What employers are affected by COBRA?

The COBRA health care continuation rules apply to the health plans of all employers except:

1. churches (but not other tax exempt organizations);

2. small employers (see below); and

3. the federal government.

Although governments are not required to comply with COBRA, similar amendments to the Public Health Service Act impose nearly identical continuation coverage requirements on state and local government employers other than those with fewer than 20 employees. Enforcement of the Public Health Service Act requirements is achieved through suits for equitable relief filed by qualified beneficiaries. COBRA-like rules also apply to employees of the federal government.

Small employer exception. An employer is exempt from COBRA if it normally employed fewer than 20 employees on a typical working day during the preceding calendar year.

As of January 1, 2000, COBRA does not apply to a group health plan for any calendar year if the employer maintaining the plan employed fewer than 20 employees on at least 50% of its typical business days during the preceding calendar year. In determining whether the small employer exception applies, employers have the option of counting by pay period rather than by every business day. Only common law employees are counted, not independent contractors or directors, for example.

The 2001 final regulations adopt a method of counting employees to determine if the small employer exception applies. A full-time employee counts as a single employee and a part-time employee counts as a fraction of a full-time employee. To figure the number of full-time equivalents among part-time employees, the numerator of the fraction equals the number of hours worked by part-time employees and the denominator equals the number of hours that must be worked to be considered a full-time employee. The denominator is based on the employer's practice, but may not exceed eight hour per day or 40 hours per week.

If more than one employer is maintaining a group health plan (except for multiple employer welfare arrangements (MEWA)), all of the employers maintaining the group health plan must meet this test. That is, each one must have fewer than 20 employees on at least 50 percent of the days in the preceding calendar year.

The continuation coverage arising from qualifying events in previous years when an employer was subject to COBRA is not cut off if the employer becomes eligible for the small employer exemption. The employer must continue to make such COBRA coverage available for the appropriate periods.

For purposes of the small employer exception:

1. all common entities under common control are considered one employer;

2. each employer subscribing to a multiple employer welfare arrangement (MEWA) is considered to maintain a separate plan, so that the exception applies separately to each subscribing employer with fewer than 20 employees-even if another subscribing employer has 20 or more employees;

3. a multiemployer (i.e., a collectively bargained) plan is subject to COBRA if any employer required to contribute to the plan employs 20 or more employees.

Cafeteria plans and flexible spending accounts. The provision of medical care through a cafeteria plan or other flexible benefit arrangement constitutes a group health plan. COBRA continuation coverage requirements apply only to those medical benefits that a covered employee has actually chosen to receive.

Flexible spending plans are covered by COBRA; but, as a practical matter, they are not usually elected because there is no tax advantage after termination. After termination of employment, most COBRA beneficiaries receive no further income from the employer, and would therefore derive no tax advantage from the pretax payments that are typical under an FSA.

However, there are a variety of reasons why an employee might elect to continue a FSA. One is that it would give a terminated employee who did not participate in the employer's indemnity plan, the ability to make plan choices in the next enrollment period. Also, if all the FSA funds have not been used, employees electing to continue the FSA will have access to their funds for claims during the normal period.

However, health flexible spending arrangements (FSAs) are covered by COBRA if the amount that the employer could require to be paid for COBRA coverage for the plan year would exceed the maximum benefit that the qualified beneficiary could receive under the FSA for the plan year. This rule limits the application of COBRA for most health flexible arrangements, thereby ensuring that COBRA continuation coverage is available in appropriate cases without requiring continuation coverage where it would not serve the statutory purpose.

COBRA beneficiary claims under FSAs. Also, terminated employees who elected an FSA may not have used all the funds available in the account prior to termination. COBRA beneficiaries who elected to receive benefits under FSAs when they were active employees have access to their accounts for claims incurred within the appropriate periods. Generally, employers allow employees who terminate employment to continue to submit claims for expenses incurred prior to the termination date until the last day of the current plan year or until the end of an extension period after the end of the current plan year. To continue coverage, terminated employees must continue to make the required premium payments.

Benefit availability. As a type of cafeteria plan, FSAs must exhibit risk-sharing and allow for uniform coverage. Therefore, the maximum amount of reimbursement elected by the participant must be available at all times, regardless of the participant's level of contributions made to date.

Length of continuation period. The 2001 final regulations limit application of COBRA to health FSAs if certain conditions are met. Specifically, a health FSA must make COBRA available to a qualified beneficiary only for the plan year in which the qualifying event occurs if:

• the health FSA is not subject to HIPAA's portability provisions because the benefits provided are excepted benefits; and

• the maximum amount that the health FSA could require to be paid for COBRA coverage equals or exceeds the maximum benefit available under the FSA for the plan year in which the qualifying event occurs.

In addition, a health FSA is not required to offer COBRA to that qualified beneficiary at all if the first two conditions are met and the maximum benefit available to the qualified beneficiary under the health FSA for the remainder of the plan year, as of the date of the qualifying event, does not exceed the maximum amount that is required that year to maintain coverage under the health FSA. To the extent a health FSA is obligated to make COBRA continuation coverage available to a qualified beneficiary, all the general COBRA rules apply in the same way as under other group health plans, including the rule for how plan limits on coverage apply to someone on COBRA continuation coverage.