A divorce in process and the spouse moving out of state prior to the divorce provide complications.
Question: An employee and spouse are in the process of finalizing a divorce. Prior to the divorce being finalized, the spouse is moving to New York, which outside the regional service area of the HMO that they’re both covered under. Can the employee drop the spouse from coverage when she moves?
Compliance Team Response
There are a few different issues here.
1)Legal Separation vs. Divorce
The first item to confirm is that the employee and spouse have not already legally separated. In many situations, the couple will obtain a legal separation order prior to the divorce finalizing. Most plans treat legal separation as a loss of eligibility event in the same manner as a final divorce.
If the parties have already legally separated, the spouse needs to be removed from the plan immediately (and provided COBRA rights), assuming the plan terminates eligibility upon legal separation.
If the parties have not legally separated, the employee needs to wait until the soonest of a) the final divorce, b) the next OE, or c) a different permitted election change event to drop the spouse. This last option is addressed in #2 below.
2) Change in Residence Affecting Eligibility
A change in residence of the employee, spouse, or dependent creates a permitted election change event for the employee where the move affects the employee’s, spouse’s, or dependent’s eligibility for coverage. Where the move affects eligibility, the employee can make an election change that is on account of and consistent with the event (the change in residence).
If the move changes the plan options available, it will create a permitted election change event allowing the employee to change the plan options(s) for which the move caused the employee to be newly eligible or lose eligibility.
For example, if the move makes the employee eligible for a Kaiser HMO that wasn’t available in Pennsylvania, the employee could change to that Kaiser HMO upon making the move. If the move causes the coverage to be of no value to the employee, spouse, or dependent (e.g., moving outside the HMO regional service area or outside the country), the employee can drop coverage for the affected family members.
In this case, the spouse is moving outside the regional service area of the HMO. The employee can therefore a) drop the spouse from coverage, or b) move the employee and spouse to different a different plan option that provides coverage in the area where they both reside. It’s likely that the employee will choose the first option based on the circumstances.
3) Removal in Anticipation of Divorce
There is a special COBRA qualifying event rule where an employee drops a spouse from coverage in anticipation of divorce. Where this is case, upon receiving notice of the divorce when it subsequently is finalized, the plan will have to offer COBRA coverage to the now ex-spouse.
The tricky part is that the COBRA coverage will be offered as of the date of the divorce. This means that there will be a gap in coverage between the employee dropping the spouse and the divorce being finalized. That’s one of the very rare circumstances where this can occur—in almost all other cases COBRA will provide continuous, seamless coverage.
In this case, the spouse could argue that her removal from coverage upon moving to New York was in anticipation of divorce, and therefore she should have COBRA rights upon the divorce finalizing. If that situation arises, the former spouse would have COBRA rights beginning as of the date of the divorce, with a gap in coverage from the date she was removed from coverage until the divorce finalizing.
Treas. Reg. Sec. 54.4980B-4, Q/A-1(a):
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. See Q&A-1 through Q&A-3 of §54.4980B-10 for special rules in the case of leave taken under the Family and Medical Leave Act of 1993 (29 U.S.C. 2601-2619).
(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.
Treas. Reg. §1.125-4(c)(2)(v):
(c) Changes in status.
(1) Change in status rule. A cafeteria plan may permit an employee to revoke an election during a period of coverage with respect to a qualified benefits plan (defined in paragraph (i)(8) of this section) to which this paragraph (c) applies and make a new election for the remaining portion of the period (referred to in this section as an election change) if, under the facts and circumstances—
(i) A change in status described in paragraph (c)(2) of this section occurs; and
(ii) The election change satisfies the consistency rule of paragraph (c)(3) of this section.
(iii) Application to other qualified benefits. [Reserved]
(2) Change in status events. The following events are changes in status for purposes of this paragraph (c):
(i) Legal marital status. Events that change an employee’s legal marital status, including the following: marriage; death of spouse; divorce; legal separation; and annulment.
(ii) Number of dependents. Events that change an employee’s number of dependents, including the following: birth; death; adoption; and placement for adoption.
(iii) Employment status. Any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: a termination or commencement of employment; a strike or lockout; a commencement of or return from an unpaid leave of absence; and a change in worksite. In addition, if the eligibility conditions of the cafeteria plan or other employee benefit plan of the employer of the employee, spouse, or dependent depend on the employment status of that individual and there is a change in that individual’s employment status with the consequence that the individual becomes (or ceases to be) eligible under the plan, then that change constitutes a change in employment under this paragraph (c) (e.g., if a plan only applies to salaried employees and an employee switches from salaried to hourly-paid with the consequence that the employee ceases to be eligible for the plan, then that change constitutes a change in employment status under this paragraph (c)(2)(iii)).
(iv) Dependent satisfies or ceases to satisfy eligibility requirements. Events that cause an employee’s dependent to satisfy or cease to satisfy eligibility requirements for coverage on account of attainment of age, student status, or any similar circumstance.
(v) Residence. A change in the place of residence of the employee, spouse, or dependent.
(vi) Adoption assistance. For purposes of adoption assistance provided through a cafeteria plan, the commencement or termination of an adoption proceeding.
(3) Consistency rule.
(i) Application to accident or health coverage and group-term life insurance. An election change satisfies the requirements of this paragraph (c)(3) with respect to accident or health coverage or group-term life insurance only if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer’s plan. A change in status that affects eligibility under an employer’s plan includes a change in status that results in an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the plan.
Treas. Reg. §54.4980B-4, Q/A-1(c):
(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-4 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.
IRS Rev. Rul. 2002-88:
If an employee eliminates the coverage of the employee’s spouse under a group health plan in anticipation of their divorce, a plan that is required to make COBRA continuation coverage available to the spouse must begin to make that coverage available as of the date of the divorce.
About the author
Lead Benefits Counsel
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.
The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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