Ending Health Coverage in Anticipation of a Qualifying Event

COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires most employers to provide former employees and dependents who lose group health benefits due to a qualifying event with an opportunity to continue group health coverage for a limited period of time.

Understanding COBRA Qualifying Events

If an employee voluntarily drops coverage at open enrollment, is it considered to be a COBRA triggering event? In most cases, the answer is no. Although an employee might voluntarily drop coverage during open enrollment for the entire family due to cost issues or the availability of preferred spousal coverage, compliance concerns could develop when it is apparent that the employee is specifically dropping coverage belonging to the spouse. Dropping spousal coverage at open enrollment may also look like a COBRA qualifying event, but it is not. (Voluntarily dropping the coverage is not a listed event connected with a loss of coverage that would trigger COBRA.) Nevertheless, what should employers do if this situation occurs?

What Is a Qualifying Event?

COBRA requires that group health plans offer a coverage continuation opportunity to targeted recipients. These recipients or “qualified beneficiaries” include the covered employee, the spouse of a covered employee, or the dependent child of a covered employee on the day before a qualifying event. These individuals are only entitled to COBRA if health coverage is lost as a result of a triggering event. These qualifying and triggering events are changes in an employee situation.

List of Accepted Qualifying Events

Qualifying events affect the employee, whether it’s something that happened to them or their family members. The following are the different qualifying events that trigger COBRA:

• Termination of the covered employee’s employment or a reduction of hours
• Divorce (or legal separation) from the covered employee
• Death of the covered employee
• A dependent child’s ceasing to be a dependent under the plan (less common now that PPACA has established adult child eligibility through age 26)

Can You End Health Insurance Coverage Without a Qualifying Event?

The COBRA regulations note that elimination of coverage in anticipation of a qualifying event does have COBRA implications when a qualifying event (such as a divorce) subsequently occurs. In such a case, the “voluntary” dropping of coverage at open enrollment is disregarded in determining whether a specified event results in a loss of coverage. This important rule prevents employers and employees from eliminating COBRA rights before an event, by applying COBRA rules as if the elimination had not occurred. This enables an individual whose coverage was affected to elect COBRA coverage identical to coverage in effect before the elimination. The rationale for this rule seems clear when an employer acts to limit COBRA rights, but it also applies, when an employee acts to affect coverage in anticipation of a qualifying event.

How Can You Drop Your Spouse From Coverage?

If an employee drops a spouse’s coverage at an annual enrollment period, that spouse is not a qualified beneficiary at that point because being voluntarily dropped from coverage is not one of the specified events. If the employee and spouse later divorce, under the “in anticipation” rule, COBRA must be offered to the ex-spouse if the covered employee dropped the spouse from coverage in anticipation of the divorce. When this rule applies, the divorce is treated as the qualifying event, and COBRA coverage runs from the date of the divorce. (Coverage is not reinstated for any period before the divorce, however.) This rule also extends to legal separations if the legal separation would cause a loss of coverage under the plan.

The “in anticipation” rule presents special challenges to plan administrators. If a spouse is taken off the plan prior to a divorce, a carrier for the plan may resist reinstating the spouse’s coverage under COBRA when the divorce occurs several months later. COBRA guidance does not specify how to determine whether an employee dropped a spouse’s coverage in anticipation of a qualifying event. In most cases, the only indication that the “in anticipation” rule may apply is the fact that a divorce occurs after the employee drops the spouse’s coverage.

Determining your Compliance Strategy

Because the “in anticipation of a qualifying event rule” looks so much like a COBRA triggering event, some employers find it helpful to send out a communication explaining that the individual has lost health coverage and that COBRA rights might emerge at a subsequent date. Providing such an advisory notice may trigger a response from a spouse who was unaware of the termination, which will give the plan administrator a good indication whether the coverage was dropped in anticipation of a subsequent divorce. In that event, the plan administrator should contact any insurance carrier (including a stop-loss carrier) promptly to ensure that the carrier will provide any required COBRA coverage when/if the divorce occurs.