On May 28, 2003, the U.S. Department of Labor (DOL) issued proposed regulations that clarify and expand group health plans’ obligations to provide notices of COBRA continuation coverage rights to qualified beneficiaries. The proposed regulations establish minimum standards for the timing and content of notices required under COBRA, standards for administering the notice process and two new notice requirements for plan administrators. The proposed regulations also include safe harbor models of the initial COBRA notice (provided at the time an employee or employee’s spouse becomes covered by a plan) and the COBRA election notice (provided when a qualifying event occurs).
The DOL anticipates that the proposed regulations, when finalized, will become effective for plan years beginning on and after January 1, 2004. Although the regulations are currently proposed, the DOL made it clear that some of its rules should be implemented immediately, as discussed below.
Failure to comply with COBRA’s notice requirements (as interpreted by the DOL) could lead to significant costs, including penalties under ERISA, unanticipated medical claims and even attorney’s fees if the issue is litigated. Moreover, the issuance of proposed regulations on COBRA notices, along with other DOL initiatives related to group health plan compliance, indicates that the DOL is likely to increase its focus on group health plans’ compliance with COBRA’s notice requirements.
Employers and plan administrators should review this new DOL guidance carefully and begin to address changes to their COBRA administration procedures and documentation as soon as possible.
Limits on DOL Regulatory Authority
COBRA’s rules as applicable to non-governmental employers are included in ERISA as well as the Internal Revenue Code. The requirements are nearly (but not exactly) identical in the two statutes. According to COBRA’s legislative history, the DOL has the authority to issue guidance only on matters related to COBRA’s notice and disclosure requirements. The U.S. Department of the Treasury (through the IRS) has the regulatory authority over all other substantive requirements. Therefore, the DOL’s guidance does not specifically address issues other than those related to notice and disclosure requirements. But the Treasury (IRS) reviewed the DOL’s proposed regulations and agrees that these regulations should also be used to interpret the comparable tax code COBRA rules.
New Rules for Initial COBRA Notice
COBRA requires group health plans to provide a written notice containing general information about COBRA rights to covered employees and their spouses "at the time of commencement of coverage" under the plan. The statute does not provide any specific time period for providing that notice.
Under the proposed regulations, this initial notice generally must be provided within 90 days of the date an employee (or spouse) becomes covered by the plan. But the initial notice must be provided earlier if the plan administrator is required to furnish a COBRA election notice to a qualified beneficiary before the end of that 90-day period. The proposed regulations also describe the required content of the initial COBRA notice. In particular, the notice must explain a qualified beneficiary’s responsibility to notify the plan administrator of certain qualifying events, including divorce and a child’s loss of dependent status under the plan, and describe the plan’s procedures for providing COBRA election notices.
Plans may satisfy this initial COBRA notice requirement by including the required information in the plan’s summary plan description (SPD). In fact, the new 90-day time period for furnishing an initial COBRA notice parallels the existing 90-day time period for furnishing an SPD to new participants. However, plan administrators should bear in mind that the delivery requirements for initial COBRA notices differ from the SPD delivery requirements. In general, an SPD must be provided only to covered employees. By contrast, the initial COBRA notice must be provided to covered employees and, separately, to their covered spouses.
To illustrate this difference, the DOL stated that in-hand delivery of a combined COBRA notice-SPD to the covered employee at his or her work site would meet the requirement for employee notification; however, it would not constitute adequate delivery of the COBRA notice to the employee’s spouse. Instead, the plan administrator could satisfy its COBRA notice obligation by mailing the combined COBRA notice-SPD to the employee and spouse at their home address, provided the plan’s latest information indicates that both reside at that address. Moreover, if a covered employee’s spouse becomes covered after the employee (e.g., a covered employee marries and adds his or her spouse to the plan), a separate initial COBRA notice must be provided to the employee’s spouse within 90 days after the spouse becomes covered.
The proposed regulations include a new model initial COBRA notice, a copy of which is available here. The new model notice is shorter and more understandable than the DOL’s prior model, and it is updated for changes in the law since the prior model was issued in ERISA Technical Release 86-2. Although use of the new model notice is not mandatory, the DOL indicated that it will no longer consider use of its prior model notice to be good faith compliance with COBRA’s notice requirements.
Plan administrators should not simply send out the DOL’s model notice without modifications. The notice contains choices of optional language and blanks where plan-specific information needs to be inserted. In addition, the model notice is designed for use by single-employer plans. Thus, it would need to be revised before being used by other types of plans, such as multiemployer plans or plans sponsored by unions for their members.
