Topic:
BUSINESS (GENERAL); HEALTH INSURANCE;
Location:
INSURANCE - HEALTH;

OLR Research Report


January 2, 2004

 

2004-R-0020

COVERAGE CONTINUATION FOLLOWING LIQUIDATION

By: Janet Brierton, Associate Legislative Attorney

You asked if a company has to pay for continued insurance coverage for employees who are laid off after the company's bankruptcy and liquidation or if COBRA takes over.

SUMMARY

In a bankruptcy that results in liquidation, health plans will usually be terminated, in which case COBRA continuation coverage is not available. Under state law, upon termination of a health plan, coverage will only continue for individuals who were totally disabled on the date of termination. Coverage will continue for 12 calendar months without payment of premium, provided a claim for coverage is submitted within one year of the plan termination. The individual receives coverage only for claims related to the disability.

When there is no continuation of coverage available, employees and their dependents will need to find coverage elsewhere. An employee may have a right to special enrollment in a spouse's group health plan. However, the employee and his or her dependents must request special enrollment within 30 days of losing coverage.

Upon termination of the plan, employees may be able to convert to individual health insurance. Federal law guarantees access to individual policies to eligible individuals, including those who are ineligible for COBRA continuation coverage. State law requires each group health insurance policy to provide Connecticut residents with a right to convert to an individual policy immediately upon termination of coverage under the group plan. The plan documents will explain how a person can convert to an individual policy.

Employees may also be eligible for coverage under state or federal government health programs, such as Medicaid, HUSKY plan (Connecticut's subsidized health insurance for eligible children and their families), Health Reinsurance Association (the Connecticut high-risk pool), and Medicare.

People with questions about continuation of coverage and conversion privileges should consult their plan documents and human resources department. They may also contact the Connecticut Insurance Department's Consumer Affairs division with coverage questions and complaints at 1-800-203-3447. The Consumer Affairs Division can provide a list of individual insurance carriers doing business in Connecticut. The list may also be found on the Insurance Department's website (www.ct.gov/cid/). Information about and applications for the Health Reinsurance Association can be obtained by calling the high-risk pool at 1-800-842-0004.

IMPACT OF BANKRUPTCY ON GROUP HEALTH PLAN

If an employer declares bankruptcy, it will generally take one of two forms: reorganization under Chapter 11 of the federal bankruptcy code, or liquidation under Chapter 7. A Chapter 11 bankruptcy usually means that the company continues in business under the court's protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect the company's pension or health plans. In some cases, plans may continue throughout the reorganization process. In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely that the company's pension and health plans will be terminated.

FEDERAL LAW: COBRA

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1986 (PL 99-272), as amended from time to time, amends ERISA, the Employee Retirement Income Security Act, to provide continuation of group health coverage that might otherwise be terminated. COBRA applies to employers with 20 or more employees.

COBRA provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage under the employer's group health plan, so long as the insured pays the required premiums. The premium for COBRA coverage cannot exceed 102% of the plan's group rate for coverage, plus 2% for administrative costs. (Costs may increase if coverage is further extended because of disability.)

COBRA Qualifying Events

However, the continuation coverage is only available when coverage is lost due to certain “qualifying events.” Qualifying events for COBRA continuation coverage are listed below.

For Employees:

● Voluntary or involuntary termination of employment for reasons other than gross misconduct

● Reduction in the number of hours worked

For Spouses:

● Voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct

● Reduction in the hours worked by the covered employee

● Covered employee's eligibility for Medicare

● Divorce or legal separation of the covered employee

● Death of the covered employee

For Dependent Children:

● Loss of dependent child status under the plan

● Voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct

● Reduction in the hours worked by the covered employee

● Covered employee's eligibility for Medicare

● Divorce or legal separation of the covered employee

● Death of the covered employee

Period of Coverage under COBRA

COBRA establishes required periods of coverage for continuation of health benefits. A plan may, however, provide longer periods of coverage beyond those required by COBRA. COBRA coverage extends for 18 months when the qualifying event is an employment termination or a reduction of hours worked. Other qualifying events, or a second qualifying event during the initial period of coverage, may extend the coverage for a maximum of 36 months. Longer periods of coverage may be available for a person who is disabled.

COBRA continuation coverage begins on the date that coverage under the group health plan ends due to a qualifying event and will terminate after the maximum period of coverage allowed. However, COBRA coverage may end earlier if:

● Premiums are not paid on a timely basis;

● The employer ceases to maintain any group health plan;

● After the COBRA election, coverage is obtained through another group health plan; or

● After the COBRA election, the insured becomes eligible for Medicare.

COBRA Eligibility

To be eligible for COBRA coverage, the employee must have been enrolled in the employer's health plan while the employee worked and the health plan must continue to be in effect for active employees. COBRA continuation coverage will not be available if the employer discontinues all of its health plans. Employees will have to seek other coverage.

Other Coverage Options

Other coverage options may include:

● A spouse's group health plan,

● An individual policy, or

● A government program.

