Continuation Coverage Requirements Applicable to
Group Health Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 54 and 602 [TD 8812] RIN 1545-
AI93

TITLE: Continuation Coverage Requirements Applicable to Group Health
Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

SUMMARY: The Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA) added health care continuation requirements that apply to
group health plans. Coverage required to be provided under those
requirements is referred to as COBRA continuation coverage. Proposed
regulations interpreting the COBRA continuation coverage
requirements were published in the Federal Register of June 15, 1987
and of January 7, 1998. This document contains final regulations
based on these two sets of proposed regulations. The final
regulations also reflect statutory amendments to the COBRA
continuation coverage requirements since COBRA was enacted. A new
set of proposed regulations addressing additional issues under the
COBRA continuation coverage provisions is 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: Effective Date: These regulations are effective February 3,
1999.

Applicability Dates: Sections 54.4980B-1 through 54.4980B-8 apply to
group health plans with respect to qualifying events occurring in
plan years beginning on or after January 1, 2000. See the Effective
Date portion of this preamble and Q&A-2 of �54.4980B-1.

FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis, 202-622-4695. This
is not a toll-free number.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507) under control number 1545-1581. Responses to these
collections of information are mandatory in some cases and required
in order to obtain a benefit in other cases. Group health plans are
required to provide certain individuals a notice of their COBRA
continuation coverage rights when certain qualifying events occur
and are required to inform health care providers who contact the
plan to confirm the coverage of certain individuals of the
individuals' complete rights to coverage. To obtain COBRA
continuation coverage or extended coverage, certain individuals are
required to notify the plan administrator of certain events or that
they are electing COBRA continuation coverage, and plans are
required to notify certain individuals of insignificant
underpayments if the plan wishes to require the individuals to pay
the deficiency. This information will be used to advise employers
and plan administrators of their obligation to offer COBRA
continuation coverage, or an extended period of such coverage; to
advise qualified beneficiaries of their right to elect COBRA
continuation coverage and of insignificant errors in payment; and to
inform health care providers of individuals' rights to COBRA
continuation coverage.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.

The estimated average annual burden per respondent varies from 30
seconds to 330 hours, depending on individual circumstances, with an
estimated average of 14 minutes.

Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to these collections of information must
be retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

On June 15, 1987, proposed regulations (EE-143-86) relating to
continuation coverage requirements applicable to group health plans
were published in the Federal Register (52 FR 22716). A public
hearing was held on November 4, 1987. Written comments were also
received.

A supplemental set of proposed regulations (REG-209485-86) was
published in the Federal Register of January 7, 1998 (63 FR 708). No
public hearing was requested or held after the publication of the
supplemental proposed regulations; written comments were received.
After consideration of these comments, after review of the reported
court decisions under the parallel COBRA continuation coverage
provisions of the Employee Retirement Income Security Act of 1974
(ERISA) and the Public Health Service Act, and based on the
experience of the IRS in administering the COBRA continuation
coverage requirements, a portion of the regulations proposed by
EE-143-86 and REG-209485-86 is adopted as revised by this Treasury
decision.

The revisions are summarized in the explanation below. Also being
published elsewhere in this issue of the Federal Register is a new
set of proposed regulations, which addresses additional iss U.S.

Explanation of Provisions

Overview

The regulations are intended to provide clear, administrable rules
regarding COBRA continuation coverage. The regulations give
comprehensive guidance on many questions under COBRA, with a view to
enhancing the certainty and reliance available to all parties -
including employees, qualified beneficiaries, employers, employee
organizations, and group health plans - in determining their COBRA
rights and obligations. The guidance is designed to further the
protective purposes of COBRA without undue administrative burdens or
costs on employers, employee organizations, or group health plans.

For example, the regulations:

- Prevent group health plans from terminating COBRA continuation
coverage on the basis of other coverage that a qualified beneficiary
had prior to electing COBRA continuation coverage, in accordance
with the Supreme Court's decision in Geissal v. Moore Medical Corp.

- Give employers and employee organizations significant flexibility
in determining, for purposes of COBRA, the number of group health
plans they maintain. This will reduce burdens on employers and
employee organizations by permitting them to structure their group
health plans in an efficient and cost-effective manner and to
satisfy their COBRA obligations based upon that structure.

- Provide baseline rules for determining the COBRA liabilities of
buyers and sellers of corporate stock and corporate assets and
permit buyers and sellers to reallocate and carry out those
liabilities by agreement. This will significantly enhance employers'
ability to negotiate and to plan appropriately for the treatment of
qualified beneficiaries in connection with mergers and acquisitions,
while protecting the rights of qualified beneficiaries affected by
the transactions.

- Limit the application of COBRA for most health flexible spending
arrangements.

This will ensure that COBRA continuation coverage under health
flexible spending arrangements is available in appropriate cases
without requiring continuation coverage where that would not serve
the statutory purposes.

- Eliminate the requirement that group health plans offer qualified
beneficiaries the option to elect only core (health) coverage under
a group health plan that otherwise provides both core and noncore
(vision and dental) coverage.

- Give employers, in determining whether the small-employer plan
exception applies, the option of counting by pay period rather than
by every business day, and The COBRA continuation coverage
requirements have also been affected by an amendment made to the
definition of group health plan by the Omnibus Budget Reconciliation
Act of 1993 (OBRA 1993). OBRA 1993 amended the definition of group
health plan in section 5000(b)(1), which the COBRA continuation
coverage provisions of the Internal Revenue Code incorporate by
reference.

provide, for that exception, for the consistent treatment of part-
time employees through the use of full-time equivalents.

The COBRA continuation coverage requirements enacted on April 7,
1986 have been amended by the Omnibus Budget Reconciliation Act of
1986 (OBRA 1986), the Tax Reform Act of 1986 (TRA 1986), the
Technical and Miscellaneous Revenue Act of 1988 (TAMRA), the Omnibus
Budget Reconciliation Act of 1989 (OBRA 1989), the Omnibus Budget
Reconciliation Act of 1990 (OBRA 1990), the Small Business Job
Protection Act of 1996 (SBJPA), and the Health Insurance Portability
and Accountability Act of 1996 (HIPAA). These amendments made 1
numerous clarifications and modifications to the COBRA continuation
coverage requirements, moved the requirements from section 162(k) to
section 4980B, added various other features, such as the disability
extension to the required period of coverage, and significantly
altered the sanctions imposed on employers and plans for failing to
comply with the requirements. The specific changes made by these
amendments are discussed below in connection with the provisions of
the regulations that relate to them.

The legislative history of COBRA provides that the Department of the
Treasury has the authority to interpret the coverage and tax
sanction provisions of COBRA and that the Department of Labor has
the authority to interpret the reporting and disclosure provisions.

Accordingly, these regulations apply in interpreting the coverage
provisions of COBRA in Title I of ERISA, as well as those in the
Internal Revenue Code. With minor exceptions, the final regulations
and the new proposed regulations being published today do not
address the notice provisions of the COBRA continuation coverage
requirements.

Organization

The final regulations being published today follow the structure of
the 1987 proposed regulations, with related questions-and-answers
grouped into topics. Each topic is now in a separate section, and
sections have been added to the new proposed regulations being
published today for (1) business reorganizations and employer
withdrawals from multiemployer plans and (2) the interaction of the
Family and Medical Leave Act of 1993 (FMLA) and COBRA. The substance
of the 1998 proposed regulations has been integrated into the
questions-and-answers of the 1987 proposed regulations. The ordering
of some of the questions-and-answers has changed, and all of the
questions-and-answers relating to the original statutory effective
date have been deleted. In addition, in a few cases, the content of
two separate questions-and-answers in the 1987 proposed regulations
has been combined into a single question-and-answer; in other cases
the content of a single question-and-answer has been expanded to two
or more questions-and-answers.

These changes have resulted in the renumbering of the questions-and-
answers. The new proposed regulations being published today are
designed to fill gaps designated in the final regulations as
reserved.

Effective Date

The 1987 proposed regulations provide that they will be effective
upon publication as final regulations. Some commenters suggested
that the final regulations should have a delayed effective date. The
final regulations follow this suggestion; they apply with respect to
qualifying events occurring in plan years beginning on or after
January 1, 2000. For any period before the effective date of the
final regulations, the plan and the employer must operate in good
faith compliance with a reasonable interpretation of the
requirements in section 4980B. For the period before the effective
date of the final regulations, the IRS will consider compliance with
the proposed regulations in �1.162-26 (the 1987 proposed
regulations) and �54.4980B-1 (the 1998 proposed regulations) to
constitute good faith compliance with a reasonable interpretation of
the statutory requirements for the topics that those proposed
regulations address, except to the extent inconsistent with a
statutory amendment adopted after the dates the proposed regulations
were issued, during the period the amendment is effective, or with a
decision of the United States Supreme Court released after the
proposed regulations were issued, during the period after the
decision is released. For any period beginning on or after the
effective date of the final regulations with respect to topics not
addressed in the final regulations, such as how to calculate the
applicable premium, the plan and the employer must operate in good
faith compliance with a reasonable interpretation of the
requirements in section 4980B.

Compliance with the new proposed regulations will constitute good
faith compliance with a reasonable interpretation of the statutory
requirements addressed in the new proposed regulations until the new
proposed regulations are finalized. In addition, actions
inconsistent with the terms of the new proposed regulations will not
necessarily constitute a lack of good faith compliance with a
reasonable interpretation of the statutory requirements addressed in
the new proposed regulations; whether there has been good faith
compliance with a reasonable interpretation of the statutory
requirements will depend on all the facts and circumstances of each
case. The IRS will not assess the excise tax with respect to a plan
that operates in good faith compliance with a reasonable
interpretation of the statutory requirements, as described in the
preceding two paragraphs. Note, however, that in the case of
lawsuits brought by qualified beneficiaries to enforce their COBRA
continuation coverage rights under ERISA or the Public Health
Service Act, the courts generally have not applied any good faith
compliance standard.

Plans That Must Comply

The final regulations provide rules regarding which group health
plans are subject to COBRA. These rules are generally similar to
those set forth in the 1987 proposed regulations.

However, the rules for determining, for purposes of the COBRA
continuation coverage requirements, the number of group health plans
maintained by an employer have been deleted, and the new proposed
regulations set forth substantially different rules, which provide
that employers and employee organizations generally have broad
discretion to determine the number of group health plans that they
maintain. Other significant changes to the 1987 proposed regulations
on this point (some of which are set forth in the 1998 proposed
regulations) include exceptions for long-term care services and
medical savings accounts and new rules regarding the small-employer
plan exception.

As in the 1987 proposed regulations, the final regulations provide
that, in general, all group health plans are subject to the COBRA
continuation coverage requirements. However, small-employer plans
(discussed below), church plans (within the meaning of section
414(e)), and governmental plans (within the meaning of section
414(d)) are not subject to COBRA. (The final regulations refer to
these as plans excepted from COBRA.) Plans excepted from COBRA are
generally not subject to the COBRA continuation coverage
requirements or the COBRA excise tax, although group health plans
maintained by state or local governments are subject to parallel
continuation coverage requirements in the Public Health Service Act
(which is administered by the Department of Health and Human
Services). Also, the Federal Employees Health Benefit Program is
subject to generally similar, although not parallel, temporary
continuation of coverage provisions under the Federal Employees
Health Benefits Amendments Act of 1988.

The final regulations define group health plan in a manner generally
similar to that in the 1987 proposed regulations. However, certain
changes in terminology have been made to reflect the statutory
cross-reference to section 5000(b)(1) set forth in section 4980B(g)
(2) (such as the use of the term health care and the definition of
employee). Additionally, the final regulations, in accordance with
section 4980B(g)(2), provide that a plan is not a group health plan
if substantially all the coverage provided under the plan is for
qualified long-term care services (as defined in section 7702B(c)).
The final regulations allow plans to use any reasonable method in
determining whether a plan satisfies this exception. The final
regulations also provide, in accordance with section 106(b)(5), that
amounts contributed by an employer to a medical savings account (as
defined in section 220(d)) are not considered part of a group health
plan for purposes of COBRA (although a high-deductible health plan
will not fail to be a group health plan simply because it covers a
holder of a medical savings account).

Under the final regulations, 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 the families of such
individuals. In accordance with section 5000(b)(1), these
individuals include employees, former employees, the employer, and
others associated or formerly associated with the employer or
employee organization in a business relationship. The final
regulations generally refer to all individuals covered under a plan
by virtue of the performance of services or by virtue of membership
in an employee organization as employees. (As discussed below, the
term employee has a narrower meaning for purposes of the small-
employer plan exception.) The final regulations use the term
employer to refer to a person for whom an individual performs
services. Pursuant to section 414(t), the term employer also
includes, with respect to such a person, any member of a group
described in section 414(b), (c), (m), or (o) that includes the
person (a controlled group) as well as any successor of the person
or of a member of the controlled group.

Under the final regulations, as under the 1987 proposed regulations,
a plan generally is considered to provide health care whether it
does so directly or through insurance, reimbursement, or other means
and whether it does so through an on-site facility or a cafeteria or
other flexible benefit arrangement. Insurance includes group
insurance policies and one or more individual policies under an
arrangement maintained by the employer or employee organization to
provide health care to two or more employees. Under the final
regulations, as under the 1987 proposed regulations, in the case of
a cafeteria plan or other flexible benefit arrangement, the COBRA
continuation coverage requirements apply only to the health care
benefits under the cafeteria plan or other flexible benefit
arrangement that an employee has actually chosen to receive.

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 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.

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 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 , by 2
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.

Under this 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.) The second
condition is that, in the plan year in which 3 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).

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.

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.

A plan is maintained by an employer or employee organization even if
the employer or employee organization does not directly or
indirectly contribute to it if coverage under the plan would not be
available to an individual at the same cost if the individual did
not have an employment-related connection to the employer or
employee organization. The final regulations, for purposes of the
definition of a group health plan, use the term health care instead
of the term medical care (which was used in the 1987 proposed
regulations). This change reflects the change in the definition of
group health plan made by OBRA 1989. However, the final regulations
provide that health care has the same meaning as the term medical
care under section 213(d). Like the 1987 proposed regulations, the
final regulations set forth a summary of items that do and do not
constitute health care.

The final regulations, generally following the 1987 proposed
regulations, set forth rules for determining whether a group health
plan is a small-employer plan. In general, a group health plan other
than a multiemployer plan is a small-employer plan if it is
maintained for a calendar year by an employer that normally employed
fewer than 20 employees during the preceding calendar year, and a
group health plan that is a multiemployer plan is a small-employer
plan if each of the employers contributing to the plan for a
calendar year normally employed fewer than 20 employees during the
preceding calendar year. Whether the plan is a multiemployer plan or
not, the term employer includes all members of a controlled group.
An example in the final regulations clarifies that the controlled
group includes foreign members, and thus a U.S. subsidiary with
fewer than 20 employees is subject to COBRA if the controlled group
has 20 or more employees world-wide.

The final regulations set forth additional rules for the application
of the small-employer plan exception to multiemployer plans, and the
new proposed regulations contain the same definition of
multiemployer plan that is in section 414(f).

Under the final regulations, an employer is considered to have
normally employed fewer than 20 employees during a particular
calendar year if it had fewer than 20 employees on at least 50
percent of its typical business days during that year. This rule
differs from the rule in the 1987 proposed regulations in two ways.
First, the 1987 proposed regulations use the term working days,
whereas the final regulations use the statutory term typical
business days.

The second difference relates to the term employee. Under the 1987
proposed regulations, self-employed individuals and independent
contractors are counted as employees for purposes of the small-
employer plan exception if they are covered under a plan of the
employer.

Commenters argued that only common law employees should be counted
for this purpose. Unlike the definition of covered employee (amended
by OBRA 1989 to make clear that individuals who are not common law
employees but who are covered under the group health plan of an
employer or employee organization by virtue of the performance of
services are still considered covered employees) and the definition
of group health plan (amended by OBRA 1993 to make clear that a
health plan covering individuals who are not common law employees of
the employer or employee organization, and who are not family
members of common law employees, is still a group health plan)the
reference to employees for purposes of the small-employer plan
exception have not been amended to include individuals who are not
common law employees. Consequently, under the final regulations,
only common law employees are taken into account for purposes of the
small-employer plan exception; self-employed individuals,
independent contractors, and directors are not counted.

Although a small-employer plan is generally excepted from COBRA, a
plan that is not a small-employer plan for a period remains subject
to COBRA for qualifying events that occurred during that period,
even if it subsequently becomes a small-employer plan.

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.

In determining whether a multiemployer plan satisfies the
requirements for the small-employer plan exception, the 1987
proposed regulations provide a special rule permitting the
multiemployer plan to be considered a small-employer plan for a year
if any contributing employer that grew to be too large to qualify
for the exception during the preceding year ceases to contribute to
the plan by February 1 of the current year. Questions have been
raised about the need for and the authority for this special rule,
and one commenter pointed out the uncertainty of how to deal with a
qualified beneficiary experiencing a qualifying event under such a
plan in January of the current year if the qualified beneficiary
needed confirmation of coverage for urgent services before it was
clear that the too-large employer would cease contributing to the
multiemployer plan by February 1. Based on these concerns, the final
regulations eliminate this special rule for multiemployer plans.

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) 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.

The final regulations modify the rules set forth in the 1987
proposed regulations for determining the plan year of a group health
plan under COBRA. These modifications are made to be consistent with
the rules in the temporary regulations under HIPAA. The definition
of plan In this regard, the U.S. Department of Labor has advised the
IRS and Treasury that to 4 the extent a plan fiduciary subjects a
plan to liability for the COBRA excise tax on account of her or his
imprudent actions, the plan fiduciary may be held personally liable
under Title I of ERISA for the amount of the tax.

year is important in applying, for example, the effective date
provisions under the final regulations and the rules for health FSAs
under the new proposed regulations. Under the final regulations, the
plan year is the year designated as such in the plan documents. If
the plan documents do not designate a plan year (or if there are no
plan documents), the plan year is the deductible/limit year used by
the plan. If the plan does not impose deductibles or limits on an
annual basis, the plan year is the policy year. If the plan does not
impose deductibles or limits on an annual basis and the plan is not
insured (or the insurance policy is not renewed annually), the plan
year is the taxable year of the employer. In any other case, the
plan year is the calendar year.

