[Federal Register Volume 63, Number 4 (Wednesday, January 7, 1998)]
[Proposed Rules]
[Pages 708-712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-232]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[REG-209485-86]
RIN 1545-AI93
Continuation Coverage Requirements of Group Health Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that provide
guidance under section 4980B of the Internal Revenue Code on certain
changes made by the Health Insurance Portability and Accountability Act
of 1996, the Omnibus Budget Reconciliation Act of 1989, and the
Technical and Miscellaneous Revenue Act of 1988 relating to the
continuation coverage requirements applicable to group health plans.
The regulations will generally affect sponsors of and participants in
group health plans, and they provide plan sponsors and plan
administrators with guidance necessary to comply with the law.
DATES: Written comments and requests for a public hearing must be
received by April 7, 1998.
ADDRESSES: Send Submissions to: CC:DOM:CORP:R (REG-209485-86), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209485-86), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Russ
Weinheimer, 202-622-4695; concerning submissions or requests for a
hearing, LaNita VanDyke, 202-622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
(OMB) for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information should
be sent 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, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC
20224. Comments on the collection of information should be received by
March 9, 1998. Comments are specifically requested concerning the
following:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How to enhance the quality, utility, and clarity of the information
to be collected;
How to minimize the burden of complying with the proposed
collection of information, including the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information is in proposed Sec. 54.4980B-
1(a)(1)(iii). This collection of information is required by statute.
The likely respondents are individuals. Responses to this collection of
information are required in order to obtain the benefit of an extended
period during which a group health plan must make COBRA continuation
coverage available.
Estimated total annual reporting burden: 440 hours.
The estimated annual burden per respondent: 1 minute.
Estimated number of respondents: 26,400.
Estimated annual frequency of responses: on occasion.
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.
Books or records relating to a collection of information must be
[[Page 709]]
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
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
amended the Code to add health care continuation coverage requirements.
These provisions, now set forth in section 4980B of the Code,\1\
generally apply to a group health plan maintained by an employer with
at least 20 employees, and require such a plan to offer each qualified
beneficiary who would otherwise lose coverage as a result of a
qualifying event an opportunity to elect, within the applicable
election period, COBRA continuation coverage. The COBRA continuation
coverage requirements were amended on various occasions,\2\ most
recently under the Health Insurance Portability and Accountability Act
of 1996 (HIPAA).
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\1\ The COBRA continuation coverage requirements were initially
set forth under section 162(k) of the Code, but were moved to
section 4980B of the Code by the Technical and Miscellaneous Revenue
Act of 1988 (TAMRA). TAMRA changed the sanction for failure to
comply with the continuation coverage requirements of the Code from
a disallowance of certain employer deductions under section 162 (and
denial of the income exclusion under section 106(a) to certain
highly compensated employees of the employer) to an excise tax under
section 4980B.
\2\ Changes affecting the COBRA continuation coverage provisions
were made under the Omnibus Budget Reconciliation Act of 1986, the
Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act
of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus
Budget Reconciliation Act of 1990, the Small Business Job Protection
Act of 1996, and the Health Insurance Portability and Accountability
Act of 1996. The statutory continuation coverage requirements have
also been affected by an amendment made to the definition of group
health plan in section 5000(b)(1) by the Omnibus Budget
Reconciliation Act of 1993; that definition is incorporated by
reference in section 4980B(g)(2).
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Proposed regulations providing guidance under the continuation
coverage requirements as originally enacted by COBRA and as amended by
the Tax Reform Act of 1986, were published as proposed Treasury
Regulation Sec. 1.162-26 in the Federal Register of June 15, 1987 (52
FR 22716).
The new set of proposed regulations being published in this notice
of proposed rulemaking reflects principally the most recent set of
statutory changes--those made by HIPAA--but also reflects certain
changes made by the Technical and Miscellaneous Revenue Act of 1988
(TAMRA) and by the Omnibus Budget Reconciliation Act of 1989 (OBRA
'89).
