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The Affordable Care Act—Countdown to Compliance for Employers, Week 27: COBRA, Marketplace Coverage, Stability Periods, and Cafeteria Plan Elections

Written by Alden J. Bianchi

Recent developments under the Affordable Care Act and COBRA, and existing rules governing mid-year election changes under cafeteria plans, have combined to make it challenging for certain terminating employees and those employees who experience a reduction in hours to continue health care coverage seamlessly. These developments include newly-issued COBRA notices, rules governing an individual’s ability to enroll in qualified health plans through a public exchange or Health Insurance Marketplace (Marketplace) other than during an open enrollment period, and rules relating to offers of coverage by applicable large employers under rules governing stability periods. The challenge relates to the transition from employer-sponsored group health plan coverage into Marketplace coverage.

The U.S. Department of Labor recently revised model COBRA notices (a general notice and an election notice, which are available here) that take into account the availability of coverage under a public exchange or Marketplace established under the Act. The purpose of the new notices is make qualified COBRA beneficiaries aware that, as a result of the Act, they now have an alternative to COBRA that may better suit their needs. According to a contemporaneous set of Frequently Asked Questions:

Some qualified beneficiaries may want to consider and compare health coverage alternatives to COBRA continuation coverage, such as coverage that is available through the [Marketplace]. Qualified beneficiaries may be eligible for a premium tax credit (a tax credit to help pay for some or all of the cost of coverage in plans offered through the Marketplace) and cost-sharing reductions (amounts that lower out-of-pocket costs for deductibles, coinsurance, and copayments), and may find that Marketplace coverage is more affordable than COBRA.

Generally, individuals may elect Marketplace coverage only during an open enrollment period. For coverage commencing in 2014, that period started October 1, 2013 and ended March 31, 2014. Individuals may also qualify for special enrollment periods outside of open enrollment if they experience certain events that include the loss of other minimum essential coverage (e.g., the loss of coverage under an eligible employer-sponsored plan or when COBRA coverage is exhausted). A COBRA qualified beneficiary could drop COBRA coverage during open enrollment even if their COBRA hasn't expired. But he or she would be unable to do so outside of open enrollment. Concerned that earlier model COBRA notices might have led to some confusion in the matter, the Centers for Medicare & Medicaid Services and Center for Consumer Information and Insurance Oversight, in a May 2 bulletin, extended the COBRA special enrollment period for persons eligible for COBRA and COBRA beneficiaries to July 1, 2014. Unit then, an individual who is currently on COBRA can voluntarily drop COBRA coverage and enroll in Marketplace coverage, without having to wait for the next open enrollment period. (This relief applies by its terms only to Federally-facilitated Marketplaces, but the state-based exchanges are encouraged to follow suit.)

An individual who terminates employment, and who thereby loses minimum essential coverage, is permitted to choose COBRA coverage or Marketplace coverage. But unlike COBRA coverage, which is generally retroactive to the date on which coverage is lost, Marketplace coverage generally takes effect prospectively as of the first day of the month following enrollment. Thus, there could be a gap in coverage, unless the employer coverage runs through the end of the month.  Under a recent amendment to the rules governing special enrollment periods, the election of Marketplace coverage can be made within 60 days before or after termination. Thus, an employee with fore-knowledge of his or her termination can time his or her election to avoid a gap. But an employee who is terminated without notice is not so fortunate. This latter employee is left with a choice between COBRA coverage, which may be more expensive but has the benefit of retroactive effect, and Marketplace coverage, which may be cheaper but may result in a gap in coverage. (An employee who is covered under his or her employer’s group health plan is denied access to premium tax credits since he or she has other minimum essential coverage. Once an employee terminates employment and coverage is lost, he or she may qualify for subsidized coverage, which is likely far less expensive than unsubsidized COBRA coverage.)

A qualified beneficiary could use COBRA to fill in the gap by (timely) enrolling in COBRA; (timely) enrolling in Marketplace coverage; and then dropping COBRA coverage once the Marketplace coverage takes effect. This process is burdensome however, as it would require affected individuals to know about and comply with two different sets of rules.

NOTE: HHS has a provided useful, web-based tool for determining whether an individual has a special enrollment right. The tool is available here.

The discussion above assumes a termination of employment or a reduction in hours that results in a loss of minimum essential coverage. But what happens to an employee who is employed by an applicable large employer that determines full-time status under the look-back measurement method? (The rules governing the application of the look-back measurement method are set out in final regulations implementing the Act’s employer shared responsibility rules). For an individual who is covered under an employer’s group health plan and who moves from full-time to part-time status during a stability period, there is no loss of minimum essential coverage. There is, therefore, no special enrollment right. And while the regulators have not issued any guidance explaining how COBRA interacts with the rules governing stability periods, it seems pretty clear that there are no COBRA rights in this instance.

It gets worse: the employee whose hours have been reduced is presumably paying the employee portion of his or her group health premiums pursuant to a cafeteria plan election. