Small carriers, firms in multi-employer plans especially have reason to cheer new rules
COBRA. Don't think race cars, radar detectors, or snakes. Think Consolidated Omnibus Budget Reconciliation Act of 1985 continuation health coverage rules. That mouthful-and-a-half is back, but in a less venomous form.
This notorious law says that employers offering health coverage must offer identical coverage to employees who have experienced "qualifying events" such as leaving the company or getting divorced. Although the company can require the individual to pay 102% of the "applicable premium" for the same type of coverage, that has not been enough to make many employers whole.
That's because the people who sign up for COBRA are far likelier to incur large claims than the full pool of workers on whom the premium is based, a phenomenon known as adverse selection. As a result, many companies have found their health insurance costs rising, even though they charged the full premium at the time to COBRA beneficiaries.
Two other aspects of COBRA made it a name only a snake charmer could love. Employers faced stiff penalties for even inadvertent violations of its requirements to give workers and dependents proper notice of the chance to buy continuation coverage. And the only official guidance, regulations proposed by the IRS in 1987 but never finalized, appeared to expand coverage still further in some ways, while leaving many questions unanswered.
The combination of adverse selection, complexity, steep penalties, and coverage expansions dictated by the IRS, Congress, and the court made COBRA appear plenty venomous to many employers. The law led companies to scale back the amount of coverage they offered and lmay have deterred new firms from providing health insurance at all.
Last month, however, the snake turned. The IRS issued final regulations covering many aspects of COBRA, along with new proposed rules for some unaddressed issues.
This time around, the IRS shows an awareness of the burden COBRA places on employers and the need to provide flexibility and simplicity wherever the law allows. Some of these changes are especially helpful to small fleets and those contributing to multi-employer plans.
Employers that had less than 20 employees on a typical business day in the previous year are exempt from COBRA rules. However, fleets with few "actual" employees, but many owner-operators - who may have been allowed to buy health coverage through the fleet - would have been subject to COBRA under the 1987 proposed rules. The final rules, though, say that only common-law employees must be counted in determining whether a firm qualifies for the small-employer exception.
The new rules also help small employers that have part-time workers. Now, these companies can count full-time equivalents, using the firm's normal definition of full-time and averaging over a pay period if they want to. Previously, it appeared that any part-time worker might count toward the 20-employee limit, no matter how few the number of hours or days the part-timer worked.
The original law and proposed regulations subjected every employer that contributed to a multi-employer plan to potentially drastic penalties, even if the error that triggered them was committed by the plan administrator. The final regs make clear that the plan is responsible for paying these penalties - not the employers - when it is at fault.
The bottom line: Neither COBRA itself, nor the new final and proposed rules, which cover 42 pages of very dense print in the February 3 issue of the Federal Register, are exactly cuddly. But they are much less deadly to employers' financial health than either the original law, with its "atom bomb for jaywalking" type of penalties, or the 1987 regs, which would have expanded the law even more.
Fleets would do well to learn about the changes in both the new proposals - on which the IRS is seeking comments until May 14 - and the final rules.