Continuation Coverage Requirements Applicable to Group Health Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG-121865-98]

RIN 1545-AW94

Continuation Coverage Requirements Applicable to Group Health

Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide

guidance under section 4980B of the Internal Revenue Code relating to

the COBRA continuation coverage requirements applicable to group health

plans. The proposed regulations in this document supplement final

regulations being published elsewhere in this issue of the Federal

Register. The regulations will generally affect sponsors of and

participants in group health plans, and they provide plan sponsors and

plan administrators with guidance necessary to comply with the law.

DATES: Written or electronic comments and outlines of topics to be

discussed at the public hearing scheduled for June 8, 1999 at 10 a.m.

must be received by May 14, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-121865-98), 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-121865-98), 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.

The public hearing scheduled for June 8, 1999 will be held in room

2615 of the Internal Revenue Building, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Yurlinda

Mathis at 202-622-4695; concerning submissions of comments, the

hearing, or to be placed on the building access list to attend the

hearing, LaNita Van Dyke at 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

amended the Internal Revenue Code (Code) to add health care

continuation coverage requirements. These provisions, now set forth in

section 4980B,\1\ generally apply to a group health plan maintained by

an employer or employee organization, with certain exceptions, 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 in section 162(k), but were moved to section 4980B 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 Internal Revenue Code from 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). Supplemental proposed regulations were published as proposed

Treasury Regulation Sec. 54.4980B-1 in the Federal Register of January

7, 1998 (63 FR 708). Final regulations are being published elsewhere in

this issue of the Federal Register.

The new set of proposed regulations being published in this notice

of proposed rulemaking addresses how the COBRA continuation coverage

requirements apply in business reorganizations. Also proposed are rules

relating to the interaction of the COBRA continuation coverage

requirements and the Family and Medical Leave Act of 1993, which were

previously published as Notice 94-103 (1994-2 C.B. 569), and certain

other issues. These provisions in the new set of proposed regulations

are summarized in the explanation below. For a summary of the new

proposed regulations integrated with a summary of the final

regulations, see the ``Explanation of Provisions'' section of the

preamble to the final regulations published elsewhere in this issue of

the Federal Register.

[[Page 5238]]

Explanation of Provisions

Plans That Must Comply

The new proposed regulations would make a number of changes to the

section in the final regulations that addresses which plans must comply

with the COBRA continuation coverage requirements. The principal

changes being proposed are to add rules simplifying the determination

of whether the small-employer plan exception applies, giving employers

and employee organizations broad discretion to determine the number of

group health plans that they maintain, and providing an exception for

certain health flexible spending accounts.

In determining whether a plan is eligible for the small-employer

plan exception, part-time employees, as well as full-time employees,

must be taken into account. Several commenters on the 1987 proposed

regulations requested clarification of how to count part-time employees

for the small-employer plan exception, and the new proposed regulations

provide guidance on this issue. Under the new proposed regulations,

instead of each part-time employee counting as a full employee, each

part-time employee counts as a fraction of an employee, with the

fraction equal to the number of hours that the part-time employee works

for the employer divided by the number of hours that an employee must

work in order to be considered a full-time employee. The number of

hours that must be worked to be considered a full-time employee is

determined in a manner consistent with the employer's general

employment practices, although for this purpose not more than eight

hours a day or 40 hours a week may be used. An employer may count

employees for each typical business day or may count employees for a

pay period and attribute the total number of employees for that pay

period to each typical business day that falls within the pay period.

The employer must use the same method for all employees and for the

entire year for which the small-employer plan determination is made.

The new proposed regulations provide guidance, for purposes of the

COBRA continuation coverage requirements, on how to determine the

number of group health plans that an employer or employee organization

maintains. Under these rules, the employer or employee organization is

generally permitted to establish the separate identity and number of

group health plans under which it provides health care benefits to

employees. Thus, if an employer or employee organization provides a

variety of health care benefits to employees, it generally may

aggregate the benefits into a single group health plan or disaggregate

benefits into separate group health plans. The status of health care

benefits as part of a single group health plan or as separate plans is

determined by reference to the instruments governing those

arrangements. If it is not clear from the instruments governing an

arrangement or arrangements to provide health care benefits whether the

benefits are provided under one plan or more than one plan, or if there

are no instruments governing the arrangement or arrangements, all such

health care benefits (other than those for qualified long-term care

services) provided by a single entity (determined without regard to the

controlled group rules) constitute a single group health plan.