Spouse's Group Health Plan

An employee losing coverage may have a right to special enrollment in a spouse's group health plan. HIPAA, the Health Insurance Portability and Accountability Act of 1996 (PL 104-191), requires a group health plan to allow special enrollment for certain individuals to enroll in the plan without having to wait until the plan's next regular open enrollment period. A special enrollment opportunity occurs if an individual with other health insurance loses that other coverage or if a person becomes a new dependent (e.g., through marriage, birth, adoption). However, the person must request special enrollment within 30 days of losing other coverage or within 30 days of becoming a new dependent.

Individual Policy

Other coverage may also be available by converting from the employer's group health plan to an individual policy. HIPAA guarantees eligible individuals access to individual policies.  Eligible individuals are those who:

have had coverage for at least 18 months without a significant break in coverage where the most recent period of coverage was under a group health plan;

did not have their group coverage terminated because of fraud or nonpayment of premiums; and

are ineligible for COBRA continuation coverage or, if offered COBRA continuation coverage (or continuation coverage under a similar state program), have both elected and exhausted their continuation coverage.

Government Program

An employee losing coverage may qualify for health coverage through state or federal government programs. Government programs may include Medicaid (for low-income individuals and individuals with special needs), a state children's insurance program (for children of qualified families, e.g., Connecticut's HUSKY plan), a state high-risk pool (for individuals denied insurance for health reasons, e.g. Connecticut's Health Reinsurance Association), and Medicare (for people age 65 and over, and for certain people who are disabled or have end-stage renal disease).

EBSA Recommendations

The U.S. Department of Labor's Employee Benefits Security Administration (“EBSA”), which administers ERISA, recommends that employees ask the plan administrator or union representative (if applicable) for a status of the plan when an employer files for bankruptcy. If the health plan will be terminated, employees should ask how outstanding health claims will be paid and when certificates of creditable coverage (showing, among other things, the dates of enrollment in the employer's health plan), required by HIPAA, will be issued.

EBSA suggests that if coverage under a group health plan ends, a person should contact their state insurance department to ask about eligibility for an individual policy under HIPAA. EBSA also recommends that if a person has unpaid health claims when the plan sponsor declares bankruptcy, then the person may want to file a proof of claim with the bankruptcy court.

STATE LAW: CONTINUATION OF COVERAGE

Connecticut law requires employers to comply with COBRA (CGS 38a-538). It also requires each group health insurance policy, regardless of the number of insureds, to provide continuation and conversion benefits found in Sections 38a-554(b) and (d) of the General Statutes, respectively (CGS 38a-546).

Continuation of Coverage

Section 38a-554(b) of the General Statutes requires each group health insurance policy to provide the option to continue coverage under certain circumstances until the individual is eligible for other group insurance. Continuation of coverage is available to an employee and the employee's covered dependents if the employee is laid-off, works reduced hours, takes a leave of absence, or terminates employment, other than as a result of gross misconduct. The employee's spouse and dependent children are entitled to continue coverage under a group health plan if the employee dies, there is a divorce, court ordered annulment or legal separation, or the child loses dependent status through marriage or by reaching age 19 (age 23 if a full-time student at an accredited institution of higher learning).

Continuation of coverage generally extends for the periods of coverage set forth in COBRA. This means that coverage will extend for 18 months or 36 months depending on the qualifying event and possibly longer if the person is disabled. However, for group health insurance policies issued, renewed, or continued in Connecticut on or after October 1, 2003, an employee and such employee's covered dependents are entitled to continue coverage until midnight of the day preceding the employee's eligibility for Medicare if the employee's reduced hours, leave of absence, or termination of employment results from his or her eligibility for Social Security income (PA 03-77).

Continuation of coverage may be subject to the requirement that the individual pay the premium for the coverage, up to 102% of the group rate.

Continuation after Termination of Health Plan

Section 38a-554(b)(4) of the General Statutes provides limited continuation of coverage following the termination of a group health plan. Regardless of an individual's eligibility for other group insurance, when a group health plan terminates, coverage for covered individuals who were totally disabled on the date the plan terminated will continue for 12 calendar months without payment of premium, provided a claim for coverage is submitted within one year of the plan termination. The individual receives coverage only for claims related to the disability.

If a person is not totally disabled on the date the plan terminates, state law does not require coverage continuation. Employees and their dependents will need to find coverage elsewhere (e.g., special enroll in a spouse's plan, convert to an individual policy, or, if eligible, apply for coverage under a government program).

Conversion to Individual Coverage

Section 38a-554(d) of the General Statutes requires each group health insurance policy to provide Connecticut residents with a right to convert to an individual policy immediately upon termination of coverage under the group plan. The terms and benefits offered under the conversion plan must be at least equal to those in an individual comprehensive health care plan as described in Sections 38a-553 and 555 of the General Statutes.

Plan documents for the group health insurance policy will explain how a person can convert to an individual policy. State law does not require employers or insurers to contact persons losing coverage to offer the individual conversion plan. In Connecticut, most plans offer conversion through the Health Reinsurance Association, the state's high-risk pool.

People with questions about continuation of coverage and conversion privileges should consult their plan documents and human resources department. They may also contact the Connecticut Insurance Department's Consumer Affairs division with coverage questions and complaints at 1-800-203-3447. The Consumer Affairs Division can provide a list of individual insurance carriers doing business in Connecticut. The list may also be found on the Insurance Department's website (www.ct.gov/cid/). Information about and applications for the Health Reinsurance Association can be obtained by calling the high-risk pool at 1-800-842-0004.

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