36-month

maximum coverage period if a second qualifying event occurred while the

child was in a period of COBRA continuation coverage resulting from a

termination-of-employment qualifying event. The maximum coverage period

for such a child is measured from the same date as for other qualified

beneficiaries with respect to the same qualifying event (and not from

the date of the birth or placement for adoption). In contrast, neither

the covered employee, the spouse of the covered employee, nor any other

dependent child of the covered employee is a qualified beneficiary

unless that person is covered under a group health plan on the day

before a qualifying event. See also Q&A-31 of Sec. 1.162-26 of this

chapter.

(c) Plan providing long-term care. A plan is not subject to the

COBRA continuation coverage requirements if substantially all of the

coverage provided under the plan is for qualified long-term care

services (as defined in section 7702B(c)). For this purpose, a plan is

permitted to use any reasonable method in determining whether

substantially all of the coverage under the plan is for qualified long-

term care services.

(d) Medical savings accounts. Under section 106(b)(5), amounts

contributed by an employer to a medical savings account are not

considered part of a group health plan that is subject to section

4980B. Thus, a plan is not required to make COBRA continuation coverage

available with respect to a medical savings account. However, a high

deductible health plan that covers a medical savings account holder may

be a group health plan and thus may be subject to the COBRA

continuation coverage requirements.

(e) Definitions. For purposes of this section--

Applicable premium is defined in section 4980B(f)(4).

Bankruptcy qualifying event is a qualifying event described in

section 4980B(f)(3)(F) (relating to certain bankruptcy proceedings).

Covered employee is defined in section 4980B(f)(7).

Group health plan is defined in section 4980B(g)(2).

High deductible health plan is defined in section 220(c)(2).

Medical savings account is defined in section 220(d).

Placement, or being placed, for adoption means the assumption and

retention by the covered employee of a legal obligation for total or

partial support of a child in anticipation of the adoption of the

child. The child's placement for adoption with the covered employee

terminates upon the termination of the legal obligation for total or

partial support. For purposes of this section and section 4980B, a

child who is immediately adopted by the covered employee without a

preceding placement for adoption is considered to be placed for

adoption on the date of the adoption.

Qualified beneficiary is defined in section 4980B(g)(1).

Qualified long-term care services is defined in section 7702B(c).

Termination-of-employment qualifying event is a qualifying event

described in section 4980B(f)(3)(B) (relating to qualifying events that

occur as a result of a termination of employment, other than for gross

misconduct, or reduction of hours of employment).

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-232 Filed 1-6-98; 8:45 am]

BILLING CODE 4830-01-U