Under the new proposed regulations, a multiemployer plan and a plan

other than a multiemployer plan are always separate plans. In addition,

any treatment of health care benefits as constituting separate group

health plans will be disregarded if a principal purpose of the

treatment is to evade any requirement of law. Of course, an employer's

flexibility to treat benefits as part of separate plans may be limited

by the operation of other laws, such as the prohibition in section 9802

on conditioning eligibility to enroll in a group health plan on the

basis of any health factor of an individual.

Many commenters on the 1987 proposed regulations requested

clarification of the application of COBRA to health care benefits

provided under flexible spending arrangements (health FSAs). Some

commentators argued that health FSAs should not be subject to COBRA.

Health FSAs satisfy the definition of group health plan in section

5000(b)(1) and, accordingly, are generally subject to the COBRA

continuation coverage requirements. However, COBRA is intended to

ensure that a qualified beneficiary has guaranteed access to coverage

under a group health plan and that the cost of that coverage is no

greater than 102 percent of the applicable premium.

The IRS and Treasury believe that the purposes of COBRA are not

furthered by requiring an employer to offer COBRA for a plan year if

the amount that the employer could require to be paid for the COBRA

coverage for the plan year would exceed the maximum benefit that the

qualified beneficiary could receive under the FSA for that plan year

and if the qualified beneficiary could not avoid a break in coverage,

for purposes of the HIPAA portability provisions,\3\ by electing COBRA

coverage under the FSA. Accordingly, the new proposed regulations

contain a rule limiting the application of the COBRA continuation

coverage requirements in the case of health FSAs.

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\3\ Under HIPAA, a qualified beneficiary who maintains coverage

after termination of employment under a group health plan that is

subject to HIPAA can avoid a break in coverage and thereby avoid

becoming subject to a preexisting condition exclusion upon later

becoming covered by another group health plan.

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Under this proposed rule, if the health FSA satisfies two

conditions, the health FSA need not make COBRA continuation coverage

available to a qualified beneficiary for any plan year after the plan

year in which the qualifying event occurs. The first condition that the

health FSA must satisfy for this exception to apply is that the health

FSA is not subject to the HIPAA portability provisions in sections 9801

though 9833 because the benefits provided under the health FSA are

excepted benefits. (See sections 9831 and 9832.) \4\ The second

condition is that, in the plan year in which the qualifying event of a

qualified beneficiary occurs, the maximum amount that the health FSA

could require to be paid for a full plan year of COBRA continuation

coverage equals or exceeds the maximum benefit available under the

health FSA for the year. It is contemplated that this second condition

will be satisfied in most cases.

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\4\ The IRS and Treasury, together with the U.S. Department of

Labor and the U.S. Department of Health and Human Services, have

issued a notice (62 FR 67688) holding that a health FSA is exempt

from HIPAA because the benefits provided under it are excepted

benefits under sections 9831 and 9832 if the employer also provides

another group health plan, the benefits under the other plan are not

limited to excepted benefits, and the maximum reimbursement under

the health FSA is not greater than two times the employee's salary

reduction election (or if greater, the employee's salary reduction

election plus five hundred dollars).

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Moreover, if a third condition is satisfied, the health FSA need

not make COBRA continuation coverage available with respect to a

qualified beneficiary at all. This third condition is satisfied if, as

of the date of the qualifying event, the maximum benefit available to

the qualified beneficiary under the health FSA for the remainder of the

plan year is not more than the maximum amount that the plan could

require as payment for the remainder of that year to maintain coverage

under the health FSA.

Duration of COBRA Continuation Coverage

The new proposed regulations would make two principal changes to

the section in the final regulations

[[Page 5239]]

addressing the duration of COBRA continuation coverage.

