368 / Who must pay the cost of COBRA continuation coverage and how is the cost calculated?

A plan may require a qualified beneficiary to pay a premium for continuation coverage. The premium generally cannot exceed a percentage of the applicable premium.

The applicable premium is the plan’s cost for similarly situated beneficiaries ( Q 367) with respect to whom a qualifying event has not occurred. The applicable premium for each determination period must be fixed by the plan before the determination period begins. A determination period is defined as any 12 month period selected by the plan, provided that it is applied consistently from one year to the next. Because the determination period is a single period for any benefit package, each qualified beneficiary will not have a separate determination period.¹

Except as provided under ARRA 2009 ( Q 356), the percentage of the applicable premium that may be charged is generally 102 percent. In the case of a disabled qualified beneficiary, the premium may be as much as 150 percent of the applicable premium for any month after the 18 month of continuation coverage. A plan may require payment equal to 150 percent of the applicable premium if a disabled qualified beneficiary experiences a second qualifying event during the disability extension period, after the 18 month. The 150 percent amount may be charged until the end of the 36 month maximum period of coverage, that is, from the beginning of the 19 month through the end of the 36th month. A plan that does so will not fail to comply with the nondiscrimination requirements of IRC Section 9802(b).²

Coverage may not be conditioned on evidence of insurability and cannot be contingent on an employee’s reimbursement of his or her employer for group health plan premiums paid during a leave taken under the Family and Medical Leave Act of 1993.³

During a determination period, a plan may increase the cost of the COBRA coverage only if the plan has previously charged less than the maximum amount permitted and even after the increase the maximum amount will not be exceeded or a qualified beneficiary changes his or her coverage. If a plan allows similarly situated active employees to change their coverage, each qualified beneficiary must be given the same opportunity.⁴

A qualified beneficiary must be permitted to make premium payments on at least a monthly basis. Any person or entity may make the required payment for COBRA continuation coverage on behalf of a qualified beneficiary.⁵

COBRA premiums must be paid in a timely fashion, which is defined as 45 days after the date of election for the period between a qualifying event and an election, and 30 days after the first date of the period for all other periods.⁶ An employer may retroactively terminate COBRA continuation coverage if the initial premium is not timely paid. In Harris v. United Automobile Insurance Group, Inc.,⁷ the 11th Circuit Court of Appeals ruled that the additional time provided in Treasury Regulation Section 54.4980B-8, A-5, applies only to those plans that are fully funded, that is, that involve an agreement with an insurance company to provide benefits. Because the health plan in Harris was funded and sponsored by the company (so that it was self-funded), the IRS regulation did not apply. Consequently, the time for submitting the taxpayer’s premium payment was not extended beyond that provided by the plan. Accordingly, the company was within its right in terminating the taxpayer’s coverage.

In effect, the Harris court ruled that the employer did not have an “arrangement” under which it was given a certain period of time to pay for the coverage of non-COBRA beneficiaries. The additional time frame provided in the regulation applies only to those plans that are fully-funded, meaning those that involve an agreement with an insurance company to provide benefits.

An employer is not required to set off the premium amount against the amount of a claim incurred during the 60 day election period but before the election was made.⁸

A plan must treat a timely payment that is not significantly less than the required amount as full payment, unless the plan notifies the qualified beneficiary of the amount of the deficiency and grants a reasonable period for payment. A reasonable period of time for this purpose is
30 days after the date when notice is provided. An amount will be considered as not significantly less if the shortfall is no greater than the lesser of $50 or 10 percent of the required amount.⁹

Revenue Ruling 96-8 provides some guidance in the area of determining COBRA costs.¹⁰

See Q 369 for a discussion of the Health Coverage Tax Credit.