Proposed Regulations (1999)
COBRA Continuation Coverage Requirements
[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
RIN 1545-AW94
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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).
/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).
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 section 1.162-26
in the Federal Register of June 15, 1987 (52 FR 22716). Supplemental proposed
regulations were published as proposed Treasury Regulation section 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.
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.
/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.
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.
/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).
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 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, 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
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 sections 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 section 54.4980B-2 in the list of
questions.
4. Revising the entry for Q-4 of section 54.4980B-7 in the list of questions.
5. Adding an entry for the section heading for section 54.4980B- 9 in the
list of questions.
6. Adding an entry for the section heading for section 54.4980B-10 in the
list of questions.
The additions and revisions read as follows:
Section 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 sections 54.4980B-1 through 54.4980B-10.
LIST OF SECTIONS
* * * * *
Section 54.4980B-9 Business reorganizations and employer withdrawals from
multiemployer plans.
Section 54.4980B-10 Interaction of FMLA and COBRA.