The 1987 proposed regulations reflect the statutory rules that were

then in effect for the maximum period that a plan is required to make

COBRA continuation coverage available. Since then the statute has been

amended to add the disability extension, to permit plans to extend the

notice period if the maximum coverage period is also extended (referred

to as the optional extension of the required periods), and to add a

special rule in the case of Medicare entitlement preceding a qualifying

event that is the termination or reduction of hours of employment. The

new proposed regulations reflect these statutory changes. The maximum

coverage period for a qualifying event that is the bankruptcy of the

employer has also been added to the new proposed regulations.

The 1987 proposed regulations incorporate the statutory bases for

terminating COBRA continuation coverage except the rule (added in 1989

and amended in 1996) that COBRA coverage can be terminated in the month

that is more than 30 days after a final determination that a qualified

beneficiary is no longer disabled. The new proposed regulations add

this statutory basis for terminating COBRA coverage, with two

clarifications. First, the new proposed regulations clarify that a

determination that a qualified beneficiary is no longer disabled allows

termination of COBRA continuation coverage for all qualified

beneficiaries who were entitled to the disability extension by reason

of the disability of the qualified beneficiary who has been determined

to no longer be disabled. Second, the new proposed regulations clarify

that such a determination does not allow termination of the COBRA

continuation coverage of a qualified beneficiary before the end of the

maximum coverage period that would apply without regard to the

disability extension.

Business Reorganizations

The 1987 proposed regulations provide little direct guidance on the

allocation of responsibility for COBRA continuation coverage in the

event of corporate transactions, such as a sale of stock of a

subsidiary or a sale of substantial assets. Commenters on the 1987

proposed regulations requested further guidance on corporate

transactions, pointing out that the existing degree of uncertainty

tends to drive up the costs and risks of a transaction to both buyers

and sellers. The IRS and Treasury share this view and believe also that

greater certainty helps to protect the rights of qualified

beneficiaries in these transactions. The IRS has been contacted by many

qualified beneficiaries whose COBRA continuation coverage has been

dropped or denied in the context of a corporate transaction. In many

cases, these qualified beneficiaries have been told by each of the

buyer and the seller that the other party is the one responsible for

providing them with COBRA continuation coverage.

The preamble to the 1998 proposed regulations requested comments on

a possible approach to allocating responsibility for COBRA continuation

coverage in corporate transactions. Commenters suggested that, in a

stock sale, as in an asset sale, it would be consistent with standard

commercial practice to provide that the seller retains liability for

all existing qualified beneficiaries, including those formerly

associated with the subsidiary being sold. The IRS and Treasury have

studied the comments and given consideration to several alternatives

with a view to establishing rules that will minimize the administrative

burden and transaction costs for the parties to transactions while

protecting the rights of qualified beneficiaries and maintaining

consistency with the statute.

Accordingly, the new proposed regulations make clear that the

parties to a transaction are free to allocate the responsibility for

providing COBRA continuation coverage by contract, even if the contract

imposes responsibility on a different party than would the new proposed

regulations. So long as the party to whom the contract allocates

responsibility performs its obligations, the other party will have no

responsibility for providing COBRA continuation coverage. If, however,

the party allocated responsibility under the contract defaults on its

obligation, and if, under the new proposed regulations, the other party

would have the obligation to provide COBRA continuation coverage in the

absence of a contractual provision, then the other party would retain

that obligation. This approach would avoid prejudicing the rights of

qualified beneficiaries to COBRA continuation coverage based upon the

provisions of a contract to which they were not a party and under which

the employer with the underlying obligation under the regulations to

provide COBRA continuation coverage could otherwise contract away that

obligation to a party that fails to perform. Moreover, the party with

the underlying responsibility under the regulations can insist on

appropriate security and, of course, could pursue contractual remedies

against the defaulting party.

