Retiree Health Benefits and COBRA

Mar 18, 2022 | All, COBRA

Employers often incorrectly assume that they don’t need to offer COBRA if they offer retiree health benefits or they misunderstand when and to whom COBRA must be offered. Unfortunately, these types of common COBRA errors can lead to significant risk of penalties and private lawsuits under COBRA.

When it comes to COBRA and retiree coverage, there are three options that employers must typically choose from: alternative coverage, concurrent coverage, and deferred COBRA coverage. Employers should review each option carefully before choosing the right coverage. Retiree coverage is complex, and employers with questions about how they should structure their retiree coverage should consult with their insurance broker and/or legal counsel.

Alternative Coverage

Alternative retiree coverage is retiree health plan coverage that is offered as an alternative to classic COBRA. By classic COBRA, we are referring to the continuation of active employee coverage at 102% of the cost for coverage periods required by COBRA.

Key features of alternative coverage:

  • Retirees are offered COBRA at retirement.
  • Alternative retiree coverage is only offered to retirees who waive COBRA.
  • Even if a retiree waives COBRA in favor of alternative retiree coverage, there are special situations where a spouse and/or dependents still must be offered COBRA. These special exceptions are described below.

Under alternative coverage, the retiree and other COBRA qualified beneficiaries, including their spouse and children, are offered both alternative retiree coverage and COBRA coverage under the active employee health plan(s). The retiree and/or qualified beneficiaries must then choose either the alternative retiree coverage or classic COBRA coverage.

Examples of alternative retiree coverage include:

  • Continuation of active employee coverage that costs the retiree less than 102% of the active employee cost. For example, employers can offer continuation of active employee coverage at 50% of the cost of the coverage until the individual reaches Medicare age.
  • A retiree health reimbursement arrangement (HRA) that is 100% funded by the employer
  • An offer of coverage under a retiree-only health plan

Special Exceptions Regarding Spouse and/or Dependents

If the retiree and/or qualified beneficiaries elect the alternative retiree coverage, the employer is not obligated to offer COBRA after the alternative retiree coverage ends, with special exceptions that are described below. These special exceptions exist if the alternative retiree coverage ends “early” due to a second qualifying event, such as the retiree’s death, divorce, Medicare entitlement, or a dependent losing eligibility.

If a spouse or dependent waives their COBRA rights based on the retiree’s termination of employment, but loses alternative retiree coverage prior to its expiration due to a second qualifying event, the spouse or dependent must be offered 36 months of COBRA under the alternative coverage, beginning at the date of the second qualifying event. Employers can avoid these special COBRA obligations if they structure the alternative retiree coverage so that it does not end “early” due to the retiree’s death, divorce, Medicare entitlement, or a dependent losing eligibility.

Employers should consult with their insurance broker and/or legal counsel when designing alternative retiree coverage to ensure that the COBRA waivers are appropriate and that special consideration is given to spouses and dependents.

Action Items for Alternative Retiree Coverage
  • Offer COBRA coverage and alternative retiree coverage to the retiree.
    • Employers who use Employee Benefits Corporation’s COBRASecure must notify us about the employee’s retirement so EBC can send a COBRA election notice on the employer’s behalf. The offer of alternative retiree coverage should clearly state that the election of alternative retiree coverage results in the waiver of COBRA rights based on the retiree’s termination of employment.
  • Send the required communications to retiree and qualified beneficiaries.
    • The retiree and spouse should be provided with full COBRA election materials. Employers should also develop special communications for retirees to remind them that if the retiree elects the alternative retiree coverage, the retiree cannot also elect COBRA.
  • If the retiree elects alternative retiree coverage and waives COBRA coverage, collect premiums for the alternative coverage option. If the retiree elects COBRA and in effect waives the alternative retiree coverage, arrange for collection of the COBRA premiums.
    • EBC can handle premium collection for employers! Fees apply.
  • If any other COBRA qualified beneficiary (a spouse or dependent) loses coverage during the alternative retiree coverage period due to a second qualifying event, offer COBRA to that COBRA qualified beneficiary.
    • Employers who use Employee Benefits Corporation’s COBRASecure service must notify us about the loss of coverage due to a second qualifying event so we can send COBRA election materials to the appropriate qualified beneficiaries.

Concurrent Coverage

Concurrent coverage occurs when the individual’s subsidized retiree coverage also counts as COBRA coverage.

Key features of concurrent coverage:

  • The employer offers retirees the subsidized continuation of active employee coverage at a cost less than 102% of the cost of coverage but more than the cost charged to active employees.
  • The employer requires the retiree to elect COBRA as a condition of receiving the subsidized retiree coverage.
  • The employer often allows retirees to continue receiving the subsidized continuation of active employee coverage for longer than 18 months. For example, the employer allows subsidized coverage to continue until retirees reach Medicare age.

Under concurrent coverage, the retiree is offered COBRA at the time of retirement. The retiree is provided the retiree benefit, such as the subsidized continuation of active employee coverage, only if they also elect COBRA.

Concurrent coverage is typically only available in situations where active employee coverage is continued for the retiree. Concurrent coverage is not available for situations where retiree coverage is a different type of benefit than the active employee coverage, such as an HRA for retirees.

If the retiree’s subsidized retiree coverage lasts longer than 18 months (which is the maximum COBRA continuation period for termination of employment), the employer is not required to offer COBRA upon expiration of the subsidized retiree coverage. However, if the employer’s subsidy ends in less than 18 months, the employer is required to allow the retiree to continue the coverage until the 18 months expire but can charge up to 102% of the cost of coverage upon expiration of the employer’s subsidy.