The final regulations reflect the statutory provisions that provide
for the imposition of an excise tax in the event of a failure by a
group health plan to comply with the COBRA continuation coverage
requirements of section 4980B(f). In the case of a multiemployer
plan, the excise tax is imposed on the plan ; in the case of any
other plan, the excise tax is imposed on the employer 4 maintaining
the plan. In certain circumstances, the excise tax can be imposed on
other persons involved with the provision of benefits under the
plan, such as an insurer providing benefits under the plan or a
third party administrator administering claims under the plan.
Separate, non-tax remedies may be available in the case of a plan
that fails to comply with the COBRA continuation coverage
requirements in ERISA.

Qualified Beneficiaries

The rules in the final regulations for determining who is a
qualified beneficiary generally follow those set forth in the 1987
proposed regulations, as well as those set forth in the 1998
proposed regulations regarding the status of newborn and adopted
children as qualified beneficiaries. However, certain provisions
have been added to the final regulations to reflect the special
statutory rules that apply in the case of bankruptcy of the employer
as a qualifying event.

Modifications have also been made to reflect the decision of the
Supreme Court in Geissal v.

Moore Medical Corp., 118 S. Ct. 1869 (1998), which held that an
individual covered under another group health plan at the time she
or he elects COBRA continuation coverage cannot be denied COBRA
continuation coverage on the basis of that other coverage.

Under the final regulations, a qualified beneficiary is, in general:
(1) any individual who, on the day before a qualifying event, is
covered under a group health plan either as a covered employee, the
spouse of a covered employee, or the dependent child of a covered
employee; or (2) any child born to or placed for adoption with a
covered employee during a period of COBRA continuation coverage.
(The final regulations retain the definitions of the terms placement
for adoption and being placed for adoption that were in the 1998
proposed regulations.) For a qualifying event that is the bankruptcy
of the employer, any covered employee who retired on or before the
date of any substantial elimination of group health plan coverage is
a qualified beneficiary; the spouse, surviving spouse, or dependent
child of the retired covered employee is also a qualified
beneficiary if the spouse, surviving spouse, or dependent child was
a beneficiary under the plan on the day before the bankruptcy
qualifying event. The final regulations add a provision clarifying
that if an individual is denied coverage under a group health plan
in violation of applicable law (including HIPAA) and experiences an
event that would be a qualifying event if the coverage had not been
wrongfully denied, the individual is considered a qualified
beneficiary.

A covered employee can be a qualified beneficiary only in connection
with a qualifying event that is the termination (or reduction of
hours) of the covered employee's employment or the employer's
bankruptcy. As under the 1987 proposed regulations, the final
regulations provide that a covered employee is not a qualified
beneficiary if her or his status as a covered employee is
attributable to certain periods in which she or he was a nonresident
alien (in which case the covered employee's spouse and dependent
children are also not qualified beneficiaries). Although a child
born to or placed for adoption with a covered employee during a
period of COBRA continuation coverage is a qualified beneficiary, a
child born to or placed for adoption with a qualified beneficiary
other than the covered employee after a qualifying event, or a
person who becomes the spouse of a qualified beneficiary (regardless
of whether the qualified beneficiary is the covered employee) after
a qualifying event is not a qualified beneficiary. The final
regulations retain the rule of the 1987 proposed regulations under
which an individual is not a qualified beneficiary if, on the day
before the qualifying event, the individual is covered under the
group health plan solely because of another individual's election of
COBRA continuation coverage.

However, consistent with Geissal, the final regulations eliminate
the rule in the 1987 proposed regulations that an individual is not
a qualified beneficiary if, on the day before the qualifying event,
the individual was entitled to Medicare benefits.

An individual ceases to be a qualified beneficiary if she or he does
not elect COBRA continuation coverage by the end of the election
period (discussed below). The final regulations clarify that an
individual who elects COBRA continuation coverage ceases to be a
qualified beneficiary once the plan's obligation to provide COBRA
continuation coverage has ended.

The term covered employee is defined in the final regulations in a
manner substantially the same as in the 1987 proposed regulations.
Although some commenters on the 1987 proposed regulations objected
to the inclusion in this definition of individuals other than common
law employees, the statutory definition was amended by OBRA 1989 to
include such individuals.

Under the final regulations, a covered employee generally includes
any individual who is or has been provided coverage under a group
health plan (other than one excepted from COBRA as of the date of
what would otherwise be a qualifying event) because of her or his
present or past performance of services for the employer maintaining
the group health plan (or by reason of membership in the employee
organization maintaining the plan). Thus, retirees and former
employees covered by a group health plan are covered employees if
the coverage is provided in whole or in part because of the previous
employment. Any individual who performs services for the employer
maintaining the plan or who is a member of the employee organization
maintaining the plan may be a covered employee. Thus, common law
employees, self-employed individuals, independent contractors, and
corporate directors can be covered employees. Generally, mere
eligibility for coverage - as opposed to actual coverage - does not
make an individual a covered employee. However, if an individual who
otherwise would be a covered employee is denied coverage under a
group health plan in violation of applicable law (including HIPAA),
the individual is considered a covered employee.

Qualifying Events

The rules regarding qualifying events under the final regulations
generally are the same as those in the 1987 proposed regulations.
Under the final regulations, a qualifying event is any of a set of
specified events that occurs while a group health plan is subject to
COBRA and that causes a covered employee (or the spouse or dependent
child of the covered employee) to lose coverage under the plan.
These specified events are: the death of a covered employee; the
termination (other than by reason of gross misconduct), or reduction
of hours, of a covered employee's employment; the divorce or legal
separation of a covered employee from the covered employee's spouse;
a covered employee's becoming entitled to Medicare benefits under
Title XVIII of the Social Security Act; a dependent child's ceasing
to be a dependent child of the covered employee under the plan; and
a proceeding in bankruptcy under Title 11 of the United States Code
with respect to an employer from whose employment a covered employee
retired at any time. The addition of employer bankruptcy as a
qualifying event reflects the amendments made to COBRA by OBRA 1986.

The reasons for which an employee has a termination of employment or
a reduction of hours of employment generally are not relevant in
determining whether the termination or reduction of hours is a
qualifying event. Thus, a voluntary termination, a strike, a
lockout, a layoff, or an involuntary discharge each may constitute a
qualifying event. However, if an employee is discharged for gross
misconduct, the termination of employment does not constitute a
qualifying event. The final regulations clarify that a reduction of
hours of a covered employee's employment includes any decrease in
the number of hours that a covered employee works or is required to
work that does not constitute a termination of employment. Thus, if
a covered employee takes a leave of absence, is laid off, or
otherwise performs no hours of work during a period, the covered
employee has experienced a reduction in hours that, if the other
applicable requirements are satisfied, constitutes a qualifying
event. (But see Notice 94-103 (1994-2 C.B.

569) and the new proposed regulations, described below, for special
rules regarding FMLA leave.) A covered employee's loss of coverage
by reason of a failure to work the minimum number of hours required
for coverage constitutes a reduction of hours of employment.

Under the final regulations, to lose coverage means to cease to be
covered under the same terms and conditions as in effect immediately
before the event. The final regulations clarify that a loss of
coverage includes an increase in an employee premium or contribution
resulting from one of the events described above. The loss of
coverage need not be concurrent with the event; it is enough that
the loss of coverage occur at any time before the end of the maximum
coverage period (described below). For employer bankruptcies, the
term to lose coverage also includes a substantial elimination of
coverage that occurs within 12 months before or after the date on
which the bankruptcy proceeding begins.

Under the final regulations, as under the 1987 proposed regulations,
reductions or eliminations in coverage in anticipation of an event
are disregarded in determining whether the event results in a loss
of coverage. Although several commenters objected to this rule, the
final regulations retain the provision in order to protect qualified
beneficiaries from being deprived of their COBRA rights because an
employer or employee organization transposes a loss or reduction of
coverage to a time before the qualifying event. This rule also
applies in cases where a covered employee discontinues the coverage
of a spouse in anticipation of a divorce or legal separation.

In such a case, upon receiving notice of the divorce or legal
separation, a plan is required to make COBRA continuation coverage
available, effective on the date of the divorce or legal separation
(but not for any period before the date of the divorce or legal
separation).

Under the final regulations, as under the 1987 proposed regulations,
an event must occur while the group health plan is subject to COBRA
in order to constitute a qualifying event. A plan that is excepted
from COBRA (for example, by reason of the small-employer plan
exception) and that later becomes subject to COBRA is not required
to provide COBRA continuation coverage to individuals who
experienced what would otherwise be a qualifying event during the
period when the plan was not subject to COBRA.

Finally, in the case of a child born to or placed for adoption with
a covered employee during a period of COBRA continuation coverage,
the qualifying event that gives rise to that period of COBRA
continuation coverage is the qualifying event applicable to that
child. Thus, if a second qualifying event has occurred before such a
child is born (for example, if the covered employee dies), the
second qualifying event also applies to the newborn child.

COBRA Continuation Coverage

The 1987 proposed regulations generally refer to the coverage that a
qualified beneficiary is entitled to as the coverage that was in
effect on the day before the qualifying event. While that is
generally true, the final regulations have been revised to
incorporate the statutory standard that a qualified beneficiary is
entitled to the coverage made available to similarly situated
beneficiaries with respect to whom a qualifying event has not
occurred. The final regulations generally use as a shorthand for
this statutory language the phrase "similarly situated nonCOBRA
beneficiaries" instead of the phrase "similarly situated active
employees" used in the 1987 proposed regulations.

In certain contexts in the final regulations, though, the phrase
"similarly situated active employees" is still used because in those
contexts - such as the right to make an independent election for
COBRA continuation coverage - qualified beneficiaries who are
spouses and dependent children of covered employees are entitled to
the rights that employees have (and in those contexts, spouses and
dependent children who are not qualified beneficiaries typically do
not have the rights that employees have).

The 1987 proposed regulations address in a separate question-and-
answer the type of coverage that must be made available to qualified
beneficiaries if a change is made in the coverage provided to
similarly situated nonCOBRA beneficiaries. The final regulations
include this rule in the question-and-answer that defines COBRA
continuation coverage. In doing so, the final regulations delete
several specific requirements in the 1987 proposed regulations. For
example, if coverage for the similarly situated nonCOBRA
beneficiaries is changed or eliminated, the 1987 proposed
regulations require that qualified beneficiaries be permitted to
elect coverage under any remaining plan made available to the
similarly situated active employees. Many commenters objected that
in the case of a mere change in benefits, the requirement to give
qualified beneficiaries an election among other plans would give
them greater rights than those active employees might have. The
final regulations follow the suggestion of the commenters in
providing that the general principle - that qualified beneficiaries
have the same rights as similarly situated nonCOBRA beneficiaries -
applies in this situation. The same principle also applies in
determining whether credit for deductibles must be carried over from
a discontinued plan to a new plan. Nevertheless, if an employer or
employee organization providing more than one plan to a group of
similarly situated nonCOBRA beneficiaries eliminates benefits under
one plan without giving the similarly situated nonCOBRA
beneficiaries the right to enroll in another plan, that option would
still have to be made available to qualified beneficiaries if the
employer continued to maintain a group health plan because of the
employer's obligation to continue to make COBRA continuation
coverage available.

The 1987 proposed regulations include detailed rules requiring that
qualified beneficiaries generally be offered the option of electing
only core coverage or both core and noncore coverage.

These rules were based on a reference in the conference report to
the Tax Reform Act of 1986.

Many commenters expressed the opinion that the reference in the
conference report is an insufficient basis for including this
concept in the regulations when nothing in the statute itself
suggests a distinction between core and noncore coverage. Commenters
also contended that the core/noncore distinction would create undue
administrative complexity and promote adverse selection. After
careful consideration, the IRS and Treasury have decided not to
include in either the final or the new proposed regulations any such
requirement to offer for core coverage separately. However, comments
are invited on whether such a requirement should be adopted.

The 1987 proposed regulations establish standards for determining
the deductibles and limits that apply to COBRA continuation coverage
in a period in which an individual or a group of family members has
coverage that is not COBRA continuation coverage and then elects
COBRA continuation coverage. (Of course, during a period in which an
individual or group of family members had only COBRA continuation
coverage, the rules for deductibles and limits would apply to them
in the same manner as they would to similarly situated nonCOBRA
beneficiaries.) Some commenters objected to the provisions of the
1987 proposed regulations for computing deductibles or limits on a
family basis in the case of a qualifying event (such as divorce)
that splits a family into two (or more) units. The 1987 proposed
regulations would require that each resulting family unit be
credited with all the expenses incurred by the entire family before
the qualifying event. The final regulations revise this rule. Under
the final regulations, in computing deductibles and limits for the
family unit receiving COBRA coverage, the plan is required to take
into account only those expenses incurred before the qualifying
event by family members who are part of the resulting family unit
after the qualifying event.

The 1987 proposed regulations provide that qualified beneficiaries
moving outside the area served by a region-specific plan must be
given the right to obtain other coverage from the employer
maintaining the region-specific plan. The rule conditions the right
to other coverage on the employer having employees in the area to
which the qualified beneficiary is moving. This proposed rule unduly
limits the application of the rule in the case of an employer or
employee organization that could provide other coverage to the
qualified beneficiary without having to establish a new plan or
enter into a new group insurance contract even though the employer
did not have employees or the employee organization did not have
members in the area that the qualified beneficiary was moving to.
This might be the case, for example, if the employer or employee
organization maintained a self-insured plan or maintained an insured
plan through an insurance company licensed to provide that same
product in the area that the qualified beneficiary was moving to.
The final regulations eliminate the condition that an employer have
employees in the area to which the qualified beneficiary is moving
and instead require that coverage be made available to the qualified
beneficiary if the employer or employee organization would be able
to provide coverage to the qualified beneficiary under one of its
existing plans. Generally the coverage that must be made available
is that made available to the similarly situated nonCOBRA
beneficiaries. If, however, the coverage made available to the
similarly situated nonCOBRA beneficiaries cannot be made available
in the area that the qualified beneficiary is moving to, then the
coverage that must be made available is coverage provided to other
employees.

The 1987 proposed regulations require, in the case of a plan
providing open enrollment rights, that open enrollment rights be
extended to qualified beneficiaries if an employer maintains two or
more plans. Thus, that rule, by its terms, does not require that
open enrollment rights be given if an employer maintains a single
plan and allows active employees during open enrollment to switch
between categories of coverage such as single and family or among
categories such as employee-only, employee-plus-one-dependent, or
employee-plus-two-or-more-dependents. The final regulations
eliminate the condition that an employer or employee organization
maintain two or more plans for a qualified beneficiary to have open
enrollment rights. Thus, open enrollment rights must be extended to
qualified beneficiaries in any case in which they are extended to
similarly situated active employees. (Note that the open enrollment
right of employees to enroll when not previously enrolled would not
have to be extended to individuals who previously did not elect to
receive COBRA continuation coverage because an individual ceases to
be a qualified beneficiary if COBRA continuation coverage is not
elected.) The 1987 proposed regulations require that qualified
beneficiaries be given the same right to add new family members that
similarly situated active employees have. Many commenters objected
to this rule, arguing that it requires more than a mere continuation
of coverage.

However, COBRA continuation coverage is more than just a
continuation of the coverage a qualified beneficiary had before the
qualifying event; it includes the same procedural rights to expand
or change coverage that similarly situated active employees have.
Moreover, the policy behind the 1987 proposed regulations is
reflected in the HIPAA amendment to COBRA creating special qualified
beneficiary status for certain newborn and adopted children as well
as in the HIPAA special enrollment rights in section 9801(f) for new
spouses and for newborn and adopted children. Accordingly, the final
regulations provide guidance on the application of the HIPAA special
enrollment rights to qualified beneficiaries and retain the rule in
the 1987 proposed regulations regarding the right of qualified
beneficiaries to add new family members (even though not eligible
for the HIPAA special enrollment rights) to the same extent that
active employees are permitted to add new family members.

Electing COBRA Continuation Coverage The final regulations set forth
rules regarding elections of COBRA continuation coverage by
qualified beneficiaries. In general, a group health plan is required
to offer a qualified beneficiary the opportunity to elect COBRA
continuation coverage at any time during the election period. The
election period begins not later than the date the qualified
beneficiary would lose coverage by reason of a qualifying event and
ends not earlier than 60 days after the later of that date or 60
days after the date on which the qualified beneficiary is provided
notice of her or his right to elect COBRA continuation coverage. For
purposes of determining whether a qualified beneficiary's election
of COBRA continuation coverage is timely, the election is deemed to
be made on the date it is sent to the employer or plan
administrator. The final regulations clarify that a qualified
beneficiary need not herself or himself elect COBRA continuation
coverage; that election can be made on behalf of the qualified
beneficiary by a third party (including a third party that is not a
qualified beneficiary).

Generally, the employer or plan administrator must determine when a
qualifying event has occurred, and a qualified beneficiary is not
required to give notice of the event. However, a The U.S. Department
of Labor has advised the IRS and Treasury that, if a covered
employee or qualified beneficiary has not been adequately informed
of the obligation to provide notice in the case of a qualifying
event that is the divorce or legal separation of the covered
employee or that is a dependent child's ceasing to be covered under
the generally applicable requirements of the plan, the covered
employee's or qualified beneficiary's failure to provide timely
notice to the plan administrator will not affect the plan's
obligation to make continuation coverage available upon receiving
notice of such event.

covered employee or qualified beneficiary is required to notify the
plan administrator of a qualifying event that is a divorce or legal
separation of the covered employee or a dependent child's ceasing to
be a dependent child under the plan terms. The 1987 proposed
regulations prescribe that the notification should be given to the
employer or other plan administrator. The final regulations simply
require that the notice be provided to the plan administrator.

