September 6, 2007
NOTIFICATION OF GROUP HEALTH CARE PLAN CHANGE
By: Janet L. Kaminski, Associate Legislative Attorney
You asked if state or federal law requires an employer sponsoring a group health care plan to notify a former employee who continues to receive plan coverage pursuant to the federal COBRA law that the plan is being changed, replaced, or discontinued. You also asked if the state legislature could enact a law to require such notification.
The Office of Legislative Research is not authorized to give legal opinions and this report should not be treated as such.
Two federal laws appear to apply to the situation you describe: the Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA).
ERISA requires the sponsor of a group health care plan subject to its provisions to inform plan participants, including any former employees eligible for plan benefits, of (1) a material reduction in covered services or benefits within 60 days of adopting the change and (2) any other material modification to the plan within 210 days of adoption. Some courts have ruled that canceling a plan is not the same as modifying it and, thus, the ERISA notification rules are not applicable in such a situation. Rather, they held that ERISA rules regarding fiduciary duties are implicated, requiring the plan sponsor to promptly notify plan participants of an impending plan termination.
COBRA requires plan administrators to notify qualified beneficiaries (e.g., individuals continuing coverage under a group health care plan who would have otherwise lost coverage due to certain specific events) if their coverage will end sooner than the end of the maximum coverage period allowed under federal law. Also, plan administrators must permit qualified beneficiaries to make the same choices given to non-COBRA plan beneficiaries. For example, if an employer replaces its group health care plan with another, then qualified beneficiaries must be offered the same opportunity to elect coverage under the replacement plan.
State law requires an employer providing group health insurance coverage for its employees, when (1) canceling or discontinuing the insurance or (2) substituting it with another insurance policy, to give each insured employee notice of the cancellation, discontinuation, or substitution at least 15 days before the effective date of the change (CGS § 38a-537). This law appears to only refer to active employees covered under the employer's benefit plan and not to former employees.
However, state law requires employers to allow “individuals to elect to continue coverage under a group plan pursuant to federal extension requirements established by [COBRA]” (CGS § 38a-538). Thus, employers who discontinue, cancel, or substitute a group health care plan and are acting in compliance with COBRA must notify former employees who are qualified beneficiaries with COBRA coverage of the plan change in accordance with COBRA.
Legislators, if they choose, could amend state law to require employers providing group health insurance coverage for employees to notify former employees continuing coverage pursuant to federal or state law of an impending plan cancellation, discontinuance, or substitution in the same manner as employers must notify insured active employees.
Congress enacted ERISA in 1974 as a federal regulatory scheme for employee benefit plans, including health care plans, whether they are fully insured through an insurance company or self-funded (29 U.S.C. §§ 1001-1461). It sets forth requirements for benefit plan participation, funding, and vesting of benefits. It also establishes uniform standards for plan reporting, disclosure, and fiduciary duties, generally freeing multi-state employers from inconsistent state regulation in these areas. ERISA applies to employee welfare plans, including health care plans. But it does not apply to:
1. governmental plans;
2. church plans;
3. plans maintained solely for the purpose of complying with workers' compensation, unemployment compensation, or disability insurance laws;
4. foreign plans; and
5. unfunded excess benefit plans.
A plan “participant” is an employee or former employee who is, or may become, eligible to receive benefits under the employer's employee benefit plan or whose beneficiaries may be eligible to receive such benefits. A “beneficiary” is a person a participant designates, or by the terms of an employee benefit plan, who is or may become entitled to benefits under the plan (29 U.S.C. §§ 1002(7) and (8)).
ERISA requires the plan administrator to provide participants and beneficiaries a document that describes the plan. The document, called the summary plan description or SPD, must be in language the average participant understands and sufficiently comprehensive to inform participants of their benefits, rights, and obligations under the plan (29 U.S.C. § 1023).
ERISA generally allows a plan sponsor to modify (or discontinue) health benefit plans so long as the procedure followed is consistent with the plan terms and ERISA. The plan administrator must inform participants of material modifications to the plan or changes to the information contained in the SPD by providing them a Summary of Material Modifications (SMM) or a revised SPD (29 U.S.C. § 1024).
Unless the modification is a material reduction in covered services or benefits under a group health plan, the plan administrator must provide participants with an SMM within 210 days after the end of the plan year in which the change was adopted. A plan administrator of a group health plan must inform plan participants of a material reduction in covered services or benefits within 60 days of adopting the modification. This 60-day rule does not apply if group health plan participants receive regular communications, including notice of plan modifications, from the plan administrator or plan sponsor at least every 90 days. A “material reduction in covered services or benefits” is any change in the plan or required SPD information that an average plan participant would consider important (e.g., increases in premiums, deductibles, coinsurance, or copayments; a reduced service area; a change in benefit determination formulas that results in a reduction in benefits payable) (29 CFR § 2520.104b-3).
