COVID-19 Extension Guidance Makes the Interplay Between COBRA and Medicare (a Bit) Trickier
The rules concerning the interplay between COBRA and Medicare are a frequent source of confusion for employers. The spike in retirements, layoffs, and furloughs attributable to the coronavirus pandemic has produced an environment where employers may be confronted with these rules more frequently. In addition, guidance extending certain COBRA deadlines in response to the ongoing pandemic creates hazards for employers that have not internalized the rules correctly.
COBRA Rights of Employees
An employee who loses group health plan coverage as a result of a qualifying event must be offered COBRA continuation coverage. “Qualifying events” that give rise to a COBRA right for an employee are the reduction of the employee’s hours of employment and termination of employment for any reason other than gross misconduct. COBRA must be offered if a former (or reduced hours) employee is “entitled to Medicare” before the employee makes a COBRA election. For purposes of COBRA, an individual will become “entitled to Medicare” only when he or she effectively enrolls in Medicare Part A or B, whichever occurs first.[1]
The timing of an individual’s Medicare entitlement is critical. A former (or reduced hours) employee who was entitled to Medicare before electing COBRA has the right to COBRA continuation coverage for a period of up to 18 months after the employee’s “qualifying event.” By contrast, a group health plan may terminate COBRA continuation coverage prior to the expiration of the 18-month period if a former (or reduced hours) employee who elects COBRA becomes entitled to Medicare after making his or her COBRA election.
COBRA Rights of Spouses and Dependent Children
Identical to the rule for employees, a group health plan may terminate COBRA continuation coverage for an employee’s spouse or dependent child who becomes entitled to Medicare after making his or her COBRA election, but cannot do so if the spouse or dependent child was entitled to Medicare before electing COBRA continuation coverage.
In addition, special rules apply that may extend the maximum COBRA period for spouses and dependent children of employees entitled to Medicare. Spouses and dependent children of employees who lose coverage as a result of the employee’s termination of employment or reduction of hours occurring less than 18 months after the employee became entitled to Medicare have a right to COBRA continuation coverage for a period of up to 36 months beginning on the date the employee became entitled to Medicare. If, however, the employee experienced a termination of employment or reduction of hours on or before the day he or she became entitled to Medicare, the employee’s spouse and dependent children will have a right to COBRA continuation coverage only for the standard period of up to 18 months. Because entitlement to Medicare is not a qualifying event that will typically result in a loss of coverage (due to the Medicare Secondary Payer rules), it seldom constitutes a second qualifying event that will extend the standard 18-month coverage period.[2]
The following examples illustrate the rules described above:
Event |
Employee COBRA Right | Spouse and Dependent Child COBRA Right | Duration of COBRA Coverage |
| Employee loses coverage because of termination of employment or reduction of hours and elects COBRA before Medicare entitlement | COBRA continuation coverage may be cut off when employee enrolls in Medicare | COBRA continuation coverage not affected by employee’s Medicare enrollment | Both up to 18 months from qualifying event (or loss of coverage if plan so provides)* unless cut short for employee due to employee’s Medicare enrollment |
| Employee loses coverage because of termination of employment or reduction of hours within 18 months after Medicare entitlement | Right to elect COBRA based on termination of employment or reduction of hours | Right to elect COBRA based on employee’s termination of employment or reduction of hours | Up to 18 months from qualifying event (or loss of coverage if plan so provides) for employee Up to 36 months from date employee became entitled to Medicare for spouse and dependent child |
| Employee loses coverage because of termination of employment or reduction of hours more than 18 months after Medicare entitlement | Right to elect COBRA based on termination of employment or reduction of hours | Right to elect COBRA based on employee’s termination of employment or reduction of hours | Both up to 18 months from qualifying event (or loss of coverage if plan so provides) |
| Spouse elects COBRA (due to employee’s termination of employment or reduction of hours) and then becomes entitled to Medicare | COBRA rights of employee not affected by spouse’s Medicare enrollment | COBRA continuation coverage may be cut off when spouse enrolls in Medicare | Both up to 18 months from qualifying event (or loss of coverage if plan so provides) unless cut short for spouse due to spouse’s Medicare enrollment |
* Because an employee’s entitlement to Medicare is not a qualifying event that typically results in a loss of coverage for spouses and dependent children (due to the Medicare Secondary Payer rules), it seldom constitutes a second qualifying event that will extend the COBRA maximum coverage period to 36 months.
COVID-19 Extension Guidance
Guidance published jointly by the Department of Labor, the Department of the Treasury, and the Internal Revenue Service on May 4, 2020 (the “Joint Notice”), extends certain tax filing, election, and payment deadlines in response to the ongoing COVID-19 national emergency. (More information regarding the Joint Notice is available here.) Among other things, the Joint Notice tolls the period for qualified beneficiaries to elect COBRA continuation coverage for “sixty (60) days after the announced end of the National Emergency or such other date announced by the Agencies in a future notification (the “Outbreak Period”). . . .” A national emergency was declared beginning March 1, 2020, and, at the time of this post, the Outbreak Period is ongoing.
Tolling the time period for qualified beneficiaries to elect COBRA continuation coverage highlights the importance of employers correctly understanding the interplay between COBRA and Medicare and enhances the risk of adverse selection for group health plans. Because the deadline for a qualified beneficiary to make a COBRA election typically occurs close in time to the date his or her coverage terminates, some employers have incorrectly assumed that COBRA continuation coverage must be offered only if the qualified beneficiary was entitled to Medicare before the qualified beneficiary’s loss of coverage or qualifying event. The Treasury Regulations, however, state that a qualified beneficiary is entitled to continuation coverage up to the maximum COBRA period so long as the qualified beneficiary becomes entitled to Medicare before the date that COBRA continuation coverage is elected. Because, under the Joint Notice, a qualified beneficiary’s COBRA election could take place months after his or her qualifying event or loss of coverage date, employers must be sure to provide COBRA election notices to, and credit the COBRA elections of, qualified beneficiaries who enroll in Medicare after their qualifying event or loss of coverage date.
In addition, the Joint Notice and ongoing nature of the coronavirus pandemic make it increasingly likely that a growing number of qualified beneficiaries will become “entitled to Medicare” before they are required to make a COBRA election. Such individuals will have the right to elect COBRA continuation coverage for up to the full 18-month continuation period and will have the opportunity to test the limits of their Medicare coverage before deciding whether to elect COBRA. This benefits qualified beneficiaries but creates an adverse selection issue for group health plans because it is likely that the only individuals who will elect COBRA are those whose needs for medical services are not adequately covered by Medicare.
Conclusion
In this changing environment, it is more important than ever that employers understand and carefully observe the rules governing the interplay between COBRA and Medicare and ensure that they recognize the COBRA rights of qualified beneficiaries who enroll in Medicare after their qualifying event or loss of coverage date. Please contact a member of our Employee Benefits and Executive Compensation Group if you have questions regarding these rules.
[1] For most individuals, enrollment in Medicare Part A is automatic. Enrollment will occur as soon as the individual begins receiving Social Security benefits, unless the individual opts-out of receiving such benefits. If an individual opts-out of Social Security benefits because he or she is still working, that individual must file an application to be entitled to Medicare Part A. Individuals entitled to Medicare Part A are generally automatically enrolled in Medicare Part B, unless they decline enrollment.
[2] Special rules that are beyond the scope of this post apply to qualified beneficiaries (and their covered spouses and dependent children) who become entitled to Medicare based on a disability.