The notice must be provided within 60 days after the date of the
qualifying event or the date on which the qualified beneficiary
would lose coverage because of the qualifying event, whichever is
later. If the notice is not provided, the group health plan is not
required to make COBRA continuation coverage available to the
qualified beneficiary . In the case of the covered 5 employee's
divorce or legal separation, a single notice sent by or on behalf of
the covered employee or any one of the qualified beneficiaries (that
is, the spouse or a dependent child) satisfies the notice
requirement for all those who become qualified beneficiaries as a
result of the divorce or legal separation.

The group health plan must make COBRA continuation coverage
available for the entire election period if the qualified
beneficiary elects coverage prior to the end of the period (except
in the case of a revoked waiver, as discussed below). An employer or
employee organization maintaining a group health plan using an
indemnity or reimbursement arrangement can satisfy this requirement
by continuing the qualified beneficiary's coverage during the
election period or by discontinuing the coverage until the qualified
beneficiary elects COBRA and then retroactively reinstating the
qualified beneficiary's coverage. Under the final regulations, as
under the 1987 proposed regulations, the date of the qualifying
event (and thus, the beginning of the maximum coverage period) is
not delayed merely because a plan provides coverage during the
election period. Claims incurred by the qualified beneficiary during
the election period do not have to be paid until COBRA continuation
coverage is elected and any payment required for coverage is made.

For a group health plan providing health services - including a
health maintenance organization or a walk-in clinic - a qualified
beneficiary who has not elected and paid for COBRA continuation
coverage can be required to choose either to elect and to pay for
coverage or to pay a reasonable and customary charge for plan
services (but only if the qualified beneficiary will be reimbursed
for that charge within 30 days after she or he elects COBRA
continuation coverage and makes any payment for coverage).
Alternatively, the plan can treat the qualified beneficiary's use of
the plan's health services as a constructive election of COBRA
continuation coverage and, if it so notifies the qualified
beneficiary prior to the use of services, can require payment for
COBRA continuation coverage.

The final regulations adopt the position in Communications Workers
of America v.

NYNEX Corp., 898 F.2d 887 (2d Cir. 1989), regarding the responses
that a group health plan must make with respect to the rights of a
qualified beneficiary during that qualified beneficiary's election
period. Specifically, the final regulations require that the plan
make a complete response to any inquiry from a health care provider
regarding the qualified beneficiary's right to coverage under the
plan during the election period. Thus, if the qualified beneficiary
has not yet elected COBRA continuation coverage but remains covered
under the plan during the election period (subject to retroactive
cancellation if no election is made), the plan must so inform the
health care provider. Conversely, if the qualified beneficiary is
not covered during the election period prior to her or his election,
the plan must inform the health care provider that the qualified
beneficiary does not have current coverage but will have retroactive
coverage if COBRA continuation coverage is elected. (The final
regulations also include similar requirements with respect to
inquiries made by health care providers during the 30- and 45-day
grace periods for paying for COBRA continuation coverage.)

A qualified beneficiary who waives COBRA continuation coverage
during the election period can revoke the waiver before the end of
the election period, but the group health plan is not then required
to provide coverage as of any date prior to the revocation. Although
several commenters objected to the rule in the 1987 proposed
regulations allowing the revocation during the election period of
any previous waiver, the final regulations retain this rule. If the
rule permitted irrevocable waivers, plans might induce qualified
beneficiaries to execute waivers hastily before becoming fully
informed of their rights and having the opportunity to carefully
consider whether to elect COBRA. As with the election of COBRA
continuation coverage, a waiver or a revocation of a waiver is
deemed to be made on the date sent. The employer or employee
organization maintaining the group health plan is not permitted to
withhold money, benefits, or anything else to which the qualified
beneficiary is entitled under any law or agreement in order to
induce a qualified beneficiary to make payment for COBRA
continuation coverage or to surrender any rights under COBRA. Any
waiver of COBRA continuation coverage rights obtained through such
means will be invalid. However, the general rules for coverage
during the election period apply in the case of waivers and
revocations of waivers. Thus, in the case of an indemnity
arrangement, the plan can deny coverage for claims until payment for
the coverage has been made (as can also be done with those health
maintenance organizations or walk-in clinics that adopt this method
for complying with the COBRA continuation coverage requirements
during the election period).

A group health plan must offer each qualified beneficiary the
opportunity to make an independent election to receive COBRA
continuation coverage and, during an open enrollment period, to
choose among any options available to similarly situated active
employees. This requirement also applies to any child born to or
placed for adoption with a covered employee during a period of COBRA
continuation coverage. (An election for a minor child may be made by
the child's parent or legal guardian.) If a covered employee or the
spouse of a covered employee elects COBRA continuation coverage and
the election does not specify whether the election is for self-only
coverage, the election is deemed to include an election of COBRA
continuation coverage on behalf of other qualified beneficiaries
with respect to that qualifying event.

Duration of COBRA Continuation Coverage

The 1987 proposed regulations incorporate the statutory bases for
terminating COBRA continuation coverage except the rule (added by
OBRA 1989 and amended by HIPAA) 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.

Section 4980B(f)(2)(B)(iv) provides that a qualified beneficiary's
right to COBRA continuation coverage may be terminated when the
qualified beneficiary "first becomes," after the date of the COBRA
election, covered under another group health plan (subject to
certain additional conditions) or entitled to Medicare benefits. The
final regulations add two new questions-and-answers that provide
guidance on this provision.

The 1987 proposed regulations substitute "is" for the statutory
phrase "first becomes." The effect of this substitution was to
permit an employer to cut off a qualified beneficiary's right to
COBRA continuation coverage based upon other group health plan
coverage that the qualified beneficiary first became covered under
before she or he elected COBRA coverage. In the case of entitlement
to Medicare benefits, the 1987 proposed regulations not only shift
the statutory "becomes" to "is," they also exclude from the
definition of qualified beneficiary anyone who is entitled to
Medicare benefits on the day before the qualifying event. After
careful consideration, the IRS and Treasury concluded that the
better interpretation of the statute is that other group health plan
coverage that a qualified beneficiary has before the COBRA election
is not a basis for cutting off the qualified beneficiary's right to
COBRA continuation coverage. (The same rule applies for entitlement
to Medicare benefits.) Based upon the recommendation of the IRS, the
Solicitor General filed an amicus brief before the Supreme Court
urging this position, which was unanimously adopted by the Supreme
Court in Geissal v. Moore Medical Corp., 118 S. Ct. 1869 (1998). The
final regulations adopt the position urged by the IRS and Treasury
and adopted by the Court in Geissal. They provide that an employer
may cut off the right to COBRA continuation coverage based upon
other group health plan coverage or entitlement to Medicare benefits
only if the qualified beneficiary first becomes covered under the
other group health plan coverage or entitled to the Medicare
benefits after the date of the COBRA election.

The statutory rule allowing a plan to discontinue COBRA continuation
coverage on account of coverage under another group health plan was
amended by OBRA 1989 to prohibit the discontinuance if the qualified
beneficiary's other coverage was subject to a preexisting condition
exclusion. This amendment was further modified by HIPAA to allow
discontinuance of COBRA continuation coverage if the preexisting
condition exclusion does not apply or is satisfied by reason of the
limitations on preexisting condition exclusions in section 9801. The
final regulations reflect this amendment and clarify that coverage
under another group health plan includes coverage under a
governmental plan.

Many commenters asked whether mere eligibility for Medicare
justifies a discontinuance of COBRA continuation coverage. In
addition, many inquiries have been received that ask whether the
qualified beneficiary must be entitled to both Part A and B of
Medicare. The final regulations clarify that entitlement to Medicare
benefits means being enrolled in Medicare and does not mean merely
being eligible to enroll in Medicare. The final regulations also
clarify that being entitled to either Part A or B is sufficient for
the plan to discontinue COBRA continuation coverage (assuming that
the entitlement to Medicare benefits first arises after COBRA
continuation coverage has been elected).

The 1987 proposed regulations allow a plan to discontinue providing
COBRA continuation coverage to a qualified beneficiary for cause on
the same basis that the plan could terminate for cause the coverage
of a similarly situated active employee (except for payments that
would be untimely if made by a nonCOBRA beneficiary but that are
made within the grace periods provided by COBRA). The final
regulations provide that, for example, if a plan terminates the
coverage of similarly situated active employees for the submission
of a fraudulent claim, then the COBRA continuation coverage of a
qualified beneficiary can also be terminated for the submission of a
fraudulent claim.

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 1998 proposed regulations set forth the requirements for a
disability extension to apply to a qualified beneficiary. Those
requirements have been incorporated into the final regulations, with
one clarification. One of the conditions for a disability extension
to apply is that the qualified beneficiary be disabled during the
first 60 days of COBRA continuation coverage. In the case of a
qualified beneficiary who is born to or placed for adoption with a
covered employee during a period of COBRA continuation coverage, the
final regulations clarify that the 60-day period is measured from
the date of the child's birth or placement for adoption.

The 1987 proposed regulations set forth standards for expanding the
maximum coverage period in the case of multiple qualifying events.
Since 1987, the statutory rules for multiple qualifying events have
been affected by the addition of the disability extension and the
optional extension of required periods. The final regulations
reflect the statutory changes.

In addition, the final regulations clarify that a termination of
employment following a qualifying event that is a reduction of hours
of employment does not expand the maximum coverage period. Accord,
Burgess v. Adams Tool & Engineering, Inc., 908 F. Supp. 473 (W.D.

Mich. 1995); contra, Gibbs v. Anchorage School District, 1995 U.S.
LEXIS 6290 (D. Ark.

1995). The underlying pattern in the statute is generally to require
18 months (or 29 months, in the case of a disability extension) of
coverage for qualifying events that are the termination or reduction
of hours of a covered employee's employment and 36 months for other
qualifying events. The statutory provision for expansion of the 18-
month period to 36 months upon the occurrence of a second qualifying
event generally follows this pattern by allowing a qualified
beneficiary who would have been entitled to 36 months of coverage if
the second qualifying event had occurred first to get a total of 36
months of COBRA continuation coverage. The statute lists six
categories of qualifying events, and termination of employment and
reduction of hours of employment are in the same category (just as
divorce and legal separation are in the same category of qualifying
event). Treating a reduction of hours of employment and a
termination of employment as variations of a single qualifying event
rather than as two distinct qualifying events is consistent with the
overall design of the statute.

The 1987 proposed regulations address situations in which, following
a qualifying event, an employer provides alternative coverage,
rather than COBRA continuation coverage, to a former employee and
her or his spouse and dependent children. The 1987 proposed
regulations provide that if the alternative coverage does not
satisfy the requirements for COBRA continuation coverage, each
qualified beneficiary must be given the opportunity to elect COBRA
continuation coverage instead of the alternative coverage. If,
however, the alternative coverage would satisfy the requirements for
COBRA continuation coverage, the 1987 proposed regulations provide
that, at the time of the original qualifying event, the employee,
spouse, and dependent children need not be provided with the
opportunity to elect COBRA continuation coverage. The final
regulations generally retain these rules but also clarify that if
the employer increases the employee share of premiums upon the
occurrence of a qualifying event, the qualified beneficiaries must
be offered the opportunity to elect COBRA continuation coverage.

The 1987 proposed regulations further provide that, if the
alternative coverage does not satisfy the requirements for COBRA
continuation coverage and if, after the original qualifying event, a
qualifying event occurs that would cause a spouse or dependent child
to lose the alternative coverage, the spouse or child must be
offered COBRA continuation coverage.

However, if the alternative coverage satisfies the requirements for
COBRA continuation coverage, and if another qualifying event that
causes the spouse or dependent child to lose the alternative
coverage occurs more than 18 months after the original qualifying
event, the 1987 proposed regulations provide that the spouse or
dependent child need not be offered COBRA continuation coverage. The
final regulations modify the 1987 proposed regulations and provide
that if an event such as the death of or divorce from the covered
employee would end the right of a spouse or dependent child to
receive the alternative coverage (whether during or after the first
18 months of COBRA continuation coverage), then that event is a
qualifying event, regardless of whether the alternative coverage
would satisfy the requirements for COBRA continuation coverage.

The Uniformed Services Employment and Reemployment Rights Act of
1994 (USERRA) gives certain members of the military reserves the
right to up to 18 months of continuation coverage when they are
called to active duty. Many people have asked if the USERRA and
COBRA periods of continuation coverage run concurrently or
consecutively. The final regulations clarify that USERRA coverage is
alternative coverage. Thus, the periods run concurrently.

The 1987 proposed regulations include the statutory rule requiring
that a conversion option otherwise made available under the plan be
made available within 180 days before the end of the maximum
coverage period. The final regulations adopt this rule without
change.

Paying for COBRA Continuation Coverage The 1987 proposed regulations
identify the qualified beneficiary as the person that can be
required to pay the applicable premium. Many plans and employers
have asked whether they must accept payment on behalf of a qualified
beneficiary from third parties, such as a hospital or a new
employer. Nothing in the statute requires the qualified beneficiary
to pay the amount required by the plan; the statute merely permits
the plan to require that payment be made. In order to make clear
that any person may make the required payment on behalf of a
qualified beneficiary, the final regulations modify the rule in the
1987 proposed regulations to refer to the payment requirement
without identifying the person who makes the payment.

The 1998 proposed regulations address the amount that a plan can
require to be paid for COBRA continuation coverage during the
disability extension. This amount is 150 percent of the applicable
premium instead of the limit of 102 percent of the applicable
premium that applies for coverage outside the disability extension.
The 1998 proposed regulations specifically reserve the issue of the
amount a plan could require to be paid in a case where only
nondisabled family members of the disabled individual receive COBRA
continuation coverage during the disability extension. The preamble
to the 1998 proposed regulations solicited comments on this issue.

Commenters suggested that the 150 percent rate could be required if
the disabled individual was part of the coverage group but that the
limit could be the 102 percent rate if only nondisabled qualified
beneficiaries were in the coverage group. The final regulations
adopt this suggestion.

The 1987 proposed regulations provide that the amount required to be
paid for a qualified beneficiary's COBRA continuation coverage must
be fixed in advance for each 12-month determination period. Many
commenters suggested exceptions that could be made to this general
rule. Section 4980B(f)(4)(C) explicitly requires that the
determination of the applicable premium be made for a period of 12
months and that the determination be made before the beginning.

Therefore, the final regulations do not permit an increase in the
applicable premium during the 12- month determination period.
However, the final regulations do revise the general rule from the
1987 proposed regulations to recognize the difference between the
applicable premium (which may not be increased during a 12-month
determination period and which is the basis for calculating the
maximum amount that the plan can require to be paid for COBRA
continuation coverage) and the maximum amount that the plan can
require to be paid for COBRA continuation coverage. Thus, the final
regulations permit a plan to increase the amount it requires to be
paid for COBRA continuation coverage during a determination period
to take into account the permitted increases during the disability
extension, to explicitly permit a plan that is requiring payment of
less than the maximum permissible amount to increase the amount
required to be paid during the 12-month determination period, and to
permit an increase if a qualified beneficiary changes to more
expensive coverage (but also to require a reduction if the qualified
beneficiary changes to less expensive coverage).

The 1987 proposed regulations set forth the statutory requirement
that qualified beneficiaries be allowed to pay for COBRA coverage in
monthly installments. The 1987 proposed regulations add that plans
may allow payment to be made at other intervals, and specifically
mention quarterly or semiannual payment as examples. The final
regulations adopt the rule in the 1987 proposed regulations, but the
final regulations add weekly payment as an example to make clear
that shorter than monthly installments are also permitted.

The 1987 proposed regulations provide that the first payment for
COBRA continuation coverage does not apply prospectively only. In
order to make clear that a plan is not precluded from allowing a
qualified beneficiary to apply the first payment prospectively only,
the final regulations provide that qualified beneficiaries need not
be given the option of having the first payment for COBRA
continuation coverage apply prospectively only.

The 1987 proposed regulations address the issue of timely payment
for COBRA continuation coverage, including an interpretation of the
statutory grace periods of 45 days for the initial payment and 30
days for all other payments. Commenters pointed out that the
application of the statutory grace period rules could produce an
anomalous result in some situations, such as allowing a plan to
require payment for the third month of COBRA continuation coverage
earlier than the plan could require payment for the first two
months. OBRA 1989 amended the 45-day grace period rule to prevent
this, and the final regulations conform to the OBRA 1989 change.

The final regulations also clarify that payment is considered made
on the date it is sent.

The final regulations also add a requirement (similar to the one
described above for the election period) relating to the response
that a plan must give when a health care provider, such as a
physician, a hospital, or a pharmacy, contacts the plan to confirm
coverage of a qualified beneficiary with respect to whom the
required payment has not been made for the current period (but for
whom any applicable grace period has not expired). In such a case,
the plan is required to inform the health care provider of all of
the details of the qualified beneficiary's right to coverage during
the applicable grace periods.

Many individuals have inquired about a plan's right to discontinue
their COBRA continuation coverage because the amount of the payment
made was short by an amount that is not significant. Sometimes the
error has been clearly one of transposed digits on a check tendered
for payment; in other instances, payment has been short by such a
small amount that it would be unreasonable to attribute the
shortfall to anything other than mistake. The final regulations
establish a mechanism for the treatment of payments that are short
by an insignificant amount.

Either the plan must treat the payment as satisfying the plan's
payment requirement or it must notify the qualified beneficiary of
the amount of the deficiency and grant the qualified beneficiary a
reasonable period of time for the deficiency to be paid. The final
regulations provide that, as a safe harbor, a period of 30 days is
deemed to be a reasonable period for this purpose. 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 (5 Cir. 1994), which held that the multiemployer plan continued
to th 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 Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that the collections of information in these regulations
will not have a significant economic impact on a substantial number
of small entities. This certification is based upon the fact that
employers with fewer than 20 employees are not subject to the
requirements set forth in the final regulations and, thus, the very
smallest employers are not affected by the collection of information
requirements. Moreover, even for small entities with 20 or more
employees who maintain group health plans and who, thus, are subject
to the requirements of COBRA, the collections of information will
not impose a substantial economic impact. The only collections of
information imposed on small entities by the regulations are (1) to
notify qualified beneficiaries of their right to elect COBRA
continuation coverage upon the occurrence of a qualifying event and
(2) to notify certain qualified beneficiaries that make
insignificant payment errors of those errors. With respect to this
first notice requirement, it is estimated that, on average, in a
given year, qualifying events will occur with respect to
approximately 10 percent of all covered employees.

