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Terminated Employees Not Terminated from Coverage

Missing an employee termination from benefits is a common error.  What is the best way to correct this?

Question: A client just realized that a group of 16 former employees were not dropped from coverage despite terminating from employment up to seven months ago.  The HRIS system did not communicate with the ben admin system, so they were never offered COBRA because they remained on active coverage.  What is the best approach to fixing this?

Compliance Team Answer:

Here is a summary of our recommendation for how to address the inadvertent extension of active health coverage for terminated employees:

Executive Summary

The former employees whose coverage active coverage inadvertently continued for some additional period following their termination from employment should:

a) Have their active coverage terminated effective as of today or on a prospective basis (e.g., the end of the month);

b) Receive a COBRA election notice reflecting the extension of employer-paid active coverage beyond the intended period;

c) Be permitted to timely elect and pay for COBRA continuation coverage effective as the date active coverage is terminated; and

d) Have a federal COBRA maximum coverage period of the standard 18 months reduced by the period of additional active coverage after termination from employment.

I. Retroactive Termination of Coverage Not Permitted

The ACA prohibits a rescission of coverage except in cases where the individual has engaged in fraud or made an intentional misrepresentation of material fact.  Rescission is defined as a cancellation or discontinuance of coverage that has retroactive effect.  (Note that where rescission is permitted, the plan must provide 30-days’ advance written notice to each affected participant.)

Copied below for reference is an example from the ACA rescission regulations that specifically prohibits a retroactive termination of coverage in this situation.  This was the employer’s or third party administrator’s mistake that did not involve fraud or a misrepresentation by the employees.  Therefore, in this case, there will be no option to retroactively terminate the former employees’ coverage.

II. No COBRA Violations

The company has not violated any COBRA requirements by taking this approach.  A COBRA qualifying event occurs when a triggering event listed in COBRA (e.g., termination of employment or reduction of hours) causes a loss of coverage.  The company’s extension of active coverage has resulted in the triggering event (termination of employment) occurring prior to the loss of coverage.  It is only at the point when both events exist (i.e., termination of employment and the resulting loss of active coverage) that a COBRA qualifying event occurs.

In situations such as this where the loss of coverage occurs subsequent to the termination of employment (as a result of an inadvertent continuation of active coverage), the COBRA qualifying event will occur as of the point where active coverage terminates.  The 44-day clock to provide the COBRA election notice does not begin to run until the COBRA qualifying event is complete.  In this situation, the 44-day deadline to provide the COBRA election notice will therefore not start to run until the termination of active coverage date.

III. COBRA Deferred Loss of Coverage Rule Determines Maximum Coverage Period

The COBRA rules provide that additional periods of active coverage after the triggering event (in this case termination of employment) apply toward the COBRA maximum coverage period to reduce the period that the qualified beneficiary may continue coverage through COBRA.  This is referred to in COBRA as a deferred loss of coverage.

The former employees whose active coverage was inadvertently continued after the termination of employment will have the additional months of active coverage credited to their COBRA maximum coverage period.  They will therefore be able to continue coverage through federal COBRA for 18 months reduced by the additional months of active coverage they received after the termination of employment.

For example, an employee who terminated from employment in November 2016 (and whose coverage should have terminated as of 12/1/16) will have received seven additional months of active coverage.  This means that the former employee’s COBRA maximum coverage period would be 11 months from 7/1/17 (18 months reduced by the seven additional months of active coverage that created the deferred loss of coverage).

IV. Reality Check

This guidance is intended primarily to ensure that the company has no compliance issues or potential penalties that could arise under the ACA rescission rules or the COBRA continuation coverage requirements.  The reality is that these former employees a) likely would have come forward requesting COBRA coverage earlier if they wanted coverage after termination of employment (they were put on notice of their COBRA rights upon hire in the initial COBRA notice), and b) likely were not aware that they remained on active coverage beyond the end of the month in which they terminated from employment.

Therefore, it is unlikely that any of the employees will have any claims incurred during the post-termination of employment period that they expect the company’s plan to cover.  It is also unlikely that the employees will elect COBRA to continue coverage (which requires the former employee to pay for 102% of the premium) beyond the active coverage termination date.  We recognize that these steps are not likely to have any practical effect with respect to the former employees’ coverage—but rather are designed to protect the company from a compliance perspective.

Regulations:

29 CFR §2590.715-2712:

(a) Prohibition on rescissions.

(1)   A group health plan, or a health insurance issuer offering group health insurance coverage, must not rescind coverage under the plan, or under the policy, certificate, or contract of insurance, with respect to an individual (including a group to which the individual belongs or family coverage in which the individual is included) once the individual is covered under the plan or coverage, unless the individual (or a person seeking coverage on behalf of the individual) performs an act, practice, or omission that constitutes fraud, or makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan or coverage. A group health plan, or a health insurance issuer offering group health insurance coverage, must provide at least 30 days advance written notice to each participant who would be affected before coverage may be rescinded under this paragraph (a)(1), regardless of whether the coverage is insured or self-insured, or whether the rescission applies to an entire group or only to an individual within the group. (The rules of this paragraph (a)(1) apply regardless of any contestability period that may otherwise apply.)

(2)   For purposes of this section, a rescission is a cancellation or discontinuance of coverage that has retroactive effect.

Example  (2) 2 (i) Facts. An employer sponsors a group health plan that provides coverage for employees who work at least 30 hours per week. Individual B has coverage under the plan as a full-time employee. The employer reassigns B to a part-time position. Under the terms of the plan, B is no longer eligible for coverage. The plan mistakenly continues to provide health coverage, collecting premiums from B and paying claims submitted by B. After a routine audit, the plan discovers that B no longer works at least 30 hours per week. The plan rescinds B’s coverage effective as of the date that B changed from a full-time employee to a part-time employee.

(ii) Conclusion. In this Example 2, the plan cannot rescind B’s coverage because there was no fraud or an intentional misrepresentation of material fact. The plan may cancel coverage for B prospectively, subject to other applicable Federal and State laws.

Treas. Reg. Sec. 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.

Treas. Reg. Sec. 54.4980B-4, Q/A-1(g), Example 5:

Example (5). (i) An employer maintains a group health plan for both active employees and retired employees (and their families). The coverage for active employees and retired employees is identical, and the employer does not require retirees to pay more for coverage than active employees. The plan does not make COBRA continuation coverage available when an employee retires (and is not required to because the retired employee has not lost coverage under the plan). The employer amends the plan to eliminate coverage for retired employees effective January 1, 2002. On that date, several retired employees (and their spouses and dependent children) have been covered under the plan since their retirement for less than the maximum coverage period that would apply to them in connection with their retirement.

(ii) The elimination of retiree coverage under these circumstances is a deferred loss of coverage for those retirees (and their spouses and dependent children) under paragraph (c) of this Q&A-1 and, thus, the retirement is a qualifying event. The plan must make COBRA continuation coverage available to them for the balance of the maximum coverage period that applies to them in connection with the retirement.


About the author

Brian Gilmore

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.


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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