COBRA High Five Part IV: Coverage During the Election and Premium Period

Question: What are the COBRA rules that apply to coverage before the qualified beneficiary elects COBRA and pays the required premium? 

Short Answer: The plan may take different approaches to handling coverage during this interim COBRA election/premium period.  Regardless of the plan’s approach, upon a timely COBRA election and initial premium payment the qualified beneficiary will have continuous and seamless coverage retroactive to the date active coverage ended. 

Did you know that “COBRA” stands for the “Consolidated Omnibus Budget Reconciliation Act of 1985”? While the law is often referred to as “of 1986” based on its enactment date, the actual title in the law is “of 1985”.  Rep. Pete Stark (D-CA) is generally credited with drafting the legislation and spearheading its passage.  In honor of the 40^th anniversary of COBRA’s introduction in Congress on July 31, 1985, we are exploring a “High Five” selection of five key COBRA issues that employers are still grappling with 40 years later.  Enjoy! 

• COBRA High Five Part I: Independent Election Rights 

• COBRA High Five Part II: The Notices of Unavailability and Termination of Coverage 

• COBRA High Five Part III: The Premium Grace Period and Shortfalls 

General Rule: COBRA Qualifying Event for Continuation Coverage 
Individuals have the right to continue group health plan coverage through COBRA upon experiencing a “qualifying event,” which is a loss of coverage triggered by one of the prescribed COBRA triggering events.  Individuals who experience a COBRA qualifying event are referred to as “qualified beneficiaries”. Group health plans subject to COBRA include medical, dental, vision, health FSA, HRA, most EAPs, and certain wellness programs and on-site medical clinics.  

There are two requirements for a COBRA qualifying event: 

1. Loss of group health plan coverage; 

2. Caused by a COBRA triggering event. 

Not all losses of coverage are a COBRA qualifying event.  Qualified beneficiaries have COBRA continuation coverage rights only if they experience a qualifying event.  The event causing the individual’s loss of coverage must be one of the listed triggering events set forth by COBRA to constitute a qualifying event.  

For more details: 

1. The COBRA Triggering Events 

2. Newfront COBRA for Employers Guide 

The COBRA Election and Initial Premium Timeframes  
The COBRA timing rules allow a significant buffer time to provide the COBRA election notice, elect COBRA, and make the initial COBRA premium payment.  This extended timeframe can create an extended gap between the period the qualified beneficiary loses active coverage and the subsequent COBRA election and payment.  

The COBRA rules generally provide the following applicable timeframes:  

44 Days: Election Notice to Qualified Beneficiary Deadline 
Employers (group health plans) generally must provide a COBRA election notice to individuals who experience a qualifying event within 44 days from the loss of coverage. 

• The rules provide 30 days for the employer to provide notice to the plan administrator. 

• The rules provide 14 days for the plan administrator to provide the election notice to the qualified beneficiary. 

• The DOL generally enforces these timeframes as a combined 44-day from loss of coverage limit. 

60 Days: Election by Qualified Beneficiary Deadline 
Employees and dependents who experience a COBRA qualifying event have 60 days from the date the COBRA election notice is “provided” to elect continuation coverage. 

• The standard approach is that the 60-day clock is triggered when the COBRA election notice is mailed, but ambiguity surrounding the rule (and mixed court decisions) have caused some to be more cautious and treat the notice as “provided” on the date the notice is received. 

45 Days: Initial Premium Payment Deadline 
COBRA qualified beneficiaries have 45 days from the COBRA election date to make the first premium payment. 

• Upon the qualified beneficiary’s timely COBRA election and initial premium payment, COBRA coverage is retroactive to the date active coverage was lost.  In other words, COBRA provides continuous, seamless coverage despite the COBRA election/premium period after the loss of active coverage. 

No Coverage Gap Upon Timely COBRA Election/Payment 
The general COBRA timeframes outlined above demonstrate that there can be a period of up to five months between the day that an employee or dependent loses coverage and the day of the initial COBRA premium payment after a timely COBRA election (the “COBRA election/premium period”).  This COBRA election/premium period can cause significant angst for qualified beneficiaries who access covered services during that timeframe.  

The most important point to stress is that upon the qualified beneficiary’s timely election and initial premium payment, COBRA coverage is retroactive to the date active coverage ended.  In other words, COBRA provides continuous, seamless coverage even though there is often an extended COBRA election/premium period after the loss of active coverage.  

Note: There are two unusual situations where there may be a gap in COBRA coverage between the date active coverage ends and the date COBRA takes effect: 

1. Removing a spouse in anticipation of divorce or legal separation; and 

2. Failure to return from FMLA leave (after failure to timely play for coverage during the leave). 

Accessing Covered Health Services Prior to Electing and Paying for COBRA 
Although in almost all cases there will be no coverage gap upon a timely COBRA election and initial premium payment, there is still the question of how to address the plan’s coverage before the qualified beneficiary makes both the election and payment.  The available approaches vary based on whether the qualified beneficiary has PPO or HMO coverage in effect at the time of the qualifying event.  

PPO Coverage During the COBRA Election/Premium Period 
The plan has two options for addressing coverage other than an HMO (e.g., PPO, most HDHPs) during the COBRA election/premium period prior to COBRA taking effect: 

1. Option 1—Continue Providing Coverage: The plan can continue to make coverage available to the qualified beneficiary in the same manner as when active coverage was in effect. 