Thus, an employer with 100 employees would be required to send 10
notices to qualified beneficiaries each year. The average cost of
sending such a notice is estimated to be $.50. Thus, the total
estimated cost for 10 notices is $5.00, which is the estimated
annual average burden on an employer with 100 employees. With
respect to the second notice requirement, it is estimated that, on
average, at any time, the number of qualified beneficiaries is
approximately equal to two percent of an employer's workforce. Of
that number, approximately 1 in 10 will make an insignificant error
in payment each year that requires the employer to send such a
notice. For example, an employer with 100 employees will have an
average of two qualified beneficiaries at any time. Thus, the
employer will receive an insignificant underpayment about once every
five years. Even if the employer chose to send out a notice each
time such an insignificant underpayment occurred, this would amount
to only one notice every five years. The average cost of sending
such a notice is estimated to be $5.00, resulting in an average
annual burden of $1.00 for an employer with 100 employees. Thus, the
total annual cost of these two notice requirements for an employer
with 100 employees is $6.00, which is not a significant economic
impact. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It
has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations. Pursuant to section 7805(f) of the Internal Revenue
Code, the 1998 notice of proposed rulemaking preceding these final
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business. Drafting Information The principal author of these
regulations is Russ Weinheimer, Office of the Associate Chief
Counsel (Employee Benefits and Exempt Organizations), IRS. However,
other personnel from the IRS and Treasury Department participated in
their development.

List of Subjects

26 CFR Part 54

Excise taxes, Health care, Health insurance, Pensions, Reporting and
recordkeeping requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
54 and 602 are amended as follows:

PART 54 - PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 is amended by adding
the following entries in numerical order to read as follows:

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

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

Section 54.4980B-2 also issued under 26 U.S.C. 4980B.

Section 54.4980B-3 also issued under 26 U.S.C. 4980B.

Section 54.4980B-4 also issued under 26 U.S.C. 4980B.

Section 54.4980B-5 also issued under 26 U.S.C. 4980B.

Section 54.4980B-6 also issued under 26 U.S.C. 4980B. Section
54.4980B-7 also issued under 26 U.S.C. 4980B.

Section 54.4980B-8 also issued under 26 U.S.C. 4980B. * * * Par. 2.
Sections 54.4980B-0, 54.4980B-1, 54.4980B-2, 54.4980B-3, 54.4980B-4,
54.4980B-5, 54.4980B-6, 54.4980B-7, and 54.4980B-8 are added to read
as follows:

�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 ��54.4980B-1 through
54.4980B-8.

LIST OF SECTIONS

�54.4980B-1 COBRA in general.

�54.4980B-2 Plans that must comply.

�54.4980B-3 Qualified beneficiaries.

�54.4980B-4 Qualifying events.

�54.4980B-5 COBRA continuation coverage.

�54.4980B-6 Electing COBRA continuation coverage.

�54.4980B-7 Duration of COBRA continuation coverage.

�54.4980B-8 Paying for COBRA continuation coverage.

LIST OF QUESTIONS

�54.4980B-1 COBRA in general.

Q-1: What are the health care continuation coverage requirements
contained in section 4980B of the Internal Revenue Code and in
ERISA?

Q-2: What is the effective date of ��54.4980B-1 through 54.4980B-8?
� 54.4980B-2 Plans that must comply.

Q-1: For purposes of section 4980B, what is a group health plan?

Q-2: For purposes of section 4980B, what is the employer?

Q-3: [Reserved]

Q-4: What group health plans are subject to COBRA?

Q-5: What is a small-employer plan?

Q-6: [Reserved]

Q-7: What is the plan year?

Q-8: How do the COBRA continuation coverage requirements apply to
cafeteria plans and other flexible benefit arrangements?

Q-9: What is the effect of a group health plan's failure to comply
with the requirements of section 4980B(f)?

Q-10: Who is liable for the excise tax if a group health plan fails
to comply with the requirements of section 4980B(f)?

�54.4980B-3 Qualified beneficiaries.

Q-1: Who is a qualified beneficiary?

Q-2: Who is an employee and who is a covered employee?

Q-3: Who are the similarly situated nonCOBRA beneficiaries?

�54.4980B-4 Qualifying events.

Q-1: What is a qualifying event?

Q-2: Are the facts surrounding a termination of employment (such as
whether it was voluntary or involuntary) relevant in determining
whether the termination of employment is a qualifying event?

�54.4980B-5 COBRA continuation coverage.

Q-1: What is COBRA continuation coverage?

Q-2: What deductibles apply if COBRA continuation coverage is
elected?

Q-3: How do a plan's limits apply to COBRA continuation coverage?

Q-4: Can a qualified beneficiary who elects COBRA continuation
coverage ever change from the coverage received by that individual
immediately before the qualifying event?

Q-5: Aside from open enrollment periods, can a qualified beneficiary
who has elected COBRA continuation coverage choose to cover
individuals (such as newborn children, adopted children, or new
spouses) who join the qualified beneficiary's family on or after the
date of the qualifying event?

�54.4980B-6 Electing COBRA continuation coverage.

Q-1: What is the election period and how long must it last?

Q-2: Is a covered employee or qualified beneficiary responsible for
informing the plan administrator of the occurrence of a qualifying
event?

Q-3: During the election period and before the qualified beneficiary
has made an election, must coverage be provided?

Q-4: Is a waiver before the end of the election period effective to
end a qualified beneficiary's election rights?

Q-5: Can an employer or employee organization withhold money or
other benefits owed to a qualified beneficiary until the qualified
beneficiary either waives COBRA continuation coverage, elects and
pays for such coverage, or allows the election period to expire?

Q-6: Can each qualified beneficiary make an independent election
under COBRA? �54.4980B-7 Duration of COBRA continuation coverage.

Q-1: How long must COBRA continuation coverage be made available to
a qualified beneficiary?

Q-2: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to coverage under another group health
plan?

Q-3: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to the qualified beneficiary's entitlement
to Medicare benefits?

Q-4: [Reserved]

Q-5: How does a qualified beneficiary become entitled to a
disability extension?

Q-6: Under what circumstances can the maximum coverage period be
expanded?

Q-7: If health coverage is provided to a qualified beneficiary after
a qualifying event without regard to COBRA continuation coverage
(for example, as a result of state or local law, the Uniformed
Services Employment and Reemployment Rights Act of 1994 (38 U.S.C.

4315), industry practice, a collective bargaining agreement,
severance agreement, or plan procedure), will such alternative
coverage extend the maximum coverage period?

Q-8: Must a qualified beneficiary be given the right to enroll in a
conversion health plan at the end of the maximum coverage period for
COBRA continuation coverage? �54.4980B-8 Paying for COBRA
continuation coverage.

Q-1: Can a group health plan require payment for COBRA continuation
coverage?

Q-2: When is the applicable premium determined and when can a group
health plan increase the amount it requires to be paid for COBRA
continuation coverage?

Q-3: Must a plan allow payment for COBRA continuation coverage to be
made in monthly installments?

Q-4: Is a plan required to allow a qualified beneficiary to choose
to have the first payment for COBRA continuation coverage applied
prospectively only?

Q-5: What is timely payment for COBRA continuation coverage?
�54.4980B-1 COBRA in general.

The COBRA continuation coverage requirements are described in
general in the following questions-and-answers:

Q-1: What are the health care continuation coverage requirements
contained in section 4980B of the Internal Revenue Code and in
ERISA?

A-1: (a) Section 4980B provides generally that a group health plan
must offer each qualified beneficiary who would otherwise lose
coverage under the plan as a result of a qualifying event an
opportunity to elect, within the election period, continuation
coverage under the plan. The continuation coverage requirements were
added to section 162 by the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), Public Law 99-272 (100 Stat.
222), and moved to section 4980B by the Technical and Miscellaneous
Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342).
Continuation coverage required under section 4980B is referred to in
��54.4980B-1 through 54.4980B-8 as COBRA continuation coverage.

(b) COBRA also added parallel continuation coverage requirements to
Part 6 of Subtitle B of Title I of the Employee Retirement Income
Security Act of 1974 (ERISA) (29 U.S.C. 1161- 1168), which is
administered by the U.S. Department of Labor. If a plan does not
comply with the COBRA continuation coverage requirements, the
Internal Revenue Code imposes an excise tax on the employer
maintaining the plan (or on the plan itself), whereas ERISA gives
certain parties - including qualified beneficiaries who are
participants or beneficiaries within the meaning of Title I of
ERISA, as well as the Department of Labor - the right to file a
lawsuit to redress the noncompliance. The rules in ��54.4980B-1
through 54.4980B-8 apply for purposes of section 4980B and generally
also for purposes of the COBRA continuation coverage requirements in
Title I of ERISA. However, certain provisions of the COBRA
continuation coverage requirements (such as the definitions of group
health plan, employee, and employer) are not identical in the
Internal Revenue Code and Title I of ERISA. In those cases in which
the statutory language is not identical, the rules in ��54.4980B-1
though 54.4980B-8 nonetheless apply to the COBRA continuation
coverage requirements of Title I of ERISA, except to the extent
those rules are inconsistent with the statutory language of Title I
of ERISA.

(c) A group health plan that is subject to section 4980B (or the
parallel provisions under ERISA) is referred to as being subject to
COBRA. (See Q&A-4 of �54.4980B-2). A qualified beneficiary can be
required to pay for COBRA continuation coverage. The term qualified
beneficiary is defined in Q&A-1 of �54.4980B-3. The term qualifying
event is defined in Q&A-1 of �54.4980B-4. COBRA continuation
coverage is described in �54.4980B-5. The election procedures are
described in �54.4980B-6. Duration of COBRA continuation coverage is
addressed in �54.4980B-7, and payment for COBRA continuation
coverage is addressed in �54.4980B-8. Unless the context indicates
otherwise, any reference in ��54.4980B-1 through 54.4980B-8 to COBRA
refers to section 4980B (as amended) and to the parallel provisions
of ERISA.

Q-2: What is the effective date of ��54.4980B-1 through 54.4980B-8?

A-2: Sections 54.4980B-1 through 54.4980B-8 apply with respect to
qualifying events occurring in plan years beginning on or after
January 1, 2000. For purposes of section 4980B, with respect to
qualifying events that occur in plan years beginning before that
date, and with respect to qualifying events that occur in plan years
beginning on or after that date for topics relating to the COBRA
continuation coverage requirements of section 4980B that are not
addressed in ��54.4980B-1 through 54.4980B-8 (such as methods for
calculating the applicable premium), plans and employers must
operate in good faith compliance with a reasonable interpretation of
the statutory requirements in section 4980B.

�54.4980B-2 Plans that must comply.

The following questions-and-answers apply in determining which plans
must comply with the COBRA continuation coverage requirements:

Q-1: For purposes of section 4980B, what is a group health plan?

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.
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.

(b) For purposes of ��54.4980B-1 through 54.4980B-8, health care has
the same meaning as medical care under section 213(d). Thus, health
care generally includes the diagnosis, cure, mitigation, treatment,
or prevention of disease, and any other undertaking for the purpose
of affecting any structure or function of the body. Health care also
includes transportation primarily for and essential to health care
as described in the preceding sentence. However, health care does
not include anything that is merely beneficial to the general health
of an individual, such as a vacation. Thus, if an employer or
employee organization maintains a program that furthers general good
health, but the program does not relate to the relief or alleviation
of health or medical problems and is generally accessible to and
used by employees without regard to their physical condition or
state of health, that program is not considered a program that
provides health care and so is not a group health plan. For example,
if an employer maintains a spa, swimming pool, gymnasium, or other
exercise/fitness program or facility that is normally accessible to
and used by employees for reasons other than relief of health or
medical problems, such a facility does not constitute a program that
provides health care and thus is not a group health plan. In
contrast, if an employer maintains a drug or alcohol treatment
program or a health clinic, or any other facility or program that is
intended to relieve or alleviate a physical condition or health
problem, the facility or program is considered to be the provision
of health care and so is considered a group health plan.

(c) Whether a benefit provided to employees constitutes health care
is not affected by whether the benefit is excludable from income
under section 132 (relating to certain fringe benefits). For
example, if a department store provides its employees discounted
prices on all merchandise, including health care items such as drugs
or eyeglasses, the mere fact that the discounted prices also apply
to health care items will not cause the program to be a plan
providing health care, so long as the discount program would
normally be accessible to and used by employees without regard to
health needs or physical condition. If, however, the employer
maintaining the discount program is a health clinic, so that the
program is used exclusively by employees with health or medical
needs, the program is considered to be a plan providing health care
and so is considered to be a group health plan.

(d) The provision of health care at a facility that is located on
the premises of an employer or employee organization does not
constitute a group health plan if -

(1) The health care consists primarily of first aid that is provided
during the employer's working hours for treatment of a health
condition, illness, or injury that occurs during those working
hours;

(2) The health care is available only to current employees; and

(3) Employees are not charged for the use of the facility.

(e) A plan does not constitute a group health plan subject to COBRA
if substantially all of the coverage provided under the plan is for
qualified long-term care services (as defined in section 7702B(c)).
For this purpose, a plan is permitted to use any reasonable method
in determining whether substantially all of the coverage provided
under the plan is for qualified long-term care services.

(f) Under section 106(b)(5), amounts contributed by an employer to a
medical savings account (as defined in section 220(d)) are not
considered part of a group health plan subject to COBRA. Thus, a
plan is not required to make COBRA continuation coverage available
with respect to amounts contributed by an employer to a medical
savings account. A high deductible health plan does not fail to be a
group health plan subject to COBRA merely because it covers a
medical savings account holder.

Q-2: For purposes of section 4980B, what is the employer?

A-2: For purposes of section 4980B, employer refers to -

(a) A person for whom services are performed;

(b) 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) of this Q&A-2;
and

(c) Any successor of a person described in paragraph (a) or (b) of
this Q&A-2.

Q-3: [Reserved]

A-3: [Reserved]

Q-4: What group health plans are subject to COBRA?

A-4: (a) All group health plans are subject to COBRA except group
health plans described in paragraph (b) of this Q&A-4. Group health
plans described in paragraph (b) of this Q&A-4 are referred to in
��54.4980B-1 through 54.4980B-8 as excepted from COBRA.

(b) The following group health plans are excepted from COBRA -

(1) Small-employer plans (see Q&A-5 of this section);

(2) Church plans (within the meaning of section 414(e)); and

(3) Governmental plans (within the meaning of section 414(d)).

(c) The COBRA continuation coverage requirements generally do not
apply to group health plans that are excepted from COBRA. However, a
small-employer plan otherwise excepted from COBRA is nonetheless
subject to COBRA with respect to qualified beneficiaries who
experience a qualifying event during a period when the plan is not a
small-employer plan (see paragraph (g) of Q&A-5 of this section).

(d) Although governmental plans are not subject to the COBRA
continuation coverage requirements, group health plans maintained by
state or local governments are generally subject to parallel
continuation coverage requirements that were added by section 10003
of COBRA to the Public Health Service Act (42 U.S.C. 300bb-1 through
300bb-8), which is administered by the U.S. Department of Health and
Human Services. Federal employees and their family members covered
under the Federal Employees Health Benefit Program are covered by
generally similar, but not parallel, temporary continuation of
coverage provisions enacted by the Federal Employees Health Benefits
Amendments Act of 1988. See 5 U.S.C. 8905a.

Q-5: What is a small-employer plan?

A-5: (a) Except in the case of a multiemployer plan, a small-
employer plan is a group health plan maintained by an employer
(within the meaning of Q&A-2 of this section) that normally employed
fewer than 20 employees (within the meaning of paragraph (c) of this
Q&A-5) during the preceding calendar year. In the case of a
multiemployer plan, a small-employer plan is a group health plan
under which each of the employers contributing to the plan for a
calendar year normally employed fewer than 20 employees during the
preceding calendar year. The rules of this paragraph (a) are
illustrated in the following example:

Example. (i) Corporation S employs 12 employees, all of whom work
and reside in the United States. S maintains a group health plan for
its employees and their families. S is a wholly-owned subsidiary of
P. In the previous calendar year, the controlled group of
corporations including P and S employed more than 19 employees,
although the only employees in the United States of the controlled
group that includes P and S are the 12 employees of S.

(ii) Under �1.414(b)-1 of this chapter, foreign corporations are not
excluded from membership in a controlled group of corporations.
Consequently, the group health plan maintained by S is not a small-
employer plan during the current calendar year because the
controlled group including S normally employed at least 20 employees
in the preceding calendar year.

(b) An employer is considered to have normally employed fewer than
20 employees during a particular calendar year if, and only if, it
had fewer than 20 employees on at least 50 percent of its typical
business days during that year.

(c) All full-time and part-time common law employees of an employer
are taken into account in determining whether an employer had fewer
than 20 employees; however, an individual who is not a common law
employee of the employer is not taken into account. Thus, the
following individuals are not counted as employees for purposes of
this Q&A-5 even though they are referred to as employees for all
other purposes of ��54.4980B-1 through 54.4980B-8 -

(1) Self-employed individuals (within the meaning of section 401(c)
(1));

(2) Independent contractors (and their employees and independent
contractors); and

(3) Directors (in the case of a corporation).