Special Exceptions Regarding Spouse and/or Dependents

The retiree’s spouse and dependents may be eligible for additional COBRA coverage if a second qualifying event (such as a loss of coverage due to the retiree’s death, divorce, Medicare entitlement, or a dependent losing eligibility) occurs prior to 18 months. Affected family members are offered COBRA for a total of 36 months from the retirement date, not from the second qualifying event date. If the retiree’s spouse and dependents have a second qualifying event after the 18 month period expires, they would not be offered additional COBRA coverage.

Action Items for Concurrent Retiree Benefits
  • Offer COBRA coverage and retiree coverage to the retiree.
    • Employers who use Employee Benefits Corporation’s COBRASecure service must notify us about the employee’s retirement so we can send a COBRA election notice on the employer’s behalf. The employer must notify us about any employer-paid subsidy for COBRA premiums as well.
  • Send the required communications to retiree and qualified beneficiaries.
    • Please note that employers should develop special communications for retirees to explain that the retiree must elect COBRA in order to obtain the subsidized retiree coverage.
  • Bill and collect any portion of premium the retiree owes to the employer.
    • If the employer uses Employee Benefits Corporation’s COBRASecure service, we can perform this service unless the employer notifies us that the employer will collect premiums directly, in which case we apply a 100% subsidy to the retiree’s plans and track the COBRA timeline only, without collecting premiums.
  • When COBRA ends, we can handle premium collection for continuing retiree coverage if an employer utilizes Employee Benefits Corporation’s Billing Services. Fees apply.
    • Employers who use Employee Benefits Corporation’s COBRASecure service but not Billing Services, and wish to continue retiree coverage after COBRA ends, will need to coordinate with the carrier so that the retiree’s coverage is not terminated after COBRA ends.

Deferred COBRA Coverage

Key features of deferred COBRA coverage:

  • The employer offers retirees the continuation of active employee coverage on the same terms and conditions as it does to active employees.
  • The employer offers COBRA upon expiration of the retiree coverage unless the retiree coverage lasts at least as long as the applicable maximum coverage period.

Providing deferred coverage comes down to whether or not an employer recognizes that an employee has had a loss of coverage. If the employer recognizes that the employee has had a loss of coverage, they must provide COBRA. For example, if a retiree has to pay their premium with after-tax dollars opposed to pre-tax payroll contributions, employers may recognize that a loss of coverage has occurred.

On the contrary, if an employer offers continuation of active employee coverage, they may recognize that no “loss of coverage” has occurred so this would not trigger an offer of COBRA. If an employer takes the position that no loss of coverage has occurred, then the employer does not need to offer COBRA to the retiree or their spouse or dependents unless and until a loss of coverage occurs prior to expiration of the maximum COBRA coverage period.

This means that if a qualified beneficiary is deemed to have a “loss of coverage” within three years following the employee’s retirement, due to either a second qualifying event (such as the employee’s death, Medicare enrollment, divorce, or dependent aging off the plan) or some other loss of coverage such as an increase in retiree premiums or elimination of retiree coverage altogether, COBRA obligations may arise, depending on the specific scenario and the timing of the loss of coverage.

These COBRA obligations are complex, so employers interested in deferred COBRA coverage may want to consider one of the following approaches instead:

  • Use Alternative Coverage and offer the retiree coverage as an alternative to COBRA.
  • Use Concurrent Coverage and offer the retiree coverage concurrently with COBRA.
  • Offer identical retiree coverage for 36 months following retirement to all qualified beneficiaries without any early termination provision. The employer should be sure that this approach is permissible under their health plan and stop loss insurance policy, if applicable.

An employer that wants to use the deferred COBRA coverage should consult with legal counsel and benefit advisors to develop a compliant approach and to ensure that the approach is permissible under their benefit plans.

Action Items for Deferred COBRA Coverage
  • The procedure will depend upon which option the employer chooses. If the employer chooses Alternative Coverage or Concurrent Coverage, see above for action item notes.
  • If the employer chooses to offer identical retiree coverage and defer offering COBRA, and if the employer uses Employee Benefits Corporation’s COBRASecure service, the employer would not notify us of the COBRA-qualifying event at the time of retirement. The employer should only notify us of any COBRA-qualifying event that occurs during the retiree coverage period if the employer determines COBRA must be offered, and the employer should specify the duration of the COBRA coverage being offered.
  • If the employer has Billing Services with Employee Benefits Corporation, we can handle premium collection for the employer even when the loss of coverage is postponed. Separate fees apply.

Choosing the Right COBRA Option for Retiree Coverage

Employee Benefits Corporation is here to offer assistance with COBRA and retiree coverage. We recommend that all employers review each coverage option carefully and consider the following:

  • Does the employer meet the conditions described above for choosing the option?
  • If the employer is unionized, does the employer need to negotiate the option with the union?
  • Does the employer’s health plan documents need to be updated to reflect the chosen option?
  • Does the option align with how the employer’s retiree coverage is set up with the employer’s insurance carrier(s), stop-loss carrier (if applicable), TPAs, and/or COBRA administrator?

COBRA regulations are complex and Employee Benefits Corporation is here to make the process easier on employers. Our end-to-end COBRA administration provides notices within the required timeframes, collection of premium payments, and much more. To learn more about our role in the COBRA process, visit our COBRASecure page.

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