Notice of Qualifying Events
COBRA requires employers to notify group health plan administrators when certain qualifying events occur, including the covered employee’s death, termination of employment, reduction in hours or Medicare entitlement. The proposed regulations describe the statutory deadline for providing such notice (in general, within 30 days after the date of the qualifying event) and the required content of the employer’s notice.
COBRA requires covered employees and other qualified beneficiaries to notify plan administrators within 60 days of other qualifying events, including the covered employee’s divorce or legal separation, a dependent child’s loss of eligibility to be covered as a dependent under the plan or a qualified beneficiary’s disability or cessation of disability. The proposed regulations extend the statutory rules by allowing plans to require individuals to notify plan administrators within 60 days of a second qualifying event (e.g., a divorce following an earlier termination of employment).
Under the proposed rules, plans must establish "reasonable procedures" for furnishing these individual notices. Plan procedures must satisfy a list of requirements set forth in the proposed regulations in order to be considered reasonable. For example, the procedures must be described in the plan’s SPD, or, presumably, a summary of material modifications (SMM), specify the means by which notice must be given and to whom and allow a reasonable period of time for furnishing the notice.
Employers and plan administrators must pay particular attention to the reasonable procedure requirement. If a plan fails to establish reasonable procedures for the furnishing of notices of qualifying events, a covered employee’s or qualified beneficiary’s written or oral notification of a specific qualifying event to any officer of the employer or any other employee who customarily handles employee benefits matters of the employer will be considered valid notice to the plan administrator and binding upon the plan. Failure to respond to this oral COBRA notification in a timely manner could subject the plan administrator to significant notice penalties of up to $110 per day.
COBRA Election Notice
COBRA requires plan administrators who receive notice of a qualifying event to provide a notice of the right to elect continuation coverage to the affected qualified beneficiaries. According to the DOL, 15 specific items must be included in every qualifying event notice. Not only must the notice explain how and when a qualified beneficiary may elect COBRA coverage, it must also identify each qualified beneficiary (by name), describe the consequences of failing to elect COBRA coverage and describe alternate health coverage that may be available and how that coverage interacts with COBRA coverage.
Plan administrators must generally provide the COBRA election notice to qualified beneficiaries within 14 days after receipt of notice of a qualifying event. If an employer is the plan administrator, the DOL confirmed its position that the employer would have up to 44 days from the qualifying event to provide the COBRA election notice.
The proposed regulations include a model COBRA election notice and COBRA information notice, a copy of which is available here. Like the new model initial COBRA notice, the model COBRA election notice is designed for use by single-employer plans and its use is not mandatory. The model COBRA election notice will need to be customized based on plan-specific information before being used.
New Notice Requirements
The proposed regulations establish two new notice requirements for group health plans. Plan administrators must provide a "notice of unavailability of continuation coverage" when they receive notice of a qualifying event (such as divorce or a child’s loss of dependent status) for an individual who is not eligible for COBRA coverage under the plan. The notice must explain why the individual is not entitled to COBRA coverage, and it must be provided within the same notice period that would apply if the individual were entitled to COBRA coverage.
Plan administrators must also notify qualified beneficiaries whose COBRA coverage is terminated earlier than the applicable maximum COBRA coverage period. The "notice of termination of health coverage" must describe the date of the termination, the reason for the termination and any alternative coverage available to the individual under the plan or applicable law. It must be provided as soon as practicable after determining that a qualified beneficiary’s COBRA coverage will terminate early. The DOL noted that COBRA termination notices may be combined with HIPAA certificates of creditable coverage.
The DOL is seeking comments on its proposed COBRA notice regulations, particularly the model notices. Employers and plan administrators should seriously consider submitting comments to the DOL, because many of the DOL’s positions, if unchanged, could make COBRA administration much more difficult and time consuming. In addition, the proposed regulations are not as detailed in many respects as necessary to ensure compliance. The deadline for submitting comments on the proposed regulations is July 28, 2003.
If you are interested in commenting on the proposed regulations, would like more information about the proposed regulations or would like to have your existing COBRA notices and notice procedures reviewed for compliance with the DOL’s new guidance, please contact either your regular McDermott, Will & Emery lawyer or members of our Welfare Benefit Plan Practice Group by clicking on the names listed on the right side of this page.