(d) [Reserved]

(e) [Reserved]

(f) [Reserved]

(g) A small-employer plan is generally excepted from COBRA. If,
however, a plan that has been subject to COBRA (that is, was not a
small-employer plan) becomes a small-employer plan, the plan remains
subject to COBRA for qualifying events that occurred during the
period when the plan was subject to COBRA. The rules of this
paragraph (g) are illustrated by the following examples:

Example 1. An employer maintains a group health plan. The employer
employed 20 employees on more than 50 percent of its working days
during 2001, and consequently the plan is not excepted from COBRA
during 2002. Employee E resigns and does not work for the employer
after January 31, 2002. Under the terms of the plan, E is no longer
eligible for coverage upon the effective date of the resignation,
that is, February 1, 2002. The employer does not hire a replacement
for E. E timely elects and pays for COBRA continuation coverage. The
employer employs 19 employees for the remainder of 2002, and
consequently the plan is not subject to COBRA in 2003. The plan must
nevertheless continue to make COBRA continuation coverage available
to E during 2003 until the obligation to make COBRA continuation
coverage available ceases under the rules of �54.4980B-7. The
obligation could continue until August 1, 2003, the date that is 18
months after the date of E's qualifying event, or longer if E is
eligible for a disability extension.

Example 2. The facts are the same as in Example 1. The employer
continues to employ 19 employees throughout 2003 and 2004 and
consequently the plan continues to be excepted from COBRA during
2004 and 2005. Spouse S is covered under the plan because S is
married to one of the employer's employees. On April 1, 2002, S is
divorced from that employee and ceases to be eligible for coverage
under the plan. The plan is subject to COBRA during 2002 because X
normally employed 20 employees during 2001. S timely notifies the
plan administrator of the divorce and timely elects and pays for
COBRA continuation coverage. Even though the plan is generally
excepted from COBRA during 2003, 2004, and 2005, it must
nevertheless continue to make COBRA continuation coverage available
to S during those years until the obligation to make COBRA
continuation coverage available ceases under the rules of
�54.4980B-7. The obligation could continue until April 1, 2005, the
date that is 36 months after the date of S 's qualifying event.

Example 3. The facts are the same as in Example 2. C is a dependent
child of one of the employer's employees and is covered under the
plan. A dependent child is no longer eligible for coverage under the
plan upon the attainment of age 23. C attains age 23 on November 16,
2005.

The plan is excepted from COBRA with respect to C during 2005
because the employer normally employed fewer than 20 employees
during 2004. Consequently, the plan is not obligated to make COBRA
continuation coverage available to C (and would not be obligated to
make COBRA continuation coverage available to C even if the plan
later became subject to COBRA again).

Q-6: [Reserved]

A-6: [Reserved]

Q-7: What is the plan year?

A-7: (a) The plan year is the year that is designated as the plan
year in the plan documents.

(b) If the plan documents do not designate a plan year (or if there
are no plan documents), then the plan year is determined in
accordance with this paragraph (b).

(1) The plan year is the deductible/limit year used under the plan.

(2) If the plan does not impose deductibles or limits on an annual
basis, then the plan year is the policy year.

(3) If the plan does not impose deductibles or limits on an annual
basis, and either the plan is not insured or the insurance policy is
not renewed on an annual basis, then the plan year is the employer's
taxable year.

(4) In any other case, the plan year is the calendar year.

Q-8: How do the COBRA continuation coverage requirements apply to
cafeteria plans and other flexible benefit arrangements?

A-8: 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. The rules
of this Q&A-8 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).

Q-9: What is the effect of a group health plan's failure to comply
with the requirements of section 4980B(f)?

A-9: Under section 4980B(a), if a group health plan subject to COBRA
fails to comply with section 4980B(f), an excise tax is imposed.
Moreover, non-tax remedies may be available if the plan fails to
comply with the parallel requirements in ERISA, which are
administered by the Department of Labor.

Q-10: Who is liable for the excise tax if a group health plan fails
to comply with the requirements of section 4980B(f)?

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 the excise tax is imposed on the plan.

(b) In certain circumstances, the excise tax is also imposed on a
person involved with the provision of benefits under the plan (other
than in the capacity of an employee), such as an insurer providing
benefits under the plan or a third party administrator administering
claims under the plan. In general, such a person will be liable for
the excise tax if the person assumes, under a legally enforceable
written agreement, the responsibility for performing the act to
which the failure to comply with the COBRA continuation coverage
requirements relates. Such a person will be liable for the excise
tax notwithstanding the absence of a written agreement assuming
responsibility for complying with COBRA if the person provides
coverage under the plan to a similarly situated nonCOBRA beneficiary
(see Q&A-3 of �54.4980B-3 for a definition of similarly situated
nonCOBRA beneficiaries) and the employer or plan administrator
submits a written request to the person to provide to a qualified
beneficiary the same coverage that the person provides to the
similarly situated nonCOBRA beneficiary. If the person providing
coverage under the plan to a similarly situated nonCOBRA beneficiary
is the plan administrator and the qualifying event is a divorce or
legal separation or a dependent child's ceasing to be covered under
the generally applicable requirements of the plan, the plan
administrator will also be liable for the excise tax if the
qualified beneficiary submits a written request for coverage.

�54.4980B-3 Qualified beneficiaries.

The determination of who is a qualified beneficiary, an employee, or
a covered employee, and of who are the similarly situated nonCOBRA
beneficiaries is addressed in the following questions-and-answers:

Q-1: Who is a qualified beneficiary?

A-1: (a)(1) Except as set forth in paragraphs (c) through (f) of
this Q&A-1, a qualified beneficiary is -

(i) Any individual who, on the day before a qualifying event, is
covered under a group health plan by virtue of being on that day
either a covered employee, the spouse of a covered employee, or a
dependent child of the covered employee; or

(ii) Any child who is born to or placed for adoption with a covered
employee during a period of COBRA continuation coverage.

(2) In the case of a qualifying event that is the bankruptcy of the
employer, a covered employee who had retired on or before the date
of substantial elimination of group health plan coverage is also a
qualified beneficiary, as is any spouse, surviving spouse, or
dependent child of such a covered employee if, on the day before the
bankruptcy qualifying event, the spouse, surviving spouse, or
dependent child is a beneficiary under the plan.

(3) In general, an individual (other than a child who is born to or
placed for adoption with a covered employee during a period of COBRA
continuation coverage) who is not covered under a plan on the day
before the qualifying event cannot be a qualified beneficiary with
respect to that qualifying event, and the reason for the
individual's lack of actual coverage (such as the individual's
having declined participation in the plan or failed to satisfy the
plan's conditions for participation) is not relevant for this
purpose. However, if the individual is denied or not offered
coverage under a plan under circumstances in which the denial or
failure to offer constitutes a violation of applicable law (such as
the Americans with Disabilities Act, 42 U.S.C. 12101-12213, the
special enrollment rules of section 9801, or the requirements of
section 9802 prohibiting discrimination in eligibility to enroll in
a group health plan based on health status), then, for purposes of
��54.4980B-1 through 54.4980B-8, the individual will be considered
to have had the coverage that was wrongfully denied or not offered.

(4) Paragraph (b) of this Q&A-1 describes how certain family members
are not qualified beneficiaries even if they become covered under
the plan; paragraphs (c), (d), and (e) of this Q&A-1 place limits on
the general rules of this paragraph (a) concerning who is a
qualified beneficiary; paragraph (f) of this Q&A-1 provides when an
individual who has been a qualified beneficiary ceases to be a
qualified beneficiary; paragraph (g) of this Q&A-1 defines placed
for adoption; and paragraph (h) of this Q&A-1 contains examples.

(b) In contrast to a child who is born to or placed for adoption
with a covered employee during a period of COBRA continuation
coverage, an individual who marries any qualified beneficiary on or
after the date of the qualifying event and a newborn or adopted
child (other than one born to or placed for adoption with a covered
employee) are not qualified beneficiaries by virtue of the marriage,
birth, or placement for adoption or by virtue of the individual's
status as the spouse or the child's status as a dependent of the
qualified beneficiary. These new family members do not themselves
become qualified beneficiaries even if they become covered under the
plan. (For situations in which a plan is required to make coverage
available to new family members of a qualified beneficiary who is
receiving COBRA continuation coverage, see Q&A-5 of �54.4980B-5,
paragraph (c) in Q&A-4 of �54.4980B-5, section 9801(f)(2), and
�54.9801- 6T(b).)

(c) An individual is not a qualified beneficiary if, on the day
before the qualifying event referred to in paragraph (a) of this
Q&A-1, the individual is covered under the group health plan by
reason of another individual's election of COBRA continuation
coverage and is not already a qualified beneficiary by reason of a
prior qualifying event.

(d) A covered employee can be a qualified beneficiary only in
connection with a qualifying event that is the termination, or
reduction of hours, of the covered employee's employment, or that is
the bankruptcy of the employer.

(e) An individual is not a qualified beneficiary if the individual's
status as a covered employee is attributable to a period in which
the individual was a nonresident alien who received from the
individual's employer no earned income (within the meaning of
section 911(d)(2)) that constituted income from sources within the
United States (within the meaning of section 861(a)(3)). If,
pursuant to the preceding sentence, an individual is not a qualified
beneficiary, then a spouse or dependent child of the individual is
not considered a qualified beneficiary by virtue of the relationship
to the individual.

(f) A qualified beneficiary who does not elect COBRA continuation
coverage in connection with a qualifying event ceases to be a
qualified beneficiary at the end of the election period (see Q&A-1
of �54.4980B-6). Thus, for example, if such a former qualified
beneficiary is later added to a covered employee's coverage (e.g.,
during an open enrollment period) and then another qualifying event
occurs with respect to the covered employee, the former qualified
beneficiary does not become a qualified beneficiary by reason of the
second qualifying event. If a covered employee who is a qualified
beneficiary does not elect COBRA continuation coverage during the
election period, then any child born to or placed for adoption with
the covered employee on or after the date of the qualifying event is
not a qualified beneficiary. Once a plan's obligation to make COBRA
continuation coverage available to an individual who has been a
qualified beneficiary ceases under the rules of �54.4980B-7, the
individual ceases to be a qualified beneficiary.

(g) For purposes of ��54.4980B-1 through 54.4980B-8, placement for
adoption or being placed for adoption means the assumption and
retention by the covered employee of a legal obligation for total or
partial support of a child in anticipation of the adoption of the
child. The child's placement for adoption with the covered employee
terminates upon the termination of the legal obligation for total or
partial support. A child who is immediately adopted by the covered
employee without a preceding placement for adoption is considered to
be placed for adoption on the date of the adoption.

(h) The rules of this Q&A-1 are illustrated by the following
examples:

Example 1.

(i) B is a single employee who voluntarily terminates employment and
elects COBRA continuation coverage under a group health plan. To
comply with the requirements of section 9801(f) and �54.9801-6T(b),
the plan permits a covered employee who marries to have her or his
spouse covered under the plan. One month after electing COBRA
continuation coverage, B marries and chooses to have B's spouse
covered under the plan.

(ii) B's spouse is not a qualified beneficiary. Thus, if B dies
during the period of COBRA continuation coverage, the plan does not
have to offer B's surviving spouse an opportunity to elect COBRA
continuation coverage.

Example 2.

(i) C is a married employee who terminates employment. C elects
COBRA continuation coverage for C but not C's spouse, and C's spouse
declines to elect such coverage.

C's spouse thus ceases to be a qualified beneficiary. At the next
open enrollment period, C adds the spouse as a beneficiary under the
plan.

(ii) The addition of the spouse during the open enrollment period
does not make the spouse a qualified beneficiary. The plan thus will
not have to offer the spouse an opportunity to elect COBRA
continuation coverage upon a later divorce from or death of C.

Example 3. (i) Under the terms of a group health plan, a covered
employee's child, upon attaining age 19, ceases to be a dependent
eligible for coverage.

(ii) At that time, the child must be offered an opportunity to elect
COBRA continuation coverage. If the child elects COBRA continuation
coverage, the child marries during the period of the COBRA
continuation coverage, and the child's spouse becomes covered under
the group health plan, the child's spouse is not a qualified
beneficiary.

Example 4. (i) D is a single employee who, upon retirement, is given
the opportunity to elect COBRA continuation coverage but declines it
in favor of an alternative offer of 12 months of employer-paid
retiree health benefits. At the end of the election period, D ceases
to be a qualified beneficiary and will not have to be given another
opportunity to elect COBRA continuation coverage (at the end of
those 12 months or at any other time). D marries E during the period
of retiree health coverage and, under the terms of that coverage, E
becomes covered under the plan.

(ii) If a divorce from or death of D will result in E's losing
coverage, E will be a qualified beneficiary because E's coverage
under the plan on the day before the qualifying event (that is, the
divorce or death) will have been by reason of D's acceptance of 12
months of employer-paid coverage after the prior qualifying event
(D's retirement) rather than by reason of an election of COBRA
continuation coverage.

Example 5. (i) The facts are the same as in Example 4, except that,
under the terms of the plan, the divorce or death does not cause E
to lose coverage so that E continues to be covered for the balance
of the original 12-month period. ( ii) E does not have to be allowed
to elect COBRA continuation coverage because the loss of coverage at
the end of the 12-month period is not caused by the divorce or
death, and thus the divorce or death does not constitute a
qualifying event. See Q&A-1 of �54.4980B-4.

Q-2: Who is an employee and who is a covered employee?

A-2: (a)(1) For purposes of ��54.4980B-1 through 54.4980B-8 (except
for purposes of Q&A-5 in �54.4980B-2, relating to the exception from
COBRA for plans maintained by an employer with fewer than 20
employees), an employee is any individual who is eligible to be
covered under a group health plan by virtue of the performance of
services for the employer maintaining the plan or by virtue of
membership in the employee organization maintaining the plan. Thus,
for purposes of ��54.4980B-1 through 54.4980B-8 (except for purposes
of Q&A-5 in �54.4980B-2), the following individuals are employees if
their relationship to the employer maintaining the plan makes them
eligible to be covered under the plan -

(i) Self-employed individuals (within the meaning of section 401(c)
(1));

(ii) Independent contractors (and their employees and independent
contractors); and

(iii) Directors (in the case of a corporation).

(2) Similarly, whenever reference is made in ��54.4980B-1 through
54.4980B-8 (except in Q&A-5 of �54.4980B-2) to an employment
relationship (such as by referring to the termination of employment
of an employee or to an employee's being employed by an employer),
the reference includes the relationship of those individuals who are
employees within the meaning of this paragraph (a). See paragraph
(c) in Q&A-5 of �54.4980B-2 for a narrower meaning of employee
solely for purposes of Q&A-5 of �54.4980B-2.

(b) For purposes of ��54.4980B-1 through 54.4980B-8, a covered
employee is any individual who is (or was) provided coverage under a
group health plan (other than a plan that is excepted from COBRA on
the date of the qualifying event; see Q&A-4 of �54.4980B-2) by
virtue of being or having been an employee. For example, a retiree
or former employee who is covered by a group health plan is a
covered employee if the coverage results in whole or in part from
her or his previous employment. An employee (or former employee) who
is merely eligible for coverage under a group health plan is
generally not a covered employee if the employee (or former
employee) is not actually covered under the plan. In general, the
reason for the employee's (or former employee's) lack of actual
coverage (such as having declined participation in the plan or
having failed to satisfy the plan's conditions for participation) is
not relevant for this purpose. However, if the employee (or former
employee) is denied or not offered coverage under circumstances in
which the denial or failure to offer constitutes a violation of
applicable law (such as the Americans with Disabilities Act, 42
U.S.C. 12101 through 12213, the special enrollment rules of section
9801, or the requirements of section 9802 prohibiting discrimination
in eligibility to enroll in a group health plan based on health
status), then, for purposes of ��54.4980B-1 through 54.4980B-8, the
employee (or former employee) will be considered to have had the
coverage that was wrongfully denied or not offered.

Q-3: Who are the similarly situated nonCOBRA beneficiaries?

A-3: For purposes of ��54.4980B-1 through 54.4980B-8, similarly
situated nonCOBRA beneficiaries means the group of covered
employees, spouses of covered employees, or dependent children of
covered employees receiving coverage under a group health plan
maintained by the employer or employee organization who are
receiving that coverage for a reason other than the rights provided
under the COBRA continuation coverage requirements and who, based on
all of the facts and circumstances, are most similarly situated to
the situation of the qualified beneficiary immediately before the
qualifying event.

�54.4980B-4 Qualifying events.

The determination of what constitutes a qualifying event is
addressed in the following questions-and-answers:

Q-1: What is a qualifying event?

A-1: (a) A qualifying event is an event that satisfies paragraphs
(b), (c), and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further
explains a reduction of hours of employment, paragraph (f) of this
Q&A-1 describes the treatment of children born to or placed for
adoption with a covered employee during a period of COBRA
continuation coverage, and paragraph (g) of this Q&A-1 contains
examples.

(b) An event satisfies this paragraph (b) if the event is any of the
following -

(1) The death of a covered employee;

(2) The termination (other than by reason of the employee's gross
misconduct), or reduction of hours, of a covered employee's
employment;

(3) The divorce or legal separation of a covered employee from the
employee's spouse;

(4) A covered employee's becoming entitled to Medicare benefits
under Title XVIII of the Social Security Act (42 U.S.C.
1395-1395ggg);

(5) A dependent child's ceasing to be a dependent child of a covered
employee under the generally applicable requirements of the plan; or

(6) A proceeding in bankruptcy under Title 11 of the United States
Code with respect to an employer from whose employment a covered
employee retired at any time.

