By Paul M. Hamburger, Proskauer Rose LLP
It is that time of year again—time to plan for and implement annual open enrollment processes. At least it is that time for the typical group health plans that operate on a calendar-year basis. For most plans, this means it is time to reprint plan-related material such as enrollment forms (electronic or otherwise), summary plan descriptions (SPDs), and summaries of benefits and coverage (SBCs). It may also be a time to solicit reenrollments. There is a lot of activity that surrounds annual open enrollment.
But what about open enrollment issues related to continuation coverage under the Consolidated Omnibus Reconciliation Act (COBRA) issues? Often, the COBRA open enrollment rules come as a surprise to plan administrators. For example, in a typical group health plan, participants cannot cover their grandchildren (unless the grandchildren are legal dependents of the participants). However, when it comes to COBRA coverage, it is possible that participants’ grandchildren can get group health plan coverage. How does that happen? Keep reading.
The starting point is to recognize that, as described in Mandated Health Benefits—The COBRA Guide, qualified beneficiaries may modify their COBRA coverage during COBRA-defined open enrollment periods. Also, and this is a very important rule, qualified beneficiaries have the same rights to change their coverage during open enrollment periods as active employees. They are not limited to the rights they might have had as spouses or children of active employees.
What is a COBRA Open Enrollment Period?
A COBRA open enrollment period is defined in the Internal Revenue Service (IRS) regulations as any period during which an employee covered under a group health plan can choose to be covered under another group health plan or under another benefit package within the same plan or to add or eliminate coverage of family members. This definition is fairly broad—if there is any period during which employees are allowed to modify their coverage, that same period is treated as an open enrollment period for COBRA coverage purposes. In other words, the COBRA rules cover annual open enrollment periods, as well as midyear opportunities to modify coverage.
When these opportunities to change coverage arise, each qualified beneficiary has the same rights as active employees to add or drop family members, change to health maintenance organization (HMO) coverage or indemnity-type coverage, or change between and among a plan’s benefit packages. Qualified beneficiaries are not limited to the rights of spouses or children otherwise covered under an employee’s coverage.
At this point, the rule can be confusing because of the way coverage generally works under a group health plan and the way qualified beneficiaries often elect COBRA coverage. Under a typical group health plan, the employee/participant elects single or family coverage. (Yes, they might be able to elect employee plus one or plus two, as well, but that is not the key point for our discussion.) The coverage type and level are determined by the employee/participant and not any otherwise covered dependents.
Now consider how COBRA works. Suppose an active employee covers the entire family under a group health plan subject to COBRA. Then, assume the employee terminates employment and triggers COBRA obligations. In that case, the entire family might continue COBRA coverage. It then looks like COBRA coverage should work the same way as before the qualifying event—the former employee/participant gets to control everything. However, it does not work that way under COBRA. COBRA affords each family member qualified beneficiary separate and independent rights to coverage from each other family member. What was a family of four before a qualifying event can “mushroom” into four separate coverage units, each of which may then add new covered dependents depending on the facts and plan terms.
Changes in Family Status
That separate and independent right for a qualified beneficiary means several things. First, it means that each qualified beneficiary could change coverage to some other available coverage option. Also, and importantly, as part of those separate and independent rights, qualified beneficiaries have the right to add new family members to their coverage in the same way that active employees can add new family members at any time during the year (whether automatically or upon a proper election).
For example, a qualified beneficiary who is a child of a former employee could get married while on COBRA coverage and add that spouse to coverage. Moreover, if the newly married child then has a child, that new child, the former employee’s grandchild, can also be added to coverage.
Previously uncovered add-ons are not qualified beneficiaries
If a qualified beneficiary adds a previously noncovered family member to COBRA coverage, however, that added individual does not become a qualified beneficiary. (See the Guide.) For example, suppose a married covered employee terminates employment when the employee and spouse are covered under family coverage. If the spouse separately elects single COBRA coverage (as is the spouse’s right) while the employee declines coverage, the spouse, as a qualified beneficiary, would have the same rights under COBRA coverage that a similarly situated active employee would have. The spouse is not limited to the rights of spouses of employees.