The new proposed regulations provide, for both sales of stock and

sales of substantial assets, such as a division or plant or

substantially all the assets of a trade or business, that the seller

retains the obligation to make COBRA continuation coverage available to

existing qualified beneficiaries. In addition, in situations in which

the seller ceases to provide any group health plan to any employee in

connection with the sale--whether such a cessation is in connection

with the sale is determined on the basis of the facts and circumstances

of each case--and thus is not responsible for providing COBRA

continuation coverage, the new proposed regulations provide that the

buyer is responsible for providing COBRA continuation coverage to

existing qualified beneficiaries. This secondary liability for the

buyer applies in all stock sales and in all sales of substantial assets

in which the buyer continues the business operations associated with

the assets without interruption or substantial change.

A particular type of asset sale raises issues for which the new

proposed regulations do not provide any special rules. (Thus, the

general rules in the new proposed regulations for business

reorganizations would apply to this type of transaction.) This type of

asset sale is one in which, after purchasing a business as a going

concern, the buyer continues to employ the employees of that business

and continues to provide those employees exactly the same health

coverage that they had before the sale (either by providing coverage

through the same insurance contract or by establishing a plan that

mirrors the one that provided benefits before the sale). The

application of the rules in the new proposed regulations to this type

of asset sale would require the seller to make COBRA continuation

coverage available to the employees continuing in employment with the

buyer (and to other family members who are qualified beneficiaries).

Ordinarily, the continuing employees (or their family members) would be

very unlikely to elect COBRA continuation coverage from the seller when

they can receive the same coverage (usually at much lower cost) as

active employees of the buyer.

Consideration is being given to whether, under appropriate

circumstances, such an asset sale would be considered not to result in

a loss of coverage for those employees who continue in employment with

the buyer after the sale. A countervailing concern,

[[Page 5240]]

however, relates to those qualified beneficiaries who might have a

reason to elect COBRA continuation coverage from the seller. An example

of such a qualified beneficiary would be an employee who continues in

employment with the buyer, whose family is likely to have medical

expenses that exceed the cost of COBRA coverage, and who has

significant questions about the solvency of the buyer or other concerns

about how long the buyer might continue to provide the same health

coverage.

Under one possible approach, a loss of coverage would be considered

not to have occurred so long as the purchasing employer in an asset

sale continued to maintain the same group health plan coverage that the

seller maintained before the sale without charging the employees any

greater percentage of the total cost of coverage than the seller had

charged before the sale. For this purpose, the coverage would be

considered unchanged if there was no obligation to provide a summary of

material modifications within 60 days after the change due to a

material reduction in covered services or benefits under the rules that

apply under Title I of ERISA. If these conditions were satisfied for

the maximum coverage period that would otherwise apply to the seller's

termination of employment of the continuing employees (generally 18

months from the date of the sale), then those terminations of

employment would never be considered qualifying events. If the

conditions were not satisfied for the full maximum coverage period,

then on the date when they ceased to be satisfied the seller would be

obligated to make COBRA continuation coverage available for the balance

of the maximum coverage period.

Comments are invited on the utility of such a rule, either in

situations in which the seller retains an ownership interest in the

buyer after the sale (for example, a sale of assets from a 100-percent

owned subsidiary to a 75-percent owned subsidiary) or, more generally,

in situations in which the seller and the buyer are unrelated.

Suggestions are also solicited for other rules that would protect

qualified beneficiaries while providing relief to employers in these

situations.

Although the new proposed regulations address how COBRA obligations

are affected by a sale of stock (and a sale of substantial assets), the

new proposed regulations do not address how the obligation to make

COBRA continuation coverage available is affected by the transfer of an

ownership interest in a noncorporate entity that causes the

noncorporate entity to cease to be a member of a group of trades or

businesses under common control (whether or not it becomes a member of

a different group of trades or business under common control). Comments

are invited on this issue.

Employer Withdrawals From Multiemployer Plans

The new proposed regulations also address COBRA obligations in

connection with an employer's cessation of contributions to a

multiemployer group health plan. The new proposed regulations provide

that the multiemployer plan generally continues to have the obligation

to make COBRA continuation coverage available to qualified

beneficiaries associated with that employer. (There generally would not

be any obligation to make COBRA continuation coverage available to

continuing employees in this situation because a cessation of

contributions is not a qualifying event.) However, once the employer

provides group health coverage to a significant number of employees who

were formerly covered under the multiemployer plan, or starts

contributing to another multiemployer plan on their behalf, the

employer's plan (or the new multiemployer plan) would have the

obligation to make COBRA continuation coverage available to the

existing qualified beneficiaries. This rule is contrary to the holding

in In re Appletree Markets, Inc., 19 F.3d 969 (5th Cir. 1994), which

held that the multiemployer plan continued to have the COBRA

obligations with respect to existing qualified beneficiaries after the

withdrawing employer established a plan for the same class of employees

previously covered under the multiemployer plan.

Interaction of FMLA and COBRA

The new proposed regulations set forth rules regarding the

interaction of the COBRA continuation coverage requirements with the

provisions of the Family and Medical Leave Act of 1993 (FMLA). The

rules under the new proposed regulations are substantially the same as

those set forth in Notice 94-103. The last two questions-and-answers in

that notice have not been included in the new proposed regulations

because they relate to general subject matter that is addressed

elsewhere in the regulations.

Under the new proposed regulations, the taking of FMLA leave by a

covered employee is not itself a qualifying event. Instead, a

qualifying event occurs when an employee who is covered under a group

health plan immediately prior to FMLA leave (or who becomes covered

under a group health plan during FMLA leave) does not return to work

with the employer at the end of FMLA leave and would, but for COBRA

continuation coverage, lose coverage under the group health plan. (As

under the general rules of COBRA, this would also constitute a

qualifying event with respect to the spouse or any dependent child of

the employee.) The qualifying event is deemed to occur on the last day

of the employee's FMLA leave, and the maximum coverage period generally

begins on that day. (The new proposed regulations provide a special

rule for cases where coverage is not lost until a later date and the

plan provides for the optional extension of the required periods.) In

the case of such a qualifying event, the employer cannot condition the

employee's rights to COBRA continuation coverage on the employee's

reimbursement of any premiums paid by the employer to maintain the

employee's group health plan coverage during the period of FMLA leave.

Any lapse of coverage under the group health plan during the period

of FMLA leave and any state or local law requiring that group health

plan coverage be provided for a period longer than that required by the

FMLA are disregarded in determining whether the employee has a

qualifying event on the last day of that leave. However, the employee's

loss of coverage at the end of FMLA leave will not constitute a

qualifying event if, prior to the employee's return from FMLA leave,

the employer has eliminated group health plan coverage for the class of

employees to which the employee would have belonged if she or he had

not taken FMLA leave.

Special Analyses

It has been determined that this notice of proposed rulemaking 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 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

[[Page 5241]]

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) copies) to the IRS. Comments

are specifically requested on the clarity of the proposed regulations

and how they may be made easier to understand. All comments will be

available for public inspection and copying.

A public hearing has been scheduled for June 8, 1999, beginning at

10 a.m. in room 2615 of the Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC. Due to building security

procedures, visitors must enter at the 10th Street entrance, located

between Constitution and Pennsylvania Avenues, NW. In addition, all

visitors must present photo identification to enter the building.

Because of access restrictions, visitors will not be admitted beyond

the immediate entrance area more than 15 minutes before the hearing

starts. For information about having your name placed on the building

access list to attend the hearing, see the FOR FURTHER INFORMATION

CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who

wish to present oral comments at the hearing must submit written

comments and an outline of the topics to be discussed and the time to

be devoted to each topic (signed original and eight (8) copies) by May

14, 1999. A period of 10 minutes will be allotted to each person for

making comments. An agenda showing the scheduling of the speakers will

be prepared after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the hearing.

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 care, Health insurance, Pensions, Reporting

and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 54 is proposed to be 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 entries for Q-3 and Q-6 of Sec. 54.4980B-2 in the

list of questions.

4. Revising the entry for Q-4 of Sec. 54.4980B-7 in the list of

questions.

5. Adding an entry for the section heading for Sec. 54.4980B-9 in

the list of questions.

6. Adding an entry for the section heading for Sec. 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-2 Plans that must comply.