Explanation of Provisions
Disability Extension; Permitted Premiums
As originally enacted, the COBRA continuation coverage provisions
required plans to make continuation coverage available for up to 18
months in the case of a qualifying event that is a termination of
employment or reduction in hours of employment and for up to 36 months
for all other qualifying events, such as death of the covered employee,
divorce from the covered employee, or a dependent child ceasing to be a
dependent under the generally applicable requirements of the plan. If
someone became entitled to the 18-month maximum period of coverage and
experienced a second qualifying event during that period of COBRA
continuation coverage, then the law provided an extended period of
coverage so that there would be a total of 36 months of COBRA
continuation coverage measured from the date of the first qualifying
event.
Under OBRA '89, provisions were added allowing the 18-month period
to be extended to 29 months if a qualified beneficiary was disabled at
the time of the qualifying event. Section 421 of HIPAA changed these
provisions by requiring plans to allow the disability extension if a
qualified beneficiary is disabled within the first 60 days of COBRA
continuation coverage and by clarifying that nondisabled qualified
beneficiaries with respect to the same qualifying event are also
entitled to the disability extension.
Thus, under the current provisions in the Code, all qualified
beneficiaries with respect to the same qualifying event are entitled to
an extension of the maximum period of COBRA continuation coverage from
18 to 29 months, if three conditions are satisfied. First, each
qualified beneficiary must be a qualified beneficiary in connection
with a qualifying event that is a termination of employment or
reduction in hours of employment. Second, a qualified beneficiary must
be determined to have been disabled (within the meaning of title II or
title XVI of the Social Security Act) within the first 60 days of COBRA
continuation coverage. Third, the plan administrator must be provided
with a copy of the determination of disability on a date that is both
within 60 days after the determination is issued and before the end of
the initial 18-month period of COBRA continuation coverage. In the case
of a disability extension, for any period after the end of the 18th
month of COBRA continuation coverage, the plan may generally require
payment for COBRA continuation coverage in an amount that does not
exceed 150 percent of the applicable premium.
These proposed regulations clarify the statutory disability
extension requirements in several respects. For example, the first 60
days of COBRA continuation coverage are generally measured from the
date of the termination of employment or reduction in hours of
employment. An exception applies if coverage would be lost (in the
absence of an election for COBRA continuation coverage) after the date
of the qualifying event and if the plan has elected to measure both the
maximum coverage period and the period for providing notice upon the
occurrence of a qualifying event from the date that coverage would be
lost rather than from the date of the qualifying event. In such a case,
the first 60 days of COBRA continuation coverage are also measured from
the date that coverage would be lost.
In addition, these proposed regulations make clear that the
disability extension applies to each qualified beneficiary, whether or
not disabled, that each qualified beneficiary has an independent right
to the disability extension, and that any of the qualified
beneficiaries may provide the plan administrator with a copy of the
determination of disability.
Another clarification relates to the period during which the plan
may charge 150 percent of the applicable premium. These proposed
regulations make clear that the plan may require payment equal to 150
percent of the applicable premium if a disabled qualified beneficiary
experiences a second qualifying event during the disability extension.
In such a case (that is, where the disabled qualified beneficiary is
entitled to a 36-month maximum coverage period only because a second
qualifying event occurs during the disability extension), the plan may
require payment of 150 percent of the applicable premium until the end
of the 36-month maximum coverage period.
HIPAA also added provisions to the Code, in section 9802(b), that
generally prohibit discrimination in premiums on the basis of health
status, including on the basis of disability. These proposed
regulations clarify that a plan that requires a disabled qualified
beneficiary entitled to the disability extension to pay 150 percent of
the applicable premium (as permitted by the proposed regulations) does
not for that reason fail to comply with the nondiscrimination
requirements of section 9802(b).
These proposed regulations do not address the extent to which a
plan can charge 150 percent of the applicable
[[Page 710]]
premium to a qualified beneficiary who is not disabled. Comments are
requested on this issue.