2. Option 2—Terminate and Retroactively Reinstate Coverage: The plan can terminate coverage for the qualified beneficiary during the COBRA election/premium period, and then reinstate coverage retroactive to the moment active coverage terminated upon the qualified beneficiary’s timely COBRA election and initial premium payment. 

Option 1 Additional Details: 

• The rules provide that the plan may choose not to pay claims incurred by the qualified beneficiary that are incurred during the COBRA election/premium period until it receives a timely COBRA election and payment. 

• Even though coverage has not terminated under this option, it can result in the functional equivalent if the plan is not processing claims during the COBRA election/premium period.  

• This in-between coverage status (i.e., coverage is active but claims are pended) during the COBRA election/premium period can cause confusion for both qualified beneficiaries and medical providers.  

• Although the ACA prohibits rescission (i.e. retroactive terminations of coverage) outside of certain types of fraud situations, FAQ guidance confirms this prohibition does not apply in the normal COBRA context. 

Option 2 Additional Details: 

• The burden is on the qualified beneficiary to maintain and submit any required records/receipts for services/expenses incurred during the COBRA election/premium period. 

• Upon a timely COBRA election and initial premium payment triggering the retroactive reinstatement of coverage, the qualified beneficiary may need to submit such documentation to the plan for processing. 

Medical Providers: 

• Under either approach, the COBRA rules require the plan to give a complete response to any health care provider contacting the plan about the qualified beneficiary’s COBRA rights during the election/premium period. 

• If the plan follows Option 1, the plan must inform the provider that coverage is subject to retroactive termination. 

• If the plan follows Option 2, the plan must inform the provider that the qualified beneficiary does not currently have coverage until a timely COBRA election and initial premium payment, which will provide coverage retroactive to the point active coverage terminated. 

HMO Coverage During the COBRA Election/Premium Period 
The plan has two options for addressing coverage during the COBRA election/premium period prior to COBRA taking effect: 

1. Option 1—Require Prior Timely Election/Payment: The HMO can condition any services on the qualified beneficiary first making a timely COBRA election and initial premium payment. 

2. Option 2—Require Subsequent Timely Election/Payment: The HMO can treat the qualified beneficiary’s use of its facility as a constructive COBRA election that obligates the qualified beneficiary to timely pay the initial COBRA premium. 

3. Option 3—Charge for Services: The HMO can condition any services on the qualified beneficiary paying the reasonable and customary charge for such services. 

Option 1 Additional Details: 

• The major flaw of this approach is that the qualified beneficiary cannot access the HMO services during the COBRA election/premium period. 

Option 2 Additional Details: 

• The qualified beneficiary must be informed that use of the HMO facility will be treated as a constructive COBRA election that requires timely payment of the initial COBRA premium to access services. 

Option 3 Additional Details: 

• Qualified beneficiaries must be reimbursed for any such payments within 30 days of a timely COBRA election and initial premium payment. 

Which Approach Does My Plan Follow?
Employers should consult with their applicable insurance carriers (fully insured plan), TPAs and stop-loss providers (self-insured plans), and COBRA TPAs (all plans) for more details on the approach that its plan follows with respect to coverage before the qualified beneficiary timely elects COBRA and pays the initial premium.  

In some cases, there may be flexibility to work with these vendors to choose an approach described above that the employer prefers.  However, in many cases the outside vendors involved in plan funding and administration will largely follow a set process that leaves little discretion available to the employer.  

Inherent Potential for Adverse Selection During COBRA Election/Premium Period 
As with most aspects of COBRA, there are many potential avenues for adverse selection with respect to the COBRA election/premium period.  Qualified beneficiaries may take advantage of the full 60-day election period and 45-day premium period (roughly 3.5 months) as a hedge to determine whether their claims outweigh the premium cost during that period prior to making the premium payment.  This is simply one of the costs embedded in maintaining a group health plan.  

On the other hand, there are multiple factors that mitigate the adverse selection concern from qualified beneficiaries who might otherwise take advantage of the COBRA election/premium period.  For one, the qualified beneficiary may prefer to avoid a coverage gap long enough to trigger a state-based individual mandate penalty.  In those situations, delaying the COBRA election/premium would not convey an inherent advantage because the employee would not be weighing the potential claim vs. premium costs.    

Another example is qualified beneficiaries may prefer the potentially lower cost of coverage available on the Exchange, which in many cases will provide access to subsidies (the §36B premium tax credit).  In those situations, the COBRA offering becomes largely irrelevant. 

Lastly, qualified beneficiaries generally will want coverage at some point.  If the expiration of the COBRA election/premium period does not nicely align with the ability to access coverage through a new employer, access to a spouse/DP/parent’s coverage at open enrollment, or access to Exchange coverage during its open enrollment period, the qualified beneficiary will generally be more motivated to avoid a significant coverage gap than the cost/benefit analysis available through the COBRA election/premium period. 

Stay tuned for the remainder of the COBRA High Five series!  

Relevant Cites: 
Treas. Reg. §54.4980B-6: 
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 (and, if applicable, payment for the coverage) 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. 

Treas. Reg. §54.4980B-8, Q/A-5(c): 
(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.) 

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).