(c) An event satisfies this paragraph (c) if, under the terms of the
group health plan, the event causes the covered employee, or the
spouse or a dependent child of the covered employee, to lose
coverage under the plan. For this purpose, to lose coverage means to
cease to be covered under the same terms and conditions as in effect
immediately before the qualifying event. Any increase in the premium
or contribution that must be paid by a covered employee (or the
spouse or dependent child of a covered employee) for coverage under
a group health plan that results from the occurrence of one of the
events listed in paragraph (b) of this Q&A-1 is a loss of coverage.
In the case of an event that is the bankruptcy of the employer, lose
coverage also means any substantial elimination of coverage under
the plan, occurring within 12 months before or after the date the
bankruptcy proceeding commences, for a covered employee who had
retired on or before the date of the substantial elimination of
group health plan coverage or for any spouse, surviving spouse, or
dependent child of such a covered employee if, on the day before the
bankruptcy qualifying event, the spouse, surviving spouse, or
dependent child is a beneficiary under the plan. For purposes of
this paragraph (c), a loss of coverage need not occur immediately
after the event, so long as the loss of coverage occurs before the
end of the maximum coverage period (see Q&A-1 and Q&A-6 of
�54.4980B-7). However, if neither the covered employee nor the
spouse or a dependent child of the covered employee loses coverage
before the end of what would be the maximum coverage period, the
event does not satisfy this paragraph (c). If coverage is reduced or
eliminated in anticipation of an event (for example, an employer's
eliminating an employee's coverage in anticipation of the
termination of the employee's employment, or an employee's
eliminating the coverage of the employee's spouse in anticipation of
a divorce or legal separation), the reduction or elimination is
disregarded in determining whether the event causes a loss of
coverage.

(d) An event satisfies this paragraph (d) if it occurs while the
plan is subject to COBRA.

Thus, an event will not satisfy this paragraph (d) if it occurs
while the plan is excepted from COBRA (see Q&A-4 of �54.4980B-2).
Even if the plan later becomes subject to COBRA, it is not required
to make COBRA continuation coverage available to anyone whose
coverage ends as a result of an event during a year in which the
plan is excepted from COBRA. For example, if a group health plan is
excepted from COBRA as a small-employer plan during the year 2001
(see Q&A-5 of �54.4980B-2) and an employee terminates employment on
December 31, 2001, the termination is not a qualifying event and the
plan is not required to permit the employee to elect COBRA
continuation coverage. This is the case even if the plan ceases to
be a small-employer plan as of January 1, 2002. Also, the same
result will follow even if the employee is given three months of
coverage beyond December 31 (that is, through March of 2002),
because there will be no qualifying event as of the termination of
coverage in March. However, if the employee's spouse is initially
provided with the three-month coverage through March 2002, but the
spouse divorces the employee before the end of the three months and
loses coverage as a result of the divorce, the divorce will
constitute a qualifying event during 2002 and so entitle the spouse
to elect COBRA continuation coverage. See Q&A-7 of �54.4980B-7
regarding the maximum coverage period in such a case.

(e) A reduction of hours of a covered employee's employment occurs
whenever there is a decrease in the hours that a covered employee is
required to work or actually works, but only if the decrease is not
accompanied by an immediate termination of employment. This is true
regardless of whether the covered employee continues to perform
services following the reduction of hours of employment. For
example, an absence from work due to disability, a temporary layoff,
or any other reason is a reduction of hours of a covered employee's
employment if there is not an immediate termination of employment.
If a group health plan measures eligibility for the coverage of
employees by the number of hours worked in a given time period, such
as the preceding month or quarter, and an employee covered under the
plan fails to work the minimum number of hours during that time
period, the failure to work the minimum number of required hours is
a reduction of hours of that covered employee's employment.

(f) The qualifying event of 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 qualifying event giving
rise to the period of COBRA continuation coverage during which the
child is born or placed for adoption. If a second qualifying event
has occurred before the child is born or placed for adoption (such
as the death of the covered employee), then the second qualifying
event also applies to the newborn or adopted child. See Q&A-6 of
�54.4980B-7.

(g) The rules of this Q&A-1 are illustrated by the following
examples, in each of which the group health plan is subject to
COBRA:

Example 1. (i) An employee who is covered by a group health plan
terminates employment (other than by reason of the employee's gross
misconduct) and, beginning with the day after the last day of
employment, is given 3 months of employer-paid coverage under the
same terms and conditions as before that date. At the end of the
three months, the coverage terminates.

(ii) The loss of coverage at the end of the three months results
from the termination of employment and, thus, the termination of
employment is a qualifying event.

Example 2. (i) An employee who is covered by a group health plan
retires (which is a termination of employment other than by reason
of the employee's gross misconduct) and, upon retirement, is
required to pay an increased amount for the same group health
coverage that the employee had before retirement.

(ii) The increase in the premium or contribution required for
coverage is a loss of coverage under paragraph (c) of this Q&A-1
and, thus, the retirement is a qualifying event.

Example 3. (i) An employee and the employee's spouse are covered
under an employer's group health plan. The employee retires and is
given identical coverage for life. However, the plan provides that
the spousal coverage will not be continued beyond six months unless
a higher premium for the spouse is paid to the plan.

(ii) The requirement for the spouse to pay a higher premium at the
end of the six months is a loss of coverage under paragraph (c) of
this Q&A-1. Thus, the retirement is a qualifying event and the
spouse must be given an opportunity to elect COBRA continuation
coverage.

Example 4. (i) F is a covered employee who is married to G, and both
are covered under a group health plan maintained by F's employer. F
and G are divorced. Under the terms of the plan, the divorce causes
G to lose coverage. The divorce is a qualifying event, and G elects
COBRA continuation coverage, remarries during the period of COBRA
continuation coverage, and G's new spouse becomes covered under the
plan. (See Q&A-5 in �54.4980B-5, paragraph (c) in Q&A-4 of
�54.4980B-5, section 9801(f)(2), and �54.9801-6T(b).) G dies. Under
the terms of the plan, the death causes G's new spouse to lose
coverage under the plan.

(ii) G's death is not a qualifying event because G is not a covered
employee.

Example 5. (i) An employer maintains a group health plan for both
active employees and retired employees (and their families). The
coverage for active employees and retired employees is identical,
and the employer does not require retirees to pay more for coverage
than active employees. The plan does not make COBRA continuation
coverage available when an employee retires (and is not required to
because the retired employee has not lost coverage under the plan).

The employer amends the plan to eliminate coverage for retired
employees effective January 1, 2002. On that date, several retired
employees (and their spouses and dependent children) have been
covered under the plan since their retirement for less than the
maximum coverage period that would apply to them in connection with
their retirement.

(ii) The elimination of retiree coverage under these circumstances
is a deferred loss of coverage for those retirees (and their spouses
and dependent children) under paragraph (c) of this Q&A-1 and, thus,
the retirement is a qualifying event. The plan must make COBRA
continuation coverage available to them for the balance of the
maximum coverage period that applies to them in connection with the
retirement.

Q-2: Are the facts surrounding a termination of employment (such as
whether it was voluntary or involuntary) relevant in determining
whether the termination of employment is a qualifying event?

A-2: Apart from facts constituting gross misconduct, the facts
surrounding the termination or reduction of hours are irrelevant in
determining whether a qualifying event has occurred. Thus, it does
not matter whether the employee voluntarily terminated or was
discharged. For example, a strike or a lockout is a termination or
reduction of hours that constitutes a qualifying event if the strike
or lockout results in a loss of coverage as described in paragraph
(c) of Q&A-1 of this section. Similarly, a layoff that results in
such a loss of coverage is a qualifying event.

�54.4980B-5 COBRA continuation coverage.

The following questions-and-answers address the requirements for
coverage to constitute COBRA continuation coverage:

Q-1: What is COBRA continuation coverage?

A-1: (a) If a qualifying event occurs, each qualified beneficiary
(other than a qualified beneficiary for whom the qualifying event
will not result in any immediate or deferred loss of coverage) must
be offered an opportunity to elect to receive the group health plan
coverage that is provided to similarly situated nonCOBRA
beneficiaries (ordinarily, the same coverage that the qualified
beneficiary had on the day before the qualifying event). See Q&A-3
of �54.4980B-3 for the definition of similarly situated nonCOBRA
beneficiaries. This coverage is COBRA continuation coverage. If
coverage under the plan is modified for similarly situated nonCOBRA
beneficiaries, then the coverage made available to qualified
beneficiaries is modified in the same way.

If the continuation coverage offered differs in any way from the
coverage made available to similarly situated nonCOBRA
beneficiaries, the coverage offered does not constitute COBRA
continuation coverage and the group health plan is not in compliance
with COBRA unless other coverage that does constitute COBRA
continuation coverage is also offered. Any elimination or reduction
of coverage in anticipation of an event described in paragraph (b)
of Q&A-1 of �54.4980B-4 is disregarded for purposes of this Q&A-1
and for purposes of any other reference in ��54.4980B-1 through
54.4980B-8 to coverage in effect immediately before (or on the day
before) a qualifying event. COBRA continuation coverage must not be
conditioned upon, or discriminate on the basis of lack of, evidence
of insurability.

(b) In the case of a qualified beneficiary who is a child born to or
placed for adoption with a covered employee during a period of COBRA
continuation coverage, the child is generally entitled to elect
immediately to have the same coverage that dependent children of
active employees receive under the benefit packages under which the
covered employee has coverage at the time of the birth or placement
for adoption. Such a child would be entitled to elect coverage
different from that elected by the covered employee during the next
available open enrollment period under the plan. See Q&A-4 of this
section.

Q-2: What deductibles apply if COBRA continuation coverage is
elected?

A-2: (a) Qualified beneficiaries electing COBRA continuation
coverage generally are subject to the same deductibles as similarly
situated nonCOBRA beneficiaries. If a qualified beneficiary's COBRA
continuation coverage begins before the end of a period prescribed
for accumulating amounts toward deductibles, the qualified
beneficiary must retain credit for expenses incurred toward those
deductibles before the beginning of COBRA continuation coverage as
though the qualifying event had not occurred. The specific
application of this rule depends on the type of deductible, as set
forth in paragraphs (b) through (d) of this Q&A-2.

Special rules are set forth in paragraph (e) of this Q&A-2, and
examples appear in paragraph (f) of this Q&A-2.

(b) If a deductible is computed separately for each individual
receiving coverage under the plan, each individual's remaining
deductible amount (if any) on the date COBRA continuation coverage
begins is equal to that individual's remaining deductible amount
immediately before that date.

(c) If a deductible is computed on a family basis, the remaining
deductible for the family on the date that COBRA continuation
coverage begins depends on the members of the family electing COBRA
continuation coverage. In computing the family deductible that
remains on the date COBRA continuation coverage begins, only the
expenses of those family members receiving COBRA continuation
coverage need be taken into account. If the qualifying event results
in there being more than one family unit (for example, because of a
divorce), the family deductible may be computed separately for each
resulting family unit based on the members in each unit. These rules
apply regardless of whether the plan provides that the family
deductible is an alternative to individual deductibles or an
additional requirement.

(d) Deductibles that are not described in paragraph (b) or (c) of
this Q&A-2 must be treated in a manner consistent with the
principles set forth in those paragraphs.

(e) If a deductible is computed on the basis of a covered employee's
compensation instead of being a fixed dollar amount and the employee
remains employed during the period of COBRA continuation coverage,
the plan is permitted to choose whether to apply the deductible by
treating the employee's compensation as continuing without change
for the duration of the COBRA continuation coverage at the level
that was used to compute the deductible in effect immediately before
the COBRA continuation coverage began, or to apply the deductible by
taking the employee's actual compensation into account. In applying
a deductible that is computed on the basis of the covered employee's
compensation instead of being a fixed dollar amount, for periods of
COBRA continuation coverage in which the employee is not employed by
the employer, the plan is required to compute the deductible by
treating the employee's compensation as continuing without change
for the duration of the COBRA continuation coverage either at the
level that was used to compute the deductible in effect immediately
before the COBRA continuation coverage began or at the level that
was used to compute the deductible in effect immediately before the
employee's employment was terminated.

(f) The rules of this Q&A-2 are illustrated by the following
examples; in each example, deductibles under the plan are determined
on a calendar year basis:

Example 1. (i) A group health plan applies a separate $100 annual
deductible to each individual it covers. The plan provides that the
spouse and dependent children of a covered employee will lose
coverage on the last day of the month after the month of the covered
employee's death. A covered employee dies on June 11, 2001. The
spouse and the two dependent children elect COBRA continuation
coverage, which will begin on August 1, 2001. As of July 31, 2001,
the spouse has incurred $80 of covered expenses, the older child has
incurred no covered expenses, and the younger one has incurred $120
of covered expenses (and therefore has already satisfied the
deductible).

(ii) At the beginning of COBRA continuation coverage on August 1,
the spouse has a remaining deductible of $20, the older child still
has the full $100 deductible, and the younger one has no further
deductible.

Example 2. (i) A group health plan applies a separate $200 annual
deductible to each individual it covers, except that each family
member is treated as having satisfied the individual deductible once
the family has incurred $500 of covered expenses during the year.
The plan provides that upon the divorce of a covered employee,
coverage will end immediately for the employee's spouse and any
children who do not remain in the employee's custody. A covered
employee with four dependent children is divorced, the spouse
obtains custody of the two oldest children, and the spouse and those
children all elect COBRA continuation coverage to begin immediately.
The family had accumulated $420 of covered expenses before the
divorce, as follows: $70 by each parent, $200 by the oldest child,
$80 by the youngest child, and none by the other two children.

(ii) The resulting family consisting of the spouse and the two
oldest children accumulated a total of $270 of covered expenses, and
thus the remaining deductible for that family could be as high as
$230 (because the plan would not have to count the incurred expenses
of the covered employee and the youngest child). The remaining
deductible for the resulting family consisting of the covered
employee and the two youngest children is not subject to the rules
of this Q&A-2 because their coverage is not COBRA continuation
coverage.

Example 3. Each year a group health plan pays 70 percent of the cost
of an individual's psychotherapy after that individual's first three
visits during the year. A qualified beneficiary whose election of
COBRA continuation coverage takes effect beginning August 1, 2001
and who has already made two visits as of that date need only pay
for one more visit before the plan must begin to pay 70 percent of
the cost of the remaining visits during 2001.

Example 4. (i) A group health plan has a $250 annual deductible per
covered individual.

The plan provides that if the deductible is not satisfied in a
particular year, expenses incurred during October through December
of that year are credited toward satisfaction of the deductible in
the next year. A qualified beneficiary who has incurred covered
expenses of $150 from January through September of 2001 and $40
during October elects COBRA continuation coverage beginning November
1, 2001.

(ii) The remaining deductible amount for this qualified beneficiary
is $60 at the beginning of the COBRA continuation coverage. If this
individual incurs covered expenses of $50 in November and December
of 2001 combined (so that the $250 deductible for 2001 is not
satisfied), the $90 incurred from October through December of 2001
are credited toward satisfaction of the deductible amount for 2002.

Q-3: How do a plan's limits apply to COBRA continuation coverage?

A-3: (a) Limits are treated in the same way as deductibles (see
Q&A-2 of this section).

This rule applies both to limits on plan benefits (such as a maximum
number of hospital days or dollar amount of reimbursable expenses)
and limits on out-of-pocket expenses (such as a limit on copayments,
a limit on deductibles plus copayments, or a catastrophic limit).
This rule applies equally to annual and lifetime limits and applies
equally to limits on specific benefits and limits on benefits in the
aggregate under the plan.

(b) The rule of this Q&A-3 is illustrated by the following examples;
in each example limits are determined on a calendar year basis:

Example 1. (i) A group health plan pays for a maximum of 150 days of
hospital confinement per individual per year. A covered employee who
has had 20 days of hospital confinement as of May 1, 2001 terminates
employment and elects COBRA continuation coverage as of that date.

(ii) During the remainder of the year 2001 the plan need only pay
for a maximum of 130 days of hospital confinement for this
individual.

Example 2. (i) A group health plan reimburses a maximum of $20,000
of covered expenses per family per year, and the same $20,000 limit
applies to unmarried covered employees.

A covered employee and spouse who have no children divorce on May 1,
2001, and the spouse elects COBRA continuation coverage as of that
date. In 2001, the employee had incurred $5,000 of expenses and the
spouse had incurred $8,000 before May 1.

(ii) The plan can limit its reimbursement of the amount of expenses
incurred by the spouse on and after May 1 for the remainder of the
year to $12,000 ($20,000 - $8,000 = $12,000). The remaining limit
for the employee is not subject to the rules of this Q&A-3 because
the employee's coverage is not COBRA continuation coverage.

Example 3. (i) A group health plan pays for 80 percent of covered
expenses after satisfaction of a $100-per-individual deductible, and
the plan pays for 100 percent of covered expenses after a family has
incurred out-of-pocket costs of $2,000. The plan provides that upon
the divorce of a covered employee, coverage will end immediately for
the employee's spouse and any children who do not remain in the
employee's custody. An employee and spouse with three dependent
children divorce on June 1, 2001, and one of the children remains
with the employee.

The spouse elects COBRA continuation coverage as of that date for
the spouse and the other two children. During January through May of
2001, the spouse incurred $600 of covered expenses and each of the
two children in the spouse's custody after the divorce incurred
covered expenses of $1,100. This resulted in total out-of-pocket
costs for these three individuals of $800 ($300 total for the three
deductibles, plus $500 for 20 percent of the other $2,500 in
incurred expenses [$600 + $1,100 + $1,100 = $2,800; $2,800 - $300 =
$2,500]).

(ii) For the remainder of 2001, the resulting family consisting of
the spouse and two children has an out-of-pocket limit of $1,200
($2,000 - $800 = $1,200) . The remaining out-of-pocket limit for the
resulting family consisting of the employee and one child is not
subject to the rules of this Q&A-3 because their coverage is not
COBRA continuation coverage.

Q-4: Can a qualified beneficiary who elects COBRA continuation
coverage ever change from the coverage received by that individual
immediately before the qualifying event?

A-4: (a) In general, a qualified beneficiary need only be given an
opportunity to continue the coverage that she or he was receiving
immediately before the qualifying event. This is true regardless of
whether the coverage received by the qualified beneficiary before
the qualifying event ceases to be of value to the qualified
beneficiary, such as in the case of a qualified beneficiary covered
under a region-specific health maintenance organization (HMO) who
leaves the HMO's service region. The only situations in which a
qualified beneficiary must be allowed to change from the coverage
received immediately before the qualifying event are as set forth in
paragraphs (b) and (c) of this Q&A-4 and in Q&A-1 of this section
(regarding changes to or elimination of the coverage provided to
similarly situated nonCOBRA beneficiaries).