* * * * *

Q-3: What is a multiemployer plan?

* * * * *

Q-6: For purposes of COBRA, 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 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

[[Page 5242]]

under a group health plan during FMLA leave?

Par. 3. Section 54.4980B-1, A-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).

2. Removing the language ``54.4980B-8'' and adding ``54.4980B-10''

in its place in the third sentence and last sentence of paragraph (b).

3. Removing the last sentence of paragraph (c) and adding two

sentences in its place to 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 Sec. 54.4980B-10 to COBRA refers

to section 4980B (as amended) and to the parallel provisions of ERISA.

* * * * *

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 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.

* * * * *

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

[[Page 5243]]

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: For purposes of COBRA, 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, for purposes of COBRA, in

determining the number of group health plans that an employer or

employee organization maintains. Except as provided in paragraph (c) of

this Q&A-6, in the case of health care benefits provided under an

arrangement or arrangements of an employer or employee organization,

the number of group health plans pursuant to which those benefits are

provided is determined by the instruments governing the arrangement or

arrangements. However, a multiemployer plan and a nonmultiemployer plan

are always separate plans. 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.

(b) If it is not clear from the instruments governing an

arrangement or arrangements to provide health care benefits whether the

benefits are provided under one plan or more than one plan, or if there

are no instruments governing the arrangement or arrangements, all such

health care benefits, except 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.

(c) Notwithstanding paragraph (a) of this Q&A-6, 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 whose employees are covered under the

plan normally employed fewer than 20 employees during the preceding

calendar year.

* * * * *

A-8: (a) 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. 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 regulations project EE-130-86 (1989-1 C.B. 944, 986)

(see Sec. 601.601(d)(2) of this chapter), 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

[[Page 5244]]

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.

(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 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. 54.4980 B-3 [Amended]

Par. 5. In Sec. 54.4980B-3, the language ``54.4980B-8'' is removed

and ``54.4980B-10'' is added in its place in the last sentence of

paragraph (a)(3) and the first sentence of paragraph (g) in A-1; in the

first and second sentences of paragraph (a)(1), the first sentence of

paragraph (a)(2), and the first and last sentences in paragraph (b) in

A-2; and in A-3.

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.

The addition and revision read as follows:

[[Page 5245]]

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. * * *

* * * * *

Sec. 54.4980B-5 [Amended]

Par. 7. In Sec. 54.4980B-5, the penultimate sentence in paragraph

(a) of A-1 is amended by removing the language ``54.4980B-8'' and

adding ``54.4980B-10'' in its place.

Par. 8. In Sec. 54.4980B-6, the Example in paragraph (c) of A-1 is

revised to read as follows:

Sec. 54.4980B-6 Electing COBRA continuation coverage.

* * * * *

A-1: * * *

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).

* * * * *

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.

(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

[[Page 5246]]

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 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. 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 sale 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.

[[Page 5247]]

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 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.

[[Page 5248]]

(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. 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 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

[[Page 5249]]

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 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 establishes one or more group

health plans (or starts contributing to another multiemployer plan that

is a group health plan) covering a significant number of the employer's

employees formerly covered under the multiemployer plan, the plan

established by the employer (or the other multiemployer plan) 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

[[Page 5250]]

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 establish any group health plan

covering 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) Employer Y 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, Y has been making contributions to M. Y

experiences financial difficulties and is forced into bankruptcy by

its creditors. Y continues to employ all of the employees covered by

the collective bargaining agreement. Y also continues to make

contributions to M until the current collective bargaining agreement

expires, on June 30, 2001, and then Y stops making contributions to

M. Y's employees (and their spouses and dependent children) lose

coverage under M effective July 1, 2001. Y does not enter into

another collective bargaining agreement covering the class of

employees covered by the expired collective bargaining agreement.

Effective September 1, 2001, Y 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 Y 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 Y. 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 3. (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. The

employees covered by the collective bargaining agreement vote to

decertify their current employee 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 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.

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 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

[[Page 5251]]

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.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 99-1519 Filed 2-2-99; 8:45 am]

BILLING CODE 4830-01-U