Newborn and Adopted Children Treated as Qualified Beneficiaries
Section 421 of HIPAA also provides that a child born to or placed
for adoption with the covered employee during a period of COBRA
continuation coverage is a qualified beneficiary. Such a child
generally is eligible to be enrolled immediately for COBRA continuation
coverage under the plan. These proposed regulations clarify that the
maximum coverage period for such a child is measured from the date of
the qualifying event that gives rise to the period of COBRA
continuation coverage during which the child is born or adopted and not
from the date of birth or placement for adoption. Thus, the child's
maximum period of COBRA continuation coverage would end at the same
time as the maximum period for other family members. In addition, the
statutory term placement for adoption is clarified to include an
adoption that is not preceded by a placement for adoption.
Long-Term Care; MSAs
Section 321(d) of HIPAA amended section 4980B of the Code to
provide that a plan does not constitute a group health plan subject to
the COBRA continuation coverage requirements if substantially all of
the coverage provided under the plan is for qualified long-term care
services, as defined in section 7702B(c). These proposed regulations
permit a plan to use any reasonable method in determining whether
substantially all of the coverage is for qualified long-term care
services. Further, the proposed regulations reflect section 106(b)(5),
added by HIPAA, which provides that COBRA continuation coverage is not
required to be made available with respect to medical savings accounts
(MSAs), as defined under section 220.
Good Faith/Reasonable Interpretations
The effective date of these regulations, when made final, will not
be earlier than the date of publication of final regulations in the
Federal Register. For the period before the effective date of final
regulations, plans and employers are required to operate in good faith
compliance with a reasonable interpretation of the statutory
requirements. Compliance with the terms of the proposed regulations
concerning the matters addressed is deemed to be good faith compliance
with a reasonable interpretation of the statutory requirements. Actions
inconsistent with the terms of the proposed regulations will not
necessarily constitute a lack of good faith compliance with a
reasonable interpretation of the statutory requirements; 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. Plans and employers may also continue to rely on proposed
Treasury Regulation Sec. 1.162-26 (published on June 15, 1987 in 52 FR
22716), except to the extent that that proposed regulation is
inconsistent with statutory amendments made after its date of
publication.
Future Guidance Concerning COBRA Obligations in Certain Stock and Asset
Sales
Treasury and the IRS are currently considering the issuance of
guidance concerning COBRA obligations in cases involving a sale of
stock in an employer that causes the employer to become a member of
another controlled group of corporations (a ``stock sale''), or a sale
of substantial assets by an employer (such as a plant or division) to
another employer outside the controlled group (an ``asset sale'').
The approach under consideration generally would provide, in the
case of a stock sale to a buyer maintaining a group health plan, that
the buyer's group health plan (and not a plan maintained by the seller)
would be responsible, after the date of the sale, for complying with
the COBRA continuation coverage requirements with respect to any
covered employee (and associated qualified beneficiary) whose last
employment was with the sold corporation. Thus, for example, the
buyer's group health plan would have the obligation, after the date of
the sale, to comply with the COBRA continuation coverage requirements
with respect to those individuals regardless of whether their
qualifying events were connected to the sale of stock or were in
advance of and not connected to the sale. If the buyer did not maintain
a group health plan, then a group health plan of the seller would
continue to be responsible for complying with the COBRA continuation
coverage requirements with respect to qualified beneficiaries
associated with the sold corporation.
In the case of an asset sale, the approach under consideration
generally would provide that a group health plan maintained by the
seller (and not a plan maintained by the buyer) would be responsible
for complying with the COBRA continuation coverage requirements with
respect to any covered employee (and associated qualified beneficiary)
whose last employment was associated with the purchased assets.
