Recent COBRA Administrative Requirement Changes

Houston, TX -- October 23, 2006 -- As part of our ongoing effort to keep our customers informed of changes to COBRA and other laws, regulations and court decisions that affect our TravisCobra and WebCOBRA.com systems and may affect the way you administer group health continuation, we want to let you know of two new items that recently came to light.

Item #1 -- The first is IRS Information Letter 2006-0042, which was issued to clarify whether payments made to a former employee to pay or help pay for his/her COBRA premiums represent taxable income to the employee. In this Letter, the IRS keyed their decision on whether or not the former employee is given "complete control" over the disposition of the funds used to pay for the COBRA coverage.

If the employer makes the payment to the employee under an understanding or assumption that the funds will be used to purchase health insurance, without the employer verifying that the funds are so used or having control over the purchase, then the monies paid to the former employee are wages subject to FICA taxes.

If, on the other hand, the employer makes the payments directly to the insurer or self-funded trustee, then the payments are not income to the employee. This is true even if the employer sends the money through the employee to the insurer, as long as the right of disposition of the funds by the employee is "not unlimited."

We have seen an increased usage of the "Subsidy" features in TravisCobra and WebCOBRA.com during the past several years, so this Information Letter was of interest to us when we first learned of it. In checking with many of our customers, payments of full or partial COBRA premiums made by employers appear to be, in most cases, made directly from the employer to the insurer or plan trustee/TPA, which will not create any taxable income for the employee. However, if premium payments are being made directly to the employee by the employer with no control or verification that they are being used to pay premiums, a taxable event may be occurring.

Since most of the subsidized premiums we see users enter on our systems do not appear to be taxable, we're going to add a feature to TravisCobra and WebCOBRA.com that will allow administrators to designate a particular subsidy payment as taxable, but will not require any new input fields to be completed if the payment is not taxable. Also a new report will be added summarizing the apparent taxable subsidy payments.

Item #2 - In an example of another state government expanding their mandated continuation regulation, the State of Tennessee, which before now only mandated continuation for three or six months on insured plans offered by employers with fewer than 20 employees, has enacted a new law effective January 1, 2007 that applies to all group health policyholders with insurance policies governed by the laws of Tennessee, regardless of employer size. The new law, known as Senate Bill 1091, requires a new notice be sent separately to divorced or separated spouses, and saying the notice must be sent via Certified Mail!

Tennessee will become the 13th state to have laws that either require administrators to perform specific actions not required by Federal law, or require administrators to extend continuation coverage past the term specified by Federal law.

The Tennessee law is interesting because it appears to place responsibility for notifying a divorcing spouse who will be losing group health coverage onto the other party to the divorce - the person whose health coverage will not terminate because of the divorce or legal separation. Under Federal COBRA law, the responsibility to notify the administrator of the divorce falls generally on the person who loses coverage. In fact, COBRA specifically says that if the employer or administrator is not notified of the divorce/separation within sixty days after it occurs, the offer of group health continuation can be refused.

The law is also interesting because it requires the new notice to be sent via certified mail to the last known address of the spouse. The certified mail requirement not only is a first, but contravenes previous Federal case law regarding how notices may be sent to satisfy COBRA requirements.

The new special notice may present new challenges to COBRA administrators because the law requires that it "Every insured or policy holder of a group policy of accident and sickness insurance offered for sale in this state (TN) which provides coverage for hospital or medical expenses that also provides coverage to the spouse of the insured, shall provide at least thirty (30) days prior notice of the termination of coverage to the covered spouse when a divorce, a legal separation, or other separation, between the insured and the covered spouse has occurred or has been filed for by the husband or wife or such divorce or separation has become final."

The law specifically mentions that it applies to COBRA coverage and also provides that the divorce court judge shall determine if the notice requirement has been met prior to issuing a decree of divorce. It also charges the "administrative office of the courts" to develop a model notice reflecting the provisions of the new law.

So what does this mean to COBRA administrators with plans sitused in Tennessee? Because the new law is somewhat vague in its requirements and timing, it raises more questions than it answers. Some of the questions are:

1. Will divorce attorneys include the notice to the spouse as part of the filing for divorce, so that the "30-day prior to loss of coverage" notice requirement is met?
2. If so, does that relieve COBRA administrators of the need to send this new notice?
3. If not, and COBRA administrators are looked to as the sender of the newly-required notice, how are they going to know to send it; i.e. who will notify them, and is the notice now going to have to be sent at least thirty days prior to loss of coverage?
4. If the notice is sent less than thirty days prior to loss of coverage, is coverage to be extended until the 30-day period has expired? If so, who pays for that coverage after the COBRA qualifying event date but prior to the new loss of coverage date? These and other questions were posed to the Tennessee Department of Commerce and Insurance on October 11th. Their representatives could not answer any of these or other questions we posed, saying that clarifications had not yet been issued.

We will modify both TravisCobra and WebCOBRA.com to meet whatever requirements surface from the new Tennessee law. We may need to add the Model Notice to the systems if one is issued by the State, and other changes may also be needed. At present the system can, of course, print notices to a divorcing spouse, so in the absence of clarification from the Tennessee state government, we are not embarking on any modifications at this time.

Administrators who have plans based in Tennessee may want to take notice of the law when it goes into effect on January 1, 2007, particularly if COBRA administrators are looked to for sending the notice via certified mail, and particularly if it becomes the responsibility of their employees to notify them of the existence of a divorce, rather than being able to wait on the spouse who lost coverage doing so within 60 days.

We will keep you informed as we learn more about the new Tennessee law's application, and as we add the capability concerning taxable subsidy payments to both TravisCobra and WebCOBRA.com

For more information about WebCOBRA.com, or any other products that Travis Software provides, please contact Travis Marketing at (281) 496-3737, email Travis Software at webcobra.marketing@travisoft.com or visit Travis Software at www.webcobra.com.