(b) If a qualified beneficiary participates in a region-specific
benefit package (such as an HMO or an on-site clinic) that will not
service her or his health needs in the area to which she or he is
relocating (regardless of the reason for the relocation), the
qualified beneficiary must be given an opportunity to elect
alternative coverage that the employer or employee organization
makes available to active employees. If the employer or employee
organization makes group health plan coverage available to similarly
situated nonCOBRA beneficiaries that can be extended in the area to
which the qualified beneficiary is relocating, then that coverage is
the alternative coverage that must be made available to the
relocating qualified beneficiary. If the employer or employee
organization does not make group health plan coverage available to
similarly situated nonCOBRA beneficiaries that can be extended in
the area to which the qualified beneficiary is relocating but makes
coverage available to other employees that can be extended in that
area, then the coverage made available to those other employees must
be made available to the relocating qualified beneficiary. However,
the employer or employee organization is not required to make any
other coverage available to the relocating qualified beneficiary if
the only coverage the employer or employee organization makes
available to active employees is not available in the area to which
the qualified beneficiary relocates (because all such coverage is
region-specific and does not service individuals in that area).

(c) If an employer or employee organization makes an open enrollment
period available to similarly situated active employees with respect
to whom a qualifying event has not occurred, the same open
enrollment period rights must be made available to each qualified
beneficiary receiving COBRA continuation coverage. An open
enrollment period means a period during which an employee covered
under a plan can choose to be covered under another group health
plan or under another benefit package within the same plan, or to
add or eliminate coverage of family members.

(d) The rules of this Q&A-4 are illustrated by the following
examples:

Example 1. (i) E is an employee who works for an employer that
maintains several group health plans. Under the terms of the plans,
if an employee chooses to cover any family members under a plan, all
family members must be covered by the same plan and that plan must
be the same as the plan covering the employee. Immediately before
E's termination of employment (for reasons other than gross
misconduct), E is covered along with E's spouse and children by a
plan.

The coverage under that plan will end as a result of the termination
of employment.

(ii) Upon E's termination of employment, each of the four family
members is a qualified beneficiary. Even though the employer
maintains various other plans and options, it is not necessary for
the qualified beneficiaries to be allowed to switch to a new plan
when E terminates employment.

(iii) COBRA continuation coverage is elected for each of the four
family members. Three months after E's termination of employment
there is an open enrollment period during which similarly situated
active employees are offered an opportunity to choose to be covered
under a new plan or to add or eliminate family coverage. ( iv)
During the open enrollment period, each of the four qualified
beneficiaries must be offered the opportunity to switch to another
plan (as though each qualified beneficiary were an individual
employee). For example, each member of E's family could choose
coverage under a separate plan, even though the family members of
employed individuals could not choose coverage under separate plans.
Of course, if each family member chooses COBRA continuation coverage
under a separate plan, the plan can require payment for each family
member that is based on the applicable premium for individual
coverage under that separate plan. See Q&A-1 of �54.4980B-8.

Example 2. (i) The facts are the same as in Example 1, except that
E's family members are not covered under E's group health plan when
E terminates employment.

(ii) Although the family members do not have to be given an
opportunity to elect COBRA continuation coverage, E must be allowed
to add them to E's COBRA continuation coverage during the open
enrollment period. This is true even though the family members are
not, and cannot become, qualified beneficiaries (see Q&A-1 of
�54.4980B-3).

Q-5: Aside from open enrollment periods, can a qualified beneficiary
who has elected COBRA continuation coverage choose to cover
individuals (such as newborn children, adopted children, or new
spouses) who join the qualified beneficiary's family on or after the
date of the qualifying event?

A-5: (a) Yes. Under section 9801 and �54.9801-6T, employees eligible
to participate in a group health plan (whether or not
participating), as well as former employees participating in a plan
(referred to in those rules as participants), are entitled to
special enrollment rights for certain family members upon the loss
of other group health plan coverage or upon the acquisition by the
employee or participant of a new spouse or of a new dependent
through birth, adoption, or placement for adoption, if certain
requirements are satisfied. Employees not participating in the plan
also can obtain rights for self-enrollment under those rules. Once a
qualified beneficiary is receiving COBRA continuation coverage (that
is, has timely elected and made timely payment for COBRA
continuation coverage), the qualified beneficiary has the same right
to enroll family members under those special enrollment rules as if
the qualified beneficiary were an employee or participant within the
meaning of those rules. However, neither a qualified beneficiary who
is not receiving COBRA continuation coverage nor a former qualified
beneficiary has any special enrollment rights under those rules.

(b) In addition to the special enrollment rights described in
paragraph (a) of this Q&A-5, if the plan covering the qualified
beneficiary provides that new family members of active employees can
become covered (either automatically or upon an appropriate
election) before the next open enrollment period, then the same
right must be extended to the new family members of a qualified
beneficiary.

(c) If the addition of a new family member will result in a higher
applicable premium (for example, if the qualified beneficiary was
previously receiving COBRA continuation coverage as an individual,
or if the applicable premium for family coverage depends on family
size), the plan can require the payment of a correspondingly higher
amount for the COBRA continuation coverage. See Q&A-1 of
�54.4980B-8.

(d) The right to add new family members under this Q&A-5 is in
addition to the rights that newborn and adopted children of covered
employees may have as qualified beneficiaries; see Q&A-1 in
�54.4980B-3.

�54.4980B-6 Electing COBRA continuation coverage.

The following questions-and-answers address the manner in which
COBRA continuation coverage is elected:

Q-1: What is the election period and how long must it last?

A-1: (a) A group health plan can condition the availability of COBRA
continuation coverage upon the timely election of such coverage. An
election of COBRA continuation coverage is a timely election if it
is made during the election period. The election period must begin
not later than the date the qualified beneficiary would lose
coverage on account of the qualifying event. (See paragraph (c) of
Q&A-1 of �54.4980B-4 for the meaning of lose coverage.) The election
period must not end before the date that is 60 days after the later
of -

(1) The date the qualified beneficiary would lose coverage on
account of the qualifying event; or

(2) The date notice is provided to the qualified beneficiary of her
or his right to elect COBRA continuation coverage.

(b) An election is considered to be made on the date it is sent to
the plan administrator.

(c) The rules of this Q&A-1 are illustrated by the following
example:

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 section 4980B(f)(8)).

(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, and in certain circumstances
might be provided for a shorter period (see Q&A-1 of �54.4980B-7).

Q-2: Is a covered employee or qualified beneficiary responsible for
informing the plan administrator of the occurrence of a qualifying
event?

A-2: (a) In general, the employer or plan administrator must
determine when a qualifying event has occurred. However, each
covered employee or qualified beneficiary is responsible for
notifying the plan administrator of the occurrence of a qualifying
event that is either a dependent child's ceasing to be a dependent
child under the generally applicable requirements of the plan or a
divorce or legal separation of a covered employee. The group health
plan is not required to offer the qualified beneficiary an
opportunity to elect COBRA continuation coverage if the notice is
not provided to the plan administrator within 60 days after the
later of -

(1) The date of the qualifying event; or

(2) The date the qualified beneficiary would lose coverage on
account of the qualifying event.

(b) For purposes of this Q&A-2, if more than one qualified
beneficiary would lose coverage on account of a divorce or legal
separation of a covered employee, a timely notice of the divorce or
legal separation that is provided by the covered employee or any one
of those qualified beneficiaries will be sufficient to preserve the
election rights of all of the qualified beneficiaries.

Q-3: During the election period and before the qualified beneficiary
has made an election, must coverage be provided?

A-3: (a) In general, each qualified beneficiary has until 60 days
after the later of the date the qualifying event would cause her or
him to lose coverage or the date notice is provided to the qualified
beneficiary of her or his right to elect COBRA continuation coverage
to decide whether to elect COBRA continuation coverage. If the
election is made during that period, coverage must be provided from
the date that coverage would otherwise have been lost (but see Q&A-4
of this section). This can be accomplished as described in paragraph
(b) or (c) of this Q&A-3.

(b) In the case of an indemnity or reimbursement arrangement, the
employer or employee organization can provide for plan coverage
during the election period or, if the plan allows retroactive
reinstatement, the employer or employee organization can terminate
the coverage of the qualified beneficiary and reinstate her or him
when the election is made. Claims incurred by a qualified
beneficiary during the election period do not have to be paid before
the election (and, if applicable, payment for the coverage) is made.
If a provider of health care (such as a physician, hospital, or
pharmacy) contacts the plan to confirm coverage of a qualified
beneficiary during the election period, the plan must give a
complete response to the health care provider about the qualified
beneficiary's COBRA continuation coverage rights during the election
period. For example, if the plan provides coverage during the
election period but cancels coverage retroactively if COBRA
continuation coverage is not elected, then the plan must inform a
provider that a qualified beneficiary for whom coverage has not been
elected is covered but that the coverage is subject to retroactive
termination. Similarly, if the plan cancels coverage but then
retroactively reinstates it once COBRA continuation coverage is
elected, then the plan must inform the provider that the qualified
beneficiary currently does not have coverage but will have coverage
retroactively to the date coverage was lost if COBRA continuation
coverage is elected.

(See paragraph (c) of Q&A-5 in �54.4980B-8 for similar rules that a
plan must follow in confirming coverage during a period when the
plan has not received payment but that is still within the grace
period for a qualified beneficiary for whom COBRA continuation
coverage has been elected.)

(c)(1) In the case of a group health plan that provides health
services (such as a health maintenance organization or a walk-in
clinic), the plan can require with respect to a qualified
beneficiary who has not elected and paid for COBRA continuation
coverage that the qualified beneficiary choose between -

(i) Electing and paying for the coverage; or

(ii) Paying the reasonable and customary charge for the plan's
services, but only if a qualified beneficiary who chooses to pay for
the services will be reimbursed for that payment within 30 days
after the election of COBRA continuation coverage (and, if
applicable, the payment of any balance due for the coverage).

(2) In the alternative, the plan can provide continued coverage and
treat the qualified beneficiary's use of the facility as a
constructive election. In such a case, the qualified beneficiary is
obligated to pay any applicable charge for the coverage, but only if
the qualified beneficiary is informed that use of the facility will
be a constructive election before using the facility.

Q-4: Is a waiver before the end of the election period effective to
end a qualified beneficiary's election rights?

A-4: If, during the election period, a qualified beneficiary waives
COBRA continuation coverage, the waiver can be revoked at any time
before the end of the election period.

Revocation of the waiver is an election of COBRA continuation
coverage. However, if a waiver of COBRA continuation coverage is
later revoked, coverage need not be provided retroactively (that is,
from the date of the loss of coverage until the waiver is revoked).
Waivers and revocations of waivers are considered made on the date
they are sent to the employer, employee organization, or plan
administrator, as applicable.

Q-5: Can an employer or employee organization withhold money or
other benefits owed to a qualified beneficiary until the qualified
beneficiary either waives COBRA continuation coverage, elects and
pays for such coverage, or allows the election period to expire?

A-5: No. An employer, and an employee organization, must not
withhold anything to which a qualified beneficiary is otherwise
entitled (by operation of law or other agreement) in order to compel
payment for COBRA continuation coverage or to coerce the qualified
beneficiary to give up rights to COBRA continuation coverage
(including the right to use the full election period to decide
whether to elect such coverage). Such a withholding constitutes a
failure to comply with the COBRA continuation coverage requirements.
Furthermore, any purported waiver obtained by means of such a
withholding is invalid.

Q-6: Can each qualified beneficiary make an independent election
under COBRA?

A-6: Yes. Each qualified beneficiary (including a child who is born
to or placed for adoption with a covered employee during a period of
COBRA continuation coverage) must be offered the opportunity to make
an independent election to receive COBRA continuation coverage. If
the plan allows similarly situated active employees with respect to
whom a qualifying event has not occurred to choose among several
options during an open enrollment period (for example, to switch to
another group health plan or to another benefit package under the
same group health plan), then each qualified beneficiary must also
be offered an independent election to choose during an open
enrollment period among the options made available to similarly
situated active employees with respect to whom a qualifying event
has not occurred. If a qualified beneficiary who is either a covered
employee or the spouse of a covered employee elects COBRA
continuation coverage and the election does not specify whether the
election is for self-only coverage, the election is deemed to
include an election of COBRA continuation coverage on behalf of all
other qualified beneficiaries with respect to that qualifying event.
An election on behalf of a minor child can be made by the child's
parent or legal guardian. An election on behalf of a qualified
beneficiary who is incapacitated or dies can be made by the legal
representative of the qualified beneficiary or the qualified
beneficiary's estate, as determined under applicable state law, or
by the spouse of the qualified beneficiary. (See also Q&A-5 of
�54.4980B-7 relating to the independent right of each qualified
beneficiary with respect to the same qualifying event to receive
COBRA continuation coverage during the disability extension.) The
rules of this Q&A-6 are illustrated by the following examples; in
each example each group health plan is subject to COBRA:

Example 1. (i) Employee H and H's spouse are covered under a group
health plan immediately before H's termination of employment (for
reasons other than gross misconduct).

Coverage under the plan will end as a result of the termination of
employment.

(ii) Upon H's termination of employment, both H and H's spouse are
qualified beneficiaries and each must be allowed to elect COBRA
continuation coverage. Thus, H might elect COBRA continuation
coverage while the spouse declines to elect such coverage, or H
might elect COBRA continuation coverage for both of them. In
contrast, H cannot decline COBRA continuation coverage on behalf of
H's spouse. Thus, if H does not elect COBRA continuation coverage on
behalf of the spouse, the spouse must still be allowed to elect
COBRA continuation coverage.

Example 2. (i) An employer maintains a group health plan under which
all employees receive employer-paid coverage. Employees can arrange
to cover their families by paying an additional amount. The employer
also maintains a cafeteria plan, under which one of the options is
to pay part or all of the employee share of the cost for family
coverage under the group health plan. Thus, an employee might pay
for family coverage under the group health plan partly with before-
tax dollars and partly with after-tax dollars. ( ii) If an
employee's family is receiving coverage under the group health plan
when a qualifying event occurs, each of the qualified beneficiaries
must be offered an opportunity to elect COBRA continuation coverage,
regardless of how that qualified beneficiary's coverage was paid for
before the qualifying event.

�54.4980B-7 Duration of COBRA continuation coverage.

The following questions-and-answers address the duration of COBRA
continuation coverage:

Q-1: How long must COBRA continuation coverage be made available to
a qualified beneficiary?

A-1: (a) Except for an interruption of coverage in connection with a
waiver, as described in Q&A-4 of �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 required period under section
4980B(f)(2)(B)(i) (the maximum coverage period) and, if applicable,
section 4980B(f)(8) (relating to the optional extension of required
periods in a case where coverage is lost after the date of, instead
of on the date of, the qualifying event);

(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
�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; and

(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.

(b) However, a group health plan can terminate for cause the
coverage of a qualified beneficiary receiving COBRA continuation
coverage on the same basis that the plan terminates for cause the
coverage of similarly situated nonCOBRA beneficiaries. For example,
if a group health plan terminates the coverage of active employees
for the submission of a fraudulent claim, then the coverage of a
qualified beneficiary can also be terminated for the submission of a
fraudulent claim. Notwithstanding the preceding two sentences, the
coverage of a qualified beneficiary can be terminated for failure to
make timely payment to the plan only if payment is not timely under
the rules of Q&A-5 in �54.4980B-8.

(c) In the case of an individual who is not a qualified beneficiary
and who is receiving coverage under a group health plan solely
because of the individual's relationship to a qualified beneficiary,
if the plan's obligation to make COBRA continuation coverage
available to the qualified beneficiary ceases under this section,
the plan is not obligated to make coverage available to the
individual who is not a qualified beneficiary.

Q-2: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to coverage under another group health
plan?

A-2: (a) If a qualified beneficiary first becomes covered under
another group health plan (including for this purpose any group
health plan of a governmental employer or employee organization)
after the date on which COBRA continuation coverage is elected for
the qualified beneficiary and the other coverage satisfies the
requirements of paragraphs (b), (c), and (d) of this Q&A-2, then the
plan may terminate the qualified beneficiary's COBRA continuation
coverage upon the date on which the qualified beneficiary first
becomes covered under the other group health plan (even if the other
coverage is less valuable to the qualified beneficiary). By
contrast, if a qualified beneficiary first becomes covered under
another group health plan on or before the date on which COBRA
continuation coverage is elected, then the other coverage cannot be
a basis for terminating the qualified beneficiary's COBRA
continuation coverage.

(b) The requirement of this paragraph (b) is satisfied if the
qualified beneficiary is actually covered, rather than merely
eligible to be covered, under the other group health plan.

(c) The requirement of this paragraph (c) is satisfied if the other
group health plan is a plan that is not maintained by the employer
or employee organization that maintains the plan under which COBRA
continuation coverage must otherwise be made available.

(d) The requirement of this paragraph (d) is satisfied if the other
group health plan does not contain any exclusion or limitation with
respect to any preexisting condition of the qualified beneficiary
(other than such an exclusion or limitation that does not apply to,
or is satisfied by, the qualified beneficiary by reason of the
provisions in section 9801 (relating to limitations on preexisting
condition exclusion periods in group health plans)).

(e) The rules of this Q&A-2 are illustrated by the following
examples:

Example 1. (i) Employer X maintains a group health plan subject to
COBRA. C is an employee covered under the plan. C is also covered
under a group health plan maintained by Employer Y, the employer of
C's spouse. C terminates employment (for reasons other than gross
misconduct), and the termination of employment causes C to lose
coverage under X's plan (and, thus, is a qualifying event). C elects
to receive COBRA continuation coverage under X's plan.

(ii) Under these facts, X's plan cannot terminate C's COBRA
continuation coverage on the basis of C's coverage under Y's plan.