However, an exception would be provided if the buyer were a ``successor
employer,'' in which case a group health plan of the buyer would be
responsible for complying with the COBRA continuation coverage
requirements with respect to qualified beneficiaries associated with
the purchased assets. Consideration is being given to treating a buyer
as a successor employer in connection with an asset sale only if the
buyer acquires substantial assets (such as a plant or division, or
substantially all of the assets of a trade or business) and continues
the business operations associated with those assets without
interruption or substantial change, and only if, in connection with the
sale, the selling employer ceases to maintain any group health plan.
The approach might also include a presumption that the cessation is in
connection with the sale if it occurs within 6 months of the sale.
Comments are requested on this possible approach to assigning
responsibility for compliance with the COBRA continuation coverage
requirements in the context of stock sales and asset sales and on any
related issues that should be addressed.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It is hereby
certified that the collection-of-information requirement in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the collection-of-information requirement is imposed on
individual qualified beneficiaries and not on small businesses or other
small entities. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (a signed original and eight (8)
[[Page 711]]
copies) to the IRS. All comments will be available for public
inspection and copying. A public hearing may be scheduled if requested
in writing by a person that timely submits written comments. If a
public hearing is scheduled, notice of the date, time, and place for
the hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Russ
Weinheimer, Office of the Associate Chief Counsel (Employee Benefits
and Exempt Organizations). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 54
Excise taxes, Health insurance, Pensions, Reporting and
recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 54 is proposed to be amended as follows:
Paragraph 1. The authority citation for Part 54 is amended in part
by adding an entry 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. * * *
Par. 2. A new section 54.4980B-1 is added to read as follows:
Sec. 54.4980B-1 Certain changes to the continuation coverage
requirements of group health plans.
(a) Disability extension--(1) In general. Paragraphs (a)(2), (3),
and (4) of this section (describing qualified beneficiaries entitled to
a disability extension, the length of the extension, and the amount
that a plan can require qualified beneficiaries to pay during the
extension) apply to a group health plan only if all three of the
conditions of this paragraph (a)(1) are satisfied.
(i) A termination-of-employment qualifying event occurs.
(ii) An individual (whether or not the covered employee) who is a
qualified beneficiary in connection with the termination-of-employment
qualifying event is determined under title II or XVI of the Social
Security Act to have been disabled at any time during the first 60 days
of COBRA continuation coverage. For this purpose, the first 60 days of
COBRA continuation coverage are measured from the date of the
termination-of-employment qualifying event, 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 required periods (as permitted under section 4980B(f)(8)), then the
first 60 days of COBRA continuation coverage are measured from the date
on which the coverage would be lost.
(iii) Any of the qualified beneficiaries affected by the
termination-of-employment qualifying event 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 termination-of-employment qualifying event.
(2) Maximum coverage period--(i) The maximum coverage period ends--
(A) 29 months after the date of the termination-of-employment
qualifying event; or
(B) 36 months after the date of the termination-of-employment
qualifying event if a qualifying event (other than a bankruptcy
qualifying event) occurs during the 29-month period that begins on the
date of the termination-of-employment qualifying event.
(ii) If, in the absence of an election for COBRA continuation
coverage, coverage under the group health plan would be lost after the
date of the termination-of-employment qualifying event and the plan
provides for the extension of the required periods, as permitted under
section 4980B(f)(8), then the dates or periods in paragraph (a)(2)(i)
of this section are measured from the date on which coverage would be
lost and not from the date of the termination-of-employment qualifying
event.
(iii) Nothing in section 4980B or this section prohibits a group
health plan from providing coverage that continues beyond the end of
the maximum coverage period.
(3) Application to all qualified beneficiaries. Paragraph (a)(2) of
this section applies to all qualified beneficiaries entitled to COBRA
continuation coverage because of the same termination-of-employment
qualifying event. Thus, for example, the 29-month 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.
