May 7, 2014
Although federal health care reform law never directly changed COBRA rules, the reform environment introduces an array of new factors that affect how continuation coverage is used and elected. For example, while the Patient Protection and Affordable Care Act (ACA) does not eliminate or reduce an employer's obligations to comply with COBRA, the law does change how an employer may choose to address certain COBRA issues in the future, and likely it both lowers the overall COBRA election rate, while intensifying the number of less-healthy people electing COBRA.
This HUB Client Bulletin addresses two issues involving COBRA:
- COBRA notices
- Eligibility for the insurance exchange and subsidies
The federal government is modifying official model COBRA notices to add new information about the alternative of electing coverage via the insurance exchanges. (This builds on an earlier revision to the model COBRA notice last year ahead of the launch of exchange operations.)
Workers and their families who are eligible for employer-sponsored coverage generally must be informed of their right to COBRA continuation coverage twice: with a "general" notice (sometimes called "initial notice") when they are first covered by the health plan and, a second time at the moment a "qualifying event" occurs. The "qualifying event" notice will deliver specific rules explaining an individual's right to purchase COBRA coverage (such as at the time an individual separates from his or her job).
The proposed changes to the model notices offer information on typically more affordable options available through the exchanges, where workers and families may be eligible for financial assistance that would not otherwise be available for COBRA continuation coverage. In most cases, due to a "special enrollment" event like termination of employment or other loss of group coverage, workers and their families would be able to enroll in exchange coverage outside of the normal open enrollment period. The new model notice makes it clear that insurance access via the exchange remains available even though the individual is eligible for COBRA continuation coverage, and financial help also remains available provided he or she has not enrolled in the continuation coverage.
The Departments of Labor, Health and Human Services, and Treasury are also publishing frequently asked questions related to the proposed changes to model notices. (See the links shown in "Helpful links".)
Eligibility for Insurance on the Exchange and the Federal Subsidy
As with earlier HIPAA compliance rules, insured plans will generally be able to depend on their insurance carrier for compliance. Communication with insurance carriers to address how compliance is satisfied is recommended.
As with many health reform provisions, the impact of the new rules in COBRA situations will not always be clear cut, and the results are not necessarily logical. For ease of discussion, we will refer to the COBRA event as involving a former employee who has lost coverage due to termination of employment, triggering a right to 18 months of COBRA. (Obviously, there could be other events with up to 36 months of COBRA.)
Question One: If an employee or family member is covered by a group plan and has a COBRA event (which causes a loss of coverage), can he or she qualify for coverage on the insurance exchange as a special enrollment?
The answer to the question will be "yes," if COBRA is not elected.
If a former employee is simply offered COBRA coverage but does not elect it, he or she should become exchange coverage eligible, presuming other qualification criteria are satisfied. Moreover, the subsidy could be available. (This is true because the individual will only be treated as "eligible for employer coverage through COBRA" -- and disqualified for subsidies -- for months when the person has elected COBRA coverage.) Without a COBRA election, the mere offer of COBRA will not preclude the individual's eligibility for exchange coverage enrollment, or the subsidy.
By contrast, if COBRA is elected, the answer to the same question is "no." Moreover, the employee cannot later enroll in exchange coverage if he or she chooses to drop (voluntarily walk-away from) COBRA coverage.
Electing COBRA immediately ends any special enrollment right. So, once the person takes COBRA coverage, there will be no special enrollment on the exchange until either COBRA is exhausted, or until the next exchange open enrollment season.
Question Two: What about the impact of COBRA on eligibility for a federal subsidy which can be used to buy coverage on the exchange?
Ironically, the subsidy remains available - regardless of whether COBRA is offered and even regardless of whether COBRA is actually elected. Under the technical rules governing how federal subsidies are extended, the mere COBRA offer does not affect an individual's ability to qualify for the subsidy, and neither does actually electing COBRA (since continuation is not technically employer-paid coverage). The seeming inconsistent application of the rule described above, inside the context of possible "subsidy" eligibility requires a closer look.
Why is this ironic? Exchange marketplace eligibility immediately closes upon a COBRA election. So, even if the individual technically qualifies for a subsidy, that person cannot enter the exchange outside of the special enrollment or open enrollment, which is the only place where the person can spend the subsidy. It is as though the person is barefoot and has money, but the only shoe store in town is closed. In other words, unless the individual enrolls via an exchange, there is no way he or she can actually spend the government's subsidy dollars.
Question Three: Can the former employee drop COBRA?
If COBRA is elected and then dropped, the person is precluded from enrolling in exchange coverage at their convenience. This means that "voluntarily dropping" COBRA or, perhaps more commonly, failing to pay for COBRA, will not create a new right to enroll on the exchange. Although the subsidy may be available technically, for similar reasons as explained above, the subsidy cannot be used ("spent") without exchange access also being available.
Question Four: What if the employer paid for COBRA for some period of time, such as for six months following severance from employment, then later for whatever reason that employer stops paying for the continuation coverage? This question has particular implications for employers planning to transition employees out of the workforce - both voluntary and involuntary terminations of employment.
Again, once COBRA is elected, the failure of anyone, even a former employer, to pay the premium will not trigger an enrollment right. The insurance carriers on the exchange can require the former employee to wait until the next annual enrollment period, so the result is the same as above: Even if the former employee can qualify for the subsidy, the individual cannot access the exchange policies, so he cannot "spend" the subsidy. In order to have health insurance, the former employee would need to either pay for the COBRA coverage until the earlier of the next open enrollment for the exchange, or wait until COBRA is exhausted. Due to this Catch-22, it would be preferable for the severance negotiation to be a cash amount, rather than payment for COBRA premiums. The former employee could then elect exchange coverage, possibly qualifying for a subsidy (a possibility the former employer should never guarantee or promise).
Question Five: If someone voluntarily drops COBRA during an exchange open enrollment, are they eligible for subsidies in the individual marketplace?
Per federal agency guidance issued April 21, 2014, during the exchange open enrollment, a person can voluntarily drop his or her COBRA coverage and obtain an exchange plan instead, even if COBRA has not expired. The individual also may be determined eligible for a subsidy in this case. (This result is possible because the exchange is hosting its enrollment season, and subsidy money that an individual might qualify for is therefore available to use to fund purchases.)
Outside of Marketplace open enrollment, if a person's COBRA expires, he or she would qualify for a special enrollment period (and he or she may be eligible for a subsidy). This interpretation fits with the long-standing HIPAA portability special enrollment rule that allowed an individual access to "other coverage" upon COBRA exhaustion.) By contrast, if the COBRA person is voluntarily dropping coverage outside of open enrollment (the COBRA has not yet expired), he would not qualify for a special enrollment period. During the next open enrollment period or when COBRA expires, he could enroll in a policy and may be eligible for a subsidy.
Caution on Subsidies
HUB International continues to caution against "coaching" employees about exchange operation and/or possible eligibility for federal subsidies for individual exchange coverage. Employees should always be directed to their personal advisors for such guidance, to seek an official Navigator with appropriate credentials, or to the array of posted tools and resources maintained by the state or federal exchange. The information contained in this Bulletin is solely intended to help you as an employer to understand how the newly-revised exchange rules could impact workers as you contemplate plan operations and strategies.
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The discussion presented in this document is informational in nature and is not (and should not be construed as) a legal opinion or legal advice. We would be happy to discuss any information above with you or your attorney.