COBRA is an abbreviation for The Consolidated Omnibus Budget Reconciliation Act of 1985.

Why was COBRA passed?

Over 40 million Americans are without health insurance coverage. When the uninsured cannot pay their medical bills, the federal government often ends up paying the bill. With escalating costs for health care and federal budget deficits, Congress enacted COBRA to shift costs from the federal government to the private sector and to help slow the rate of growth in the number of uninsured.

Without COBRA continuation coverage, many more people would be uninsured if their employer-provided health insurance coverage terminated due to certain events, such as termination of employment. Therefore, another basic intent of Congress’ passage of COBRA was to cover such individuals during the transition period between the loss of health insurance from the former employer to obtaining coverage under a new employer.

Who must comply with COBRA?

All employers who had 20 or more employees on 50 percent of their typical business days during the preceding calendar year must comply. The only exceptions are:

1. Employers with more than 20 employees who do not sponsor group health plans for their employees;
2. The federal government has its own rules; and
3. Church plans within the meaning of IRS Code Section 414(e).

Who must be offered COBRA?

Covered employees and their covered dependents (“beneficiaries”) must be offered COBRA if they experience a qualifying event.

Covered employees for COBRA purposes are individual who were or are currently provided coverage under a group health plan that comes under the provisions of COBRA.

Covered beneficiaries are covered employees and dependents of covered employees who are covered by the employer’s group plan the day before a COBRA qualifying event takes place and include: covered spouses of employees, covered children of employees and any children born to or placed for adoption with covered employees. A key to understanding COBRA is that each covered beneficiary has the same rights under the group health plan as covered active employees.

When must COBRA be offered?

COBRA must be offered when a covered beneficiary experiences a qualifying event, which is defined by the IRS as an individual “ceasing to be covered under the same terms and conditions as in effect immediately before the qualifying event.”

For how long must COBRA be offered?

The length of time COBRA benefits must be offered is determined by the specific type of qualifying event as follows:

18 Month Qualifying Events:

• Voluntary termination,
• Involuntary termination (gross misconduct exception), or
• Reduction in hours (including strike, layoff, leave of absence, etc.).

36 Month Qualifying Events:

• Death of the employee,
• The employee’s entitlement to Medicare,
• Divorce or legal separation, or
• Dependent child ceasing to be an eligible dependent.

The employer is responsible for knowing when any of the following qualifying events have occurred:

• Voluntary termination,
• Involuntary termination,
• Reduction in hours,
• Death of the employee, or
• Medicare entitlement.

The employee (or other covered beneficiary) must inform the employer or plan administrator of the following qualifying events within 60 days from the latter of the date of the event, or the date on which the qualified beneficiary would lose coverage because of the event:

• Divorce or legal separation, or
• Dependent child ceasing to be an eligible dependent.

What are the guidelines for COBRA extensions and secondary qualifying events?

In certain situations, the initial COBRA continuation period can be extended. These include:

1. Standard Secondary Events – The term standard secondary event simply means one qualifying event stacking on top of another. When such an event occurs, a qualified beneficiary who is already on COBRA can extend COBRA coverage from 18 months to 36 months from the date of the original qualifying event. Examples of secondary qualifying events include:

• Death of the employee,
• Medicare entitlement,
• Divorce or legal separation, or
• Dependent child ceasing to be an eligible dependent.

2. Medicare Entitlement Event – If a termination or reduction of hours occurs less than 18 months after the employee’s Medicare entitlement, qualified beneficiaries (other than the covered employee) must be allowed 18 months from the date of termination or reduction of hours, or 36 months from the date of Medicare entitlement, whichever is longer. A covered employee receives 18 months from the original qualifying event.

3. Disability – COBRA coverage may be extended from 18 to 29 months for qualified beneficiaries who become disabled before the end of the first 60 days of COBRA coverage. If one member of the family qualifies for this extension, all (covered) members qualify.

What are the election periods and time frames?

The employer has 30 days to notify the plan administrator that a qualifying event has occurred. The plan administrator has 14 days to generate a qualifying event notification. If the employer and plan administrator are the same, the employer may have only 14 days from the date of the qualifying event to generate the qualifying event notification.

Each qualified beneficiary has 60 days from the latter of the date of notice or loss of coverage to elect COBRA coverage. Each qualified beneficiary has independent election rights.

Qualified beneficiaries have 45 days from the date of election to pay their premiums. COBRA participants are allowed at least 30 days grace period each month to pay their premiums. If the plan allows a longer period, COBRA participants must also be allowed the longer period.

When does COBRA end?

COBRA provides specific times (“terminating events”) when continuation coverage may be terminated. These include:

• The end of the continuation period,
• Non-payment of premiums,
• The date on which the qualified beneficiary becomes covered under another group health plan that does not contain any exclusion or limitation with respect to any pre-existing condition of the beneficiary other than an exclusion or limitation which does not apply to, or has been satisfied under HIPAA (“Health Insurance Portability and Accountability Act”),
• The date on which the qualified beneficiary becomes (after the date of election) entitled to Medicare, and
• The date on which the employer ceases to maintain any group health plan.