Therefore, if active employees can add spouses during open enrollment periods, then the spouse who is a qualified beneficiary in this example can add a spouse to coverage (even the former employee) during open enrollment. However, the newly added individual (including a former employee who did not elect COBRA coverage at the outset) does not become a qualified beneficiary if added at a later time during open enrollment. This means that a former employee who is subsequently added to COBRA coverage no longer has individual rights under COBRA, including the right to add newly acquired dependents (such as a new spouse or child).
Extent of the open enrollment period rule
Suppose an employee works part time and, as a part-time employee, is eligible only for health coverage under a group health plan subject to COBRA coverage rules. Assume that only full-time employees are eligible for dental coverage. Now assume that a covered part-time employee terminates employment, loses health coverage, and elects COBRA coverage. During an open enrollment period, would the group health plan have to allow this qualified beneficiary the opportunity to elect dental plan coverage? No. Under COBRA, the qualified beneficiary would only have the same rights as similarly situated active employees (i.e., part-time employees). Because part-time employees are not otherwise eligible for dental coverage, a qualified beneficiary who is a part-time employee (or a spouse or child of a part-time employee) cannot elect that coverage. COBRA does not alter the underlying eligibility rules for each group health plan to that extent.
Now suppose that the employee was a full-time employee and was eligible for dental plan coverage before the COBRA-qualifying event but was not enrolled in that coverage. During open enrollment, the group health plan must allow the qualified beneficiary the opportunity to enroll in dental plan coverage to the same extent that similarly situated (i.e., full-time) active employees could do so.
Open Enrollment Examples
The following examples taken from the COBRA regulations illustrate how these rules on open enrollment apply to qualified beneficiaries:
Example 1. Ethan works for an employer that maintains several group health plans. Under the terms of the plans, if an employee chooses to cover any family members, all family members must be covered by the same plan that covers the employee. Immediately before Ethan’s termination of employment (for reasons other than gross misconduct), Ethan, his spouse, and his children were covered by a plan. This coverage will end as a result of the qualifying event.
When Ethan’s termination of employment occurred, each of his family members became a qualified beneficiary. Even though the employer maintains various other medical plans and options, it was not necessary to allow the qualified beneficiaries to switch to a different medical plan when Ethan terminated employment.
Each family member elects COBRA coverage. Three months after Ethan’s termination of employment, an open enrollment period occurs during which similarly situated active employees can choose coverage under a different medical plan or add or eliminate family coverage.
During the open enrollment period, each of the four qualified beneficiaries must be allowed to switch to another medical plan (as though each qualified beneficiary were an individual employee). For example, each member of Ethan’s family could choose coverage under a separate plan, even though the family members of employed individuals could not choose coverage under separate plans. Of course, if each family member chooses COBRA coverage under a separate plan, the plan can require payment for each family member that is based on the applicable premium for individual coverage under that separate plan.
Example 2. The facts are the same as in Example 1, except that Ethan’s family members are not covered under the group health plan when Ethan terminates employment.
Although his family members do not have to be allowed to elect COBRA coverage, Ethan must be allowed to add them to his COBRA coverage during the open enrollment period. This is true even though the family members are not, and cannot become, qualified beneficiaries.
The controversy over newly acquired dependents
This ability of qualified beneficiaries to add newly acquired dependents and have full open and Health Insurance Portability and Accountability Act (HIPAA) special enrollment rights under group health plans, as if they were active employees, is a unique attribute of COBRA coverage. In many ways, this gives qualified beneficiaries greater rights than active employees.
Example 3. Active employees cannot ordinarily add grandchildren to their coverage. However, under COBRA, if a dependent child of a former employee who has elected COBRA coverage (a qualified beneficiary) has a child (i.e., the former employee’s grandchild), that child can be added to the COBRA coverage. A former employee’s grandchild could therefore be covered under the employer’s health plan, while an active employee’s grandchild could not.
As this discussion and the examples show, the COBRA rules applicable to open enrollment can be tricky and somewhat counterintuitive. With careful planning and consultation with benefits counsel, though, the rules can be managed.
Paul M. Hamburger is co-chair of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center and head of the Washington, D.C., office of law firm Proskauer Rose LLP. He is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force. Hamburger has more than 35 years of experience in advising employers and administrators and is the author of numerous articles and publications on COBRA and other employee benefits issues affecting pension and welfare plans. Hamburger is contributing editor of BLR’s Mandated Health Benefits—The COBRA Guide.