(4) Payment during disability extension--(i) Disabled qualified
beneficiaries--(A) A group health plan is permitted to require a
disabled qualified beneficiary described in paragraph (a)(1) of this
section, for any period of COBRA continuation coverage after the end of
the 18th month, to pay an amount that does not exceed 150 percent of
the applicable premium. However, the plan is not permitted to require a
disabled qualified beneficiary described in paragraph (a)(1) of this
section to pay an amount that exceeds 102 percent of the applicable
premium for any period of COBRA continuation coverage to which the
qualified beneficiary is entitled without regard to the application of
this paragraph (a). Thus, if a disabled qualified beneficiary described
in paragraph (a)(1) of this section experiences a second qualifying
event within the original 18-month period of COBRA continuation
coverage, then the plan is not permitted to require the qualified
beneficiary to pay an amount that exceeds 102 percent of the applicable
premium for any period of COBRA continuation coverage. By contrast, if
a disabled qualified beneficiary described in paragraph (a)(1) of this
section experiences a second qualifying event after the end of the 18th
month of original COBRA continuation coverage, the plan may require the
qualified beneficiary to pay 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).
(B) A group health plan does not fail to comply with section
9802(b) and Sec. 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 disabled qualified beneficiary described in
paragraph (a)(1) of this section merely because the plan requires
payment of a premium in an amount permitted under paragraph
(a)(4)(i)(A) of this section.
(ii) Nondisabled qualified beneficiaries. [Reserved].
(b) Newborns and adopted children. A child who is born to or placed
for adoption with a covered employee during a period of COBRA
continuation coverage is a qualified beneficiary and generally is
eligible to be enrolled immediately for COBRA continuation coverage
under the plan. See section 4980B(g)(1)(A), section 9801(f)(2) and
Sec. 54.9801-6T(b) (relating to special enrollment rights of dependents
of employees), and Q&A-31 of Sec. 1.162-26 of this chapter (relating to
the right of qualified beneficiaries to have new family members covered
to the same extent that similarly situated active employees can have
new family members covered under the plan). Such a child has the same
open-enrollment-period rights as other qualified
[[Page 712]]
beneficiaries with respect to the same qualifying event (see Q&A-30(c)
of Sec. 1.162-26 of this chapter) and would be entitled to a 36-month
maximum coverage period if a second qualifying event occurred while the
child was in a period of COBRA continuation coverage resulting from a
termination-of-employment qualifying event. The maximum coverage period
for such a child is measured from the same date as for other qualified
beneficiaries with respect to the same qualifying event (and not from
the date of the birth or placement for adoption). In contrast, neither
the covered employee, the spouse of the covered employee, nor any other
dependent child of the covered employee is a qualified beneficiary
unless that person is covered under a group health plan on the day
before a qualifying event. See also Q&A-31 of Sec. 1.162-26 of this
chapter.
(c) Plan providing long-term care. A plan is not subject to the
COBRA continuation coverage requirements 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 under the plan is for qualified long-
term care services.
(d) Medical savings accounts. Under section 106(b)(5), amounts
contributed by an employer to a medical savings account are not
considered part of a group health plan that is subject to section
4980B. Thus, a plan is not required to make COBRA continuation coverage
available with respect to a medical savings account. However, a high
deductible health plan that covers a medical savings account holder may
be a group health plan and thus may be subject to the COBRA
continuation coverage requirements.
(e) Definitions. For purposes of this section--
Applicable premium is defined in section 4980B(f)(4).
Bankruptcy qualifying event is a qualifying event described in
section 4980B(f)(3)(F) (relating to certain bankruptcy proceedings).
Covered employee is defined in section 4980B(f)(7).
Group health plan is defined in section 4980B(g)(2).
High deductible health plan is defined in section 220(c)(2).
Medical savings account is defined in section 220(d).
Placement, 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. For purposes of this section and section 4980B, 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.
Qualified beneficiary is defined in section 4980B(g)(1).
Qualified long-term care services is defined in section 7702B(c).
Termination-of-employment qualifying event is a qualifying event
described in section 4980B(f)(3)(B) (relating to qualifying events that
occur as a result of a termination of employment, other than for gross
misconduct, or reduction of hours of employment).
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-232 Filed 1-6-98; 8:45 am]
BILLING CODE 4830-01-U