Example 2. (i) Employer W maintains a group health plan subject to
COBRA. D is an employee covered under the plan. D terminates
employment (for reasons other than gross misconduct), and the
termination of employment causes D to lose coverage under W's plan
(and, thus, is a qualifying event). D elects to receive COBRA
continuation coverage under W's plan.

Later D becomes employed by Employer V and is covered under V's
group health plan. D's coverage under V's plan is not subject to any
exclusion or limitation with respect to any preexisting condition of
D.

(ii) Under these facts, W can terminate D's COBRA continuation
coverage on the date D becomes covered under V's plan.

Example 3. (i) The facts are the same as in Example 2, except that D
becomes employed by V and becomes covered under V's group health
plan before D elects COBRA continuation coverage under W's plan.

(ii) Because the termination of employment is a qualifying event, D
must be offered COBRA continuation coverage under W's plan, and W is
not permitted to terminate D's COBRA continuation coverage on
account of D's coverage under V's plan because D first became
covered under V's plan before COBRA continuation coverage was
elected for D.

Q-3: When may a plan terminate a qualified beneficiary's COBRA
continuation coverage due to the qualified beneficiary's entitlement
to Medicare benefits?

A-3: (a) If a qualified beneficiary first becomes entitled to
Medicare benefits under Title XVIII of the Social Security Act (42
U.S.C. 1395-1395ggg) after the date on which COBRA continuation
coverage is elected for the qualified beneficiary, then the plan may
terminate the qualified beneficiary's COBRA continuation coverage
upon the date on which the qualified beneficiary becomes so
entitled. By contrast, if a qualified beneficiary first becomes
entitled to Medicare benefits on or before the date that COBRA
continuation coverage is elected, then the qualified beneficiary's
entitlement to Medicare benefits cannot be a basis for terminating
the qualified beneficiary's COBRA continuation coverage.

(b) A qualified beneficiary becomes entitled to Medicare benefits
upon the effective date of enrollment in either part A or B,
whichever occurs earlier. Thus, merely being eligible to enroll in
Medicare does not constitute being entitled to Medicare benefits.

Q-4: [Reserved]

A-4: [Reserved]

Q-5: How does a qualified beneficiary become entitled to a
disability extension?

A-5: (a) A qualified beneficiary becomes entitled to a disability
extension if the requirements of paragraphs (b), (c), and (d) of
this Q&A-5 are satisfied with respect to the qualified beneficiary.
If the disability extension applies with respect to a qualifying
event, it applies with respect to each qualified beneficiary
entitled to COBRA continuation coverage because of that qualifying
event. Thus, for example, the 29-month maximum coverage period
applies to each qualified beneficiary who is not disabled as well as
to the qualified beneficiary who is disabled, and it applies
independently with respect to each of the qualified beneficiaries.
See Q&A-1 in �54.4980B-8, which permits a plan to require payment of
an increased amount during the disability extension.

(b) The requirement of this paragraph (b) is satisfied if a
qualifying event occurs that is a termination, or reduction of
hours, of a covered employee's employment.

(c) The requirement of this paragraph (c) is satisfied if an
individual (whether or not the covered employee) who is a qualified
beneficiary in connection with the qualifying event described in
paragraph (b) of this Q&A-5 is determined under Title II or XVI of
the Social Security Act (42 U.S.C. 401-433 or 1381-1385) to have
been disabled at any time during the first 60 days of COBRA
continuation coverage. 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 in
accordance with section 4980B(f)(8), then the period of the first 60
days of COBRA continuation coverage is measured from the date on
which the coverage would be lost).

However, in the case of a qualified beneficiary who is a child born
to or placed for adoption with a covered employee during a period of
COBRA continuation coverage, the period of the first 60 days of
COBRA continuation coverage is measured from the date of birth or
placement for adoption. For purposes of this paragraph (c), an
individual is determined to be disabled within the first 60 days of
COBRA continuation coverage if the individual has been determined
under Title II or XVI of the Social Security Act to have been
disabled before the first day of COBRA continuation coverage and has
not been determined to be no longer disabled at any time between the
date of that disability determination and the first day of COBRA
continuation coverage.

(d) The requirement of this paragraph (d) is satisfied if any of the
qualified beneficiaries affected by the qualifying event described
in paragraph (b) of this Q&A-5 provides notice to the plan
administrator of the disability determination on a date that is both
within 60 days after the date the determination is issued and before
the end of the original 18-month maximum coverage period that
applies to the qualifying event.

Q-6: Under what circumstances can the maximum coverage period be
expanded?

A-6: (a) The maximum coverage period can be expanded if the
requirements of Q&A-5 of this section (relating to the disability
extension ) or paragraph (b) of this Q&A-6 are satisfied.

(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 the
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). 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.

Q-7: If health coverage is provided to a qualified beneficiary after
a qualifying event without regard to COBRA continuation coverage
(for example, as a result of state or local law, the Uniformed
Services Employment and Reemployment Rights Act of 1994 (38 U.S.C.
4315), industry practice, a collective bargaining agreement,
severance agreement, or plan procedure), will such alternative
coverage extend the maximum coverage period?

A-7: (a) No. The end of the maximum coverage period is measured
solely as described in Q&A-1 and Q&A-6 of this section, which is
generally from the date of the qualifying event.

(b) If the alternative coverage does not satisfy all the
requirements for COBRA continuation coverage, or if the amount that
the group health plan requires to be paid for the alternative
coverage is greater than the amount required to be paid by similarly
situated nonCOBRA beneficiaries for the coverage that the qualified
beneficiary can elect to receive as COBRA continuation coverage, the
plan covering the qualified beneficiary immediately before the
qualifying event must offer the qualified beneficiary receiving the
alternative coverage the opportunity to elect COBRA continuation
coverage. See Q&A-1 of �54.4980B-6.

(c) If an individual rejects COBRA continuation coverage in favor of
alternative coverage, then, at the expiration of the alternative
coverage period, the individual need not be offered a COBRA
election. However, if the individual receiving alternative coverage
is a covered employee and the spouse or a dependent child of the
individual would lose that alternative coverage as a result of a
qualifying event (such as the death of the covered employee), the
spouse or dependent child must be given an opportunity to elect to
continue that alternative coverage, with a maximum coverage period
of 36 months measured from the date of that qualifying event.

Q-8: Must a qualified beneficiary be given the right to enroll in a
conversion health plan at the end of the maximum coverage period for
COBRA continuation coverage?

A-8: If a qualified beneficiary's COBRA continuation coverage under
a group health plan ends as a result of the expiration of the
maximum coverage period, the group health plan must, during the 180-
day period that ends on that expiration date, provide the qualified
beneficiary the option of enrolling under a conversion health plan
if such an option is otherwise generally available to similarly
situated nonCOBRA beneficiaries under the group health plan. If such
a conversion option is not otherwise generally available, it need
not be made available to qualified beneficiaries.

�54.4980B-8 Paying for COBRA continuation coverage.

The following questions-and-answers address paying for COBRA
continuation coverage:

Q-1: Can a group health plan require payment for COBRA continuation
coverage?

A-1: (a) Yes. For any period of COBRA continuation coverage, a group
health plan can require the payment of an amount that does not
exceed 102 percent of the applicable premium for that period. (See
paragraph (b) of this Q&A-1 for a rule permitting a plan to require
payment of an increased amount due to the disability extension.) The
applicable premium is defined in section 4980B(f)(4). A group health
plan can terminate a qualified beneficiary's COBRA continuation
coverage as of the first day of any period for which timely payment
is not made to the plan with respect to that qualified beneficiary
(see Q&A-1 of �54.4980B-7). For the meaning of timely payment, see
Q&A-5 of this section.

(b) A group health plan is permitted to require the payment of an
amount that does not exceed 150 percent of the applicable premium
for any period of COBRA continuation coverage covering a disabled
qualified beneficiary (for example, whether single or family
coverage) if the coverage would not be required to be made available
in the absence of a disability extension. (See Q&A-5 of �54.4980B-7
for rules to determine whether a qualified beneficiary is entitled
to a disability extension.) A plan is not permitted to require the
payment of an amount that exceeds 102 percent of the applicable
premium for any period of COBRA continuation coverage to which a
qualified beneficiary is entitled without regard to the disability
extension. Thus, if a qualified beneficiary entitled to a disability
extension experiences a second qualifying event within the original
18-month maximum coverage period, then the plan is not permitted to
require the payment of an amount that exceeds 102 percent of the
applicable premium for any period of COBRA continuation coverage. By
contrast, if a qualified beneficiary entitled to a disability
extension experiences a second qualifying event after the end of the
original 18-month maximum coverage period, then the plan may require
the payment of an amount that is up to 150 percent of the applicable
premium for the remainder of the period of COBRA continuation
coverage (that is, from the beginning of the 19th month through the
end of the 36th month) as long as the disabled qualified beneficiary
is included in that coverage. The rules of this paragraph (b) are
illustrated by the following examples; in each example the group
health plan is subject to COBRA:

Example 1. (i) An employer maintains a group health plan. The plan
determines the cost of covering individuals under the plan by
reference to two categories, individual coverage and family
coverage, and the applicable premium is determined for those two
categories. An employee and members of the employee's family are
covered under the plan. The employee experiences a qualifying event
that is the termination of the employee's employment. The employee's
family qualifies for the disability extension because of the
disability of the employee's spouse. (Timely notice of the
disability is provided to the plan administrator.) Timely payment of
the amount required by the plan for COBRA continuation coverage for
the family (which does not exceed 102 percent of the cost of family
coverage under the plan) was made to the plan with respect to the
employee's family for the first 18 months of COBRA continuation
coverage, and the disabled spouse and the rest of the family
continue to receive COBRA continuation coverage through the 29
month. th (ii) Under these facts, the plan may require payment of up
to 150 percent of the applicable premium for family coverage in
order for the family to receive COBRA continuation coverage from the
19 month through the 29 month. If the plan determined the cost of
coverage by th th reference to three categories (such as employee,
employee-plus-one-dependent, employee-plus-two- or-more-dependents)
or more than three categories, instead of two categories, the plan
could still require, from the 19 month through the 29 month of COBRA
continuation coverage, the th th payment of 150 percent of the cost
of coverage for the category of coverage that included the disabled
spouse.

Example 2. (i) The facts are the same as in Example 1, except that
only the covered employee elects and pays for the first 18 months of
COBRA continuation coverage.

(ii) Even though the employee's disabled spouse does not elect or
pay for COBRA continuation coverage, the employee satisfies the
requirements for the disability extension to apply with respect to
the employee's qualifying event. Under these facts, the plan may not
require the payment of more than 102 percent of the applicable
premium for individual coverage for the entire period of the
employee's COBRA continuation coverage, including the period from
the 19 th month through the 29 month. If COBRA continuation coverage
had been elected and paid for th with respect to other nondisabled
members of the employee's family, then the plan could not require
the payment of more than 102 percent of the applicable premium for
family coverage (or for any other appropriate category of coverage
that might apply to that group of qualified beneficiaries under the
plan, such as employee-plus-one-dependent or employee-plus-two-or-
more- dependents) for those family members to continue their
coverage from the 19 month th through the 29 month. th

(c) A group health plan does not fail to comply with section 9802(b)
and �54.9802-1T(b) (which generally prohibit an individual from
being charged, on the basis of health status, a higher premium than
that charged for similarly situated individuals enrolled in the
plan) with respect to a qualified beneficiary entitled to the
disability extension merely because the plan requires payment of an
amount permitted under paragraph (b) of this Q&A-1.

Q-2: When is the applicable premium determined and when can a group
health plan increase the amount it requires to be paid for COBRA
continuation coverage? A-2: (a) The applicable premium for each
determination period must be computed and fixed by a group health
plan before the determination period begins. A determination period
is any 12-month period selected by the plan, but it must be applied
consistently from year to year.

The determination period is a single period for any benefit package.
Thus, each qualified beneficiary does not have a separate
determination period beginning on the date (or anniversaries of the
date) that COBRA continuation coverage begins for that qualified
beneficiary. ( b) During a determination period, a plan can increase
the amount it requires to be paid for a qualified beneficiary's
COBRA continuation coverage only in the following three cases:

(1) The plan has previously charged less than the maximum amount
permitted under Q&A-1 of this section and the increased amount
required to be paid does not exceed the maximum amount permitted
under Q&A-1 of this section;

(2) The increase occurs during the disability extension and the
increased amount required to be paid does not exceed the maximum
amount permitted under paragraph (b) of Q&A-1 of this section; or

(3) A qualified beneficiary changes the coverage being received (see
paragraph (c) of this Q&A-2 for rules on how the amount the plan
requires to be paid may or must change when a qualified beneficiary
changes the coverage being received).

(c) If a plan allows similarly situated active employees who have
not experienced a qualifying event to change the coverage they are
receiving, then the plan must also allow each qualified beneficiary
to change the coverage being received on the same terms as the
similarly situated active employees. (See Q&A-4 in �54.4980B-5.) If
a qualified beneficiary changes coverage from one benefit package
(or a group of benefit packages) to another benefit package (or
another group of benefit packages), or adds or eliminates coverage
for family members, then the following rules apply. If the change in
coverage is to a benefit package, group of benefit packages, or
coverage unit (such as family coverage, self-plus-one-dependent, or
self-plus-two-or- more-dependents) for which the applicable premium
is higher, then the plan may increase the amount that it requires to
be paid for COBRA continuation coverage to an amount that does not
exceed the amount permitted under Q&A-1 of this section as applied
to the new coverage. If the change in coverage is to a benefit
package, group of benefit packages, or coverage unit (such as
individual or self-plus-one-dependent) for which the applicable
premium is lower, then the plan cannot require the payment of an
amount that exceeds the amount permitted under Q&A-1 of this section
as applied to the new coverage.

Q-3: Must a plan allow payment for COBRA continuation coverage to be
made in monthly installments?

A-3: Yes. A group health plan must allow payment for COBRA
continuation coverage to be made in monthly installments. A group
health plan is permitted to also allow the alternative of payment
for COBRA continuation coverage being made at other intervals (for
example, weekly, quarterly, or semiannually).

Q-4: Is a plan required to allow a qualified beneficiary to choose
to have the first payment for COBRA continuation coverage applied
prospectively only?

A-4: No. A plan is permitted to apply the first payment for COBRA
continuation coverage to the period of coverage beginning
immediately after the date on which coverage under the plan would
have been lost on account of the qualifying event. Of course, if the
group health plan allows a qualified beneficiary to waive COBRA
continuation coverage for any period before electing to receive
COBRA continuation coverage, the first payment is not applied to the
period of the waiver.

Q-5: What is timely payment for COBRA continuation coverage?

A-5: (a) Except as provided in this paragraph (a) or in paragraph
(b) or (d) of this Q&A-5, timely payment for a period of COBRA
continuation coverage under a group health plan means payment that
is made to the plan by the date that is 30 days after the first day
of that period.

Payment that is made to the plan by a later date is also considered
timely payment if either - (1) Under the terms of the plan, covered
employees or qualified beneficiaries are allowed until that later
date to pay for their coverage for the period; or

(2) Under the terms of an arrangement between the employer or
employee organization and an insurance company, health maintenance
organization, or other entity that provides plan benefits on the
employer's or employee organization's behalf, the employer or
employee organization is allowed until that later date to pay for
coverage of similarly situated nonCOBRA beneficiaries for the
period.

(b) Notwithstanding paragraph (a) of this Q&A-5, a plan cannot
require payment for any period of COBRA continuation coverage for a
qualified beneficiary earlier than 45 days after the date on which
the election of COBRA continuation coverage is made for that
qualified beneficiary.

(c) If, after COBRA continuation coverage has been elected for a
qualified beneficiary, a provider of health care (such as a
physician, hospital, or pharmacy) contacts the plan to confirm
coverage of a qualified beneficiary for a period for which the plan
has not yet received payment, the plan must give a complete response
to the health care provider about the qualified beneficiary's COBRA
continuation coverage rights, if any, described in paragraphs (a),
(b), and

(d) of this Q&A-5. For example, if the plan provides coverage during
the 30- and 45-day grace periods described in paragraphs (a) and (b)
of this Q&A-5 but cancels coverage retroactively if payment is not
made by the end of the applicable grace period, then the plan must
inform a provider with respect to a qualified beneficiary for whom
payment has not been received that the qualified beneficiary is
covered but that the coverage is subject to retroactive termination
if timely payment is not made. Similarly, if the plan cancels
coverage if it has not received payment by the first day of a period
of coverage but retroactively reinstates coverage if payment is made
by the end of the grace period for that period of coverage, then the
plan must inform the provider that the qualified beneficiary
currently does not have coverage but will have coverage
retroactively to the first date of the period if timely payment is
made. (See paragraph (b) of Q&A-3 in �54.4980B-6 for similar rules
that the plan must follow in confirming coverage during the election
period.)

(d) If timely payment is made to the plan in an amount that is not
significantly less than the amount the plan requires to be paid for
a period of coverage, then the amount paid is deemed to satisfy the
plan's requirement for the amount that must be paid, unless the plan
notifies the qualified beneficiary of the amount of the deficiency
and grants a reasonable period of time for payment of the deficiency
to be made. For this purpose, as a safe harbor, 30 days after the
date the notice is provided is deemed to be a reasonable period of
time.

(e) Payment is considered made on the date on which it is sent to
the plan.

PART 602 - OMB CONTROL NUMBERS UNDER THE Paperwork Reduction Act

Par. 3. The authority citation for part 602 continues to read as
follows:

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

4. In �602.101, paragraph (c) is amended by adding entries in
numerical order to the table to read as follows:

�602.101 OMB Control numbers.

* * * * *

(c) * * *
_______________________________________________________________

CFR part or section where Current OMB identified and described
control No.

* * * * *

54.4980B-6........................................1545-1581

54.4980B-7........................................1545-1581

54.4980B-8........................................1545-1581

* * * * *
_______________________________________________________________

Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: December 28, 1998
Donald C. Lubick
Assistant Secretary of the Treasury
(Tax Policy)

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