How much can an employer charge for COBRA?

Employers are allowed to charge COBRA participants up to 102% of the applicable premium for continuation coverage. The applicable premium means the same amount plan participants who have not experienced a qualifying event are charged. The extra 2% is allowed to compensate employers for expenses resulting from their efforts to comply with COBRA health insurance continuation regulations.

Employers simply cannot continue absorbing cost increases of the type we have seen in the last few years. In one form or another, an increasing share of the cost of healthcare insurance is being passed on to employees. A recent Towers Perrin Healthcare Cost Survey indicated “employees will contribute 16% of the premium cost for employee only coverage and 25% for dependent coverage (21% overall) for 2005.” Our own experience indicates employees are paying more than 25% of the cost of dependent coverage (up to 100%) and as much as 25% to 40% of total plan costs in many companies.

Other effective cost-containment strategies that should be considered include: establishing or increasing across-the-board deductibles and co-pays, placing annual visit or dollar limits on specific types of treatments and modifying co-insurance and/or out-of-pocket stop loss limits. To help employees deal with their increasing portion of health insurances costs, employers should consider establishing one of the new IRS Section 125 flexible spending accounts, such as an HSA or HRA. These accounts permit employees to set aside a portion of their income on a pre-tax basis to use for reimbursing themselves for healthcare expenses not covered by insurance.

In our view, the availability of affordable health insurance is the most important employee benefit a company offers to its employees. Anyone who is responsible for seeing the benefit is available and affordable knows that task is becoming more challenging each year.

Projected Salary Increases for 2004 – 2005
The Bureau of National Affairs (“BNA”) reports salary increases for the upcoming year are projected to be about 3.5%, or about the same as for 2003 – 2004. The Bureau of Labor Statistics (“BLS”) reports the Cost of Living Index (“CPI”) for the 12 months ended August 2004 was 2.7%. Therefore, one interpretation of the BNA projection might be the 3.5% projected increase consists of about 77% inflation coverage and 23% for merit.

Home Depot to Pay $5.5 Million to Resolve Discrimination Suit in Colorado
On August 25, 2004, the Equal Employment Opportunity Commission (“EEOC”) announced resolution of a discrimination suit against Home Depot’s stores in Colorado. The suit, filed on behalf of 38 individuals, alleged hostile work environment discrimination based on gender, race and national origin. In addition, Home Depot was alleged to have retaliated against employees who complained about discrimination.

Home Depot apparently agreed to resolution of the suit without going to trial. To resolve the charges, the parties entered into a Consent Decree, which called for Home Depot to:

• Pay $3 million to the 38 individuals who were party to the suit;
• Pay $2.5 million into a class settlement fund to provide relief for other individuals who allegedly were harmed by the alleged unlawful conduct;
• Provide training on the requirements of anti-discrimination laws, with appropriate levels of information presented to non-supervisory employees, managers and human resource employees;
• Appoint an EEO Coordinator to insure compliance with the Consent Decree and oversee the company’s investigation of employee complaints of discrimination; and
• Submit quarterly reports to the EEOC and remain under continued monitoring by the EEOC for a period of 30 months.

Commenting on the settlement, EEOC’s Regional Attorney for the Denver District Office, said: “We commend Home Depot for working cooperatively with us to resolve this case. Without the willingness of Home Depot to mediate and bring prompt closure, this case could have taken years to litigate. Instead, the parties were able to work collaboratively to bring this matter to an amicable resolution that satisfied the interests of all parties concerned.”

Home Depot denied the allegations in the complaint.

Actions Speak Louder Than Words
While they are participating in the application process, job applicants can be expected to be at their best including appearance, demeanor and statements made about their experience and ability. One such applicant, candidate A, recently spent a portion of her interview touting her contributions to the success of her most recent employer. However, when asked why she left, she stated she “voluntarily quit due to a conflict with a coworker.”

Based in part upon this statement, as well as the availability of other qualified candidates, we recommended against hiring her. Two days later the client stated he was glad he followed our advice not to hire candidate A because he ran into one of her former supervisors who stated: “I’m glad you did not hire candidate A, she is disruptive and would have caused problems in your office.”

About HR Advisor:

The information contained in HR Advisor is based upon extensive professional experience, research and “best practices.” DMJ HR does not practice law and nothing contained in this newsletter is intended or should be construed as legal advice. Readers who need legal advice on subjects discussed in HR Advisor should consult with their legal counsel.

Comments or suggestions pertaining to HR Advisor should be directed to:

Deborah Hall, SPHR
Consultant, DMJ Human Resources Division
A Division of DMJ & Co., LLP
PO Box 9258
Greensboro, NC 27429-0258
Telephone: 336-275-9886
E-mail: dhall@dmj.com