Question: How do the 12-month COBRA determination period requirements apply where the plan year or premium changes mid-year?
Short Answer: With some limited exceptions, the general rule is that the plan’s COBRA premium must remain consistent for a 12-month determination period.
General Rule: 12-Month Determination Period
The plan generally must keep a stable COBRA premium amount for a 12-month “determination period.” That 12-month determination period can be any period consistently applied year-to-year on a uniform basis for all qualified beneficiaries.
As a practical matter, employers almost always match this 12-month COBRA determination period to the underlying plan year.
Three Situations Where Employers May Change the COBRA Premium Mid-Determination Period
The COBRA regulations provide that employers may change the applicable COBRA premium during the determination period only in the following three situations:
- The plan had previously charged less than the maximum amount permitted (i.e., less than 102% of the cost of coverage, or less than 150% for the disability extension);
- The increase is for a disabled qualified beneficiary’s move from the standard COBRA premium for the first 18-months (up to 102% of the cost of coverage) to the 11-month disability extension cost of coverage (up to 150% of the cost of coverage); or
- The qualified beneficiary moves to a different plan option with a different cost of coverage upon one of the permitted events.
For more details on the disability extension rules, see our previous post: The COBRA Disability Extension.
For more details on when a qualified beneficiary can change plan options, see our previous post: Enrolling New Dependents and Changing Plan Options Under COBRA.
Moving to New Plan Year: Extended Determination Period (Conservative Approach)
Where moving to a new plan year, the COBRA regulations do not directly address how this change interacts with the 12-month determination period.
The more conservative approach would therefore be to maintain the COBRA premium for the full plan year and the short transitional plan year. That would result in a determination period of longer than 12 months, requiring the employer to cover the additional premium cost of any increase in the short plan year.
Moving to New Plan Year: Short Determination Period (More Common Approach)
The more common approach would be to interpret the rules to permit a short determination period to match the plan’s short plan year in transitioning to the new plan year. This appears to be a low risk approach as long as the employer has a bona fide business reason for the change to the plan year.
The short determination period clearly would not be permitted if the purpose of the short plan year were to act as a subterfuge of the general 12-month determination period rule (i.e., if it were merely intended to increase the cost of COBRA coverage for qualified beneficiaries). Absent that unlikely scenario, we think the short determination period to match the short transitional plan year is a reasonable position that is unlikely to be scrutinized.
Mid-Determination Period Decrease in Plan Premiums: Recommend Adjustment
It is not clear from the COBRA rules whether the employer is required to decrease the COBRA rate mid-determination period based on a reduction to the plan’s premium.
Although it is not entirely clear whether the change is required, the general COBRA rule is that qualified beneficiaries cannot be required more than 102% (or 150% for a disability extension) of the cost of coverage. Therefore, our position is that the best practice approach is to immediately decrease the required COBRA premium for qualified beneficiaries upon a reduction to the plan premium—even where that reduction occurs in the middle of a 12-month determination period.
Note that there is at least a reasonable argument that the mid-year COBRA premium reduction is not required because the rules direct employers to keep the COBRA rate stable for the 12-month determination period. We would consider that to be only a mildly aggressive position. However, the better argument is likely that the employer is required to reduce the COBRA rate in the same manner as if the qualified beneficiary moves to a lower-cost plan option mid-year.
Mid-Determination Period Increase in Plan Premiums Imposed by Insurance Carrier: No Adjustment Permitted
It is clear that employers cannot increase the COBRA premium for qualified beneficiaries mid-year to address a mid-year increase in the plan premium.
For example, if a plan with a calendar-year determination period receives a cost increase from its insurance carrier in July, the employer cannot correspondingly increase the COBRA premium for qualified beneficiaries until the following January. Any such mid-year increase would have to be borne by the employer until the next determination period.
Mid-Determination Period Change in Insurance Carriers Causing Increased Premium: Adjustment May Be Permitted
Although it is not entirely clear, it is likely that employers can increase the COBRA premium mid-determination period to account for the change to the plan coverage mid-determination period.
In other words, because employers are permitted to change the COBRA premium where qualified beneficiaries move to a different plan option with a different cost of coverage, it is likely that employers can similarly change the COBRA premium where the premium increase is caused by changes to the plan options offered by the plan.
Reminder: Advance Notice of Premium Change Required
DOL guidance provides that employers must provide COBRA qualified beneficiaries with reasonable advance notice of increased COBRA premiums, as well as a reasonable opportunity to pay the increased premium.
This means that the employer likely cannot terminate a qualified beneficiary’s COBRA coverage for insufficient payment unless the employer had notified the qualified beneficiary of the premium increase in advance of it taking effect. Failure to provide advance notice will result in the employer effectively having no enforcement mechanism if the qualified beneficiary refuses to pay the increased amount.
For more details on COBRA, see our ABD Office Hours Webinar: COBRA for Employers.
Treas. Reg. §54.4980B-8, Q/A-2:
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.
ABA JCEB DOL Q/A-5 (May 7, 2008):
Question 5: How much advance notice must the employer provide of the annual increase in the COBRA premium?
DoL Answer 5: The Staff acknowledges that neither the COBRA notice provisions in Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) nor the DoL’s COBRA notice regulations (29 C.F.R. §§ 2590.606-1 through 2590.606-4) explicitly provide for advance notice of a COBRA premium increase. Nonetheless, Treasury regulations provide that if a COBRA premium payment is short by an amount that is insignificant, the qualified beneficiary must be provided notice of such underpayment and a reasonable amount of time to make the payment difference. See Treasury Regulation § 54.4980B-8, Question and Answer 5. Likewise, both the statute and Treasury regulations include provisions requiring equal coverage and, to some extent, equal treatment between COBRA qualified beneficiaries and same similarly situated non-COBRA beneficiaries. See ERISA § 602(1) and Treasury Regulation § 54.4980B- 5, Question and Answer 1. Accordingly, in the Staff’s view, COBRA continuation coverage should not be terminated for insufficient payment if COBRA qualified beneficiaries are not provided a reasonable advance notice of increased premiums and a reasonable opportunity to pay the increased premium.
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