ERISA does not specifically address a plan sponsor's duties to inform participants about an impending plan termination. However, several courts have addressed the issue and determined that the law's requirement that a sponsor notify plan participants of material changes or modifications is not applicable to cancelling a plan. Instead, they have ruled that employers owe a fiduciary duty to participants and beneficiaries to promptly notify them that benefits will be terminated, since a termination “affects [their] rights to much greater degree than compared to a mere modification” (Rucker v. Pacific FM, Inc., 806 F.Supp. 1453, 1459 (N.D.Cal 1992)).
ERISA provides for numerous civil and criminal penalties for noncompliance of its various provisions. A plan administrator who does not provide plan materials to a participant or beneficiary as required or within 30 days of a written request may be personally liable to such person up to $110 a day, in the court's discretion (29 U.S.C. § 1132(c)(1)(A) and 29 CFR § 2575.502c-1).
Congress passed COBRA in 1986. It amends ERISA and other federal laws to provide continuation of group health coverage that otherwise might be terminated (29 U.S.C. §§ 1161-1168). COBRA contains provisions giving certain former employees, retirees, spouses, former spouses, and dependent children the right to temporarily continue health coverage at group rates when coverage is lost due to certain specific events. The law generally applies to the group health plans of private-sector employers with 20 or more employees and most state and local governments. It does not apply to plans sponsored by certain church-related organizations.
The U.S. Department of Labor issued final COBRA regulations on May 26, 2004. Until that time, guidance was in the form of interim regulations. The final regulations apply to a plan on the first day of its first plan year after November 26, 2004.
A “qualified beneficiary” generally is an individual covered by a group health plan on the day before a qualifying event who is an employee, the employee's spouse, or an employee's dependent child. In certain cases, a retired employee, the retired employee's spouse, and the retired employee's dependent children may be qualified beneficiaries. In addition, any child born to or placed for adoption with a covered employee during the period of COBRA coverage is considered a qualified beneficiary.
Qualifying events are certain events that would cause an individual to lose coverage under the group health plan. The type of qualifying event will determine who the qualified beneficiaries are and the amount of time that a plan must offer the continued health coverage to them under COBRA.
The qualifying events for employees are (1) voluntary or involuntary termination of employment for reasons other than gross misconduct and (2) reduction in the number of hours of employment.
The qualifying events for spouses are:
1. voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct;
2. reduction in the hours worked by the covered employee;
3. the covered employee becoming entitled to Medicare;
4. divorce or legal separation from the covered employee; and
5. the covered employee's death.
The qualifying events for dependent children are the same as for the spouse with one addition--loss of dependent child status under the plan rules.
COBRA Benefits, Plan Changes, and Plan Termination
Qualified beneficiaries must be offered coverage identical to that available to similarly situated beneficiaries who are not receiving COBRA coverage. This is generally the same coverage that the qualified beneficiary had immediately before qualifying for continuation coverage.
A change in the benefits under the active employees' plan also applies to qualified beneficiaries. Qualified beneficiaries must be allowed to make the same choices given to non-COBRA plan beneficiaries (e.g., during the plan's open enrollment). Thus, if an employer replaces its group health care plan with another, then qualified beneficiaries receiving COBRA coverage must be offered the same opportunity to select the new plan as active employees are given. If a qualified beneficiary does not elect the new plan, his or her coverage ceases on the last day of the plan year.
If the employer cancels all group health care plans, then there is no coverage that can be continued. As a result, employees and qualified beneficiaries previously covered under the employer's plan will have to obtain coverage elsewhere.
The law requires plan administrators (typically the employer) to provide information about COBRA to employees and qualified beneficiaries at specific times, as shown in Table 1. The U.S. DOL's 2004 final regulations included two notice requirements not specified in the COBRA statute—notice of unavailability of COBRA and notice of early termination of COBRA coverage.
The “notice of early termination of continuation coverage” requirement is triggered when a plan cancels a beneficiary's coverage prior to the end of the maximum coverage period otherwise allowed under COBRA, such as for nonpayment or when the employer ceases to offer any health care coverage to its active employees. The notice must include the reason the coverage is ending early, the coverage termination date, and any conversion rights (e.g., to an individual policy) the beneficiary might have under the plan. The regulations specify that the notice must be provided “as soon as practicable” following the administrator's determination that coverage is terminating.
Table 1: Required COBRA Notices
Initial COBRA notice
Notice of rights to purchase temporary extension of group health coverage when coverage is lost due to a qualifying event.
Covered employees and covered spouses.
When group health plan coverage begins.
COBRA election notice
Notice to qualified beneficiaries of their right to elect COBRA coverage upon the occurrence of a qualifying event.
Covered employees, covered spouses, and dependent children who are qualified beneficiaries.
Generally within 14 days after the employee or qualified beneficiary notifies the administrator of the qualifying event.
Notice of unavailability of COBRA
Notice that an individual is not entitled to COBRA
Individuals who provide notice to the administrator of a qualifying event whom the administrator determines are not eligible for COBRA coverage.
Generally within 14 days after the individual notifies the administrator of the qualifying event.
Notice of early termination of COBRA coverage
Notice that a qualified beneficiary's COBRA coverage will terminate earlier than the maximum period of coverage.
Qualified beneficiaries whose COBRA coverage will terminate earlier than the maximum period of coverage.
As soon as practicable following the administrator's determination that the coverage will terminate.
Source: U.S. Department of Labor, Employee Benefits Security Administration
There are many penalties for not complying with the COBRA requirements. A non-complying employer or plan administrator may be subject to:
1. an IRS excise tax of $100 per day per violation ($200 a day if the violation affects more than one beneficiary);
2. ERISA penalties of $110 per day, per qualified beneficiary, per violation;
3. claim costs incurred by the qualified beneficiary; and
4. damages and attorney fees.
Connecticut law requires group health care plans to include certain continuation of coverage and “discontinuance and replacement” (D&R) provisions (CGS §§ 38a-546). The continuation of coverage requirements are based on federal COBRA requirements, but extend continuation privileges to specified individuals not covered by federal law. D&R requirements contemplate the termination of a plan insured by one carrier (e.g., HMO, insurer) and the possible replacement of it with a plan insured by another (i.e., the succeeding) carrier.
Discontinuation – Covered Employee
The law requires the insurance commissioner to adopt regulations for group coverage D&R. Such regulations, adopted in September 1992, require an insurer, in any notice of discontinuance it provides to a group policyholder (e.g., an employer), to request the policyholder to notify its employees covered under the plan:
1. of the date on which it is discontinuing;
2. that, unless otherwise provided for in the plan, the carrier will not be liable for claims incurred after that date;
3. that if the policyholder continues to collect premium contributions for coverage beyond that date, the policyholder may be solely liable for the benefits for which contributions were collected; and
4. to refer to their benefit certificates or contracts to determine what rights, if any, are available to them when the plan discontinues.
The regulation also requires the carrier to provide the policyholder with a supply of notice forms that the policyholder may distribute to its covered employees (Conn. Agency Regs. § 38a-546-4).
The regulation specifically states that it does not relieve an employer from the notice of plan cancellation, discontinuance, or substitution requirements contained in statute at CGS § 38a-537.
Cancellation, Discontinuance, or Substitution – Covered Employee
State law requires an employer providing group health insurance coverage for its employees, when (1) canceling or discontinuing the insurance or (2) substituting it with another insurance policy, to give each insured employee notice of the cancellation, discontinuation, or substitution at least 15 days before the effective date of the change. The law requires the state labor commissioner to fine an employer who fails to provide timely notice up to $1,000 for each violation (CGS § 38a-537(a)).
Employer Liability. An employer that fails to give the required notice of a discontinuance or cancellation is liable for benefits to the same extent as the carrier would have been if coverage had not been cancelled or discontinued. An employer that makes deductions from an employee's wages for group health insurance coverage and fails to procure such coverage is liable for benefits to the same extent as the carrier would have been if coverage had been procured. If any corporation makes deductions from an employee's wages for group health insurance coverage and fails to procure such coverage, any officer of the corporation responsible for procuring coverage for employees who willfully failed to procure coverage is personally liable for benefits to the same extent as the carrier would have been if coverage had been procured, if an amount owed an employee due to the officer's failure cannot be collected from the corporation itself (CGS §§ 38a-537(b) and (c)).
Retroactive Coverage. Whenever an employer ceases doing business, any terminated employee whose group health insurance was discontinued on or before the termination date and who did not receive the required discontinuation notice is eligible for 90 days from the discontinuation date to purchase as a conversion privilege an individual comprehensive health care plan for him- or herself and any dependents covered by the discontinued group plan from the former carrier or the Health Reinsurance Association, if any insurer is not issuing such coverage, with coverage retroactive to the discontinuation date. The employee must pay the premiums for the period of retroactive coverage. However, retroactive coverage is not available for any period during which the employee is eligible for benefits under another group plan (CGS § 38a-537(d)).
Cancellation, Discontinuance, or Substitution – Former Employee
The state law just discussed appears to only refer to active employees covered under the employer's benefit plan. Therefore, it appears that the notice requirement of CGS § 38a-537 does not apply with respect to former employees continuing coverage under COBRA.
However, state law requires employers to allow “individuals to elect to continue coverage under a group plan pursuant to federal extension requirements established by [COBRA]” (CGS § 38a-538). Thus, employers who discontinue, cancel, or substitute a group health care plan and are acting in compliance with COBRA (and ERISA, if applicable) will notify former employees who are qualified beneficiaries with COBRA coverage of such a plan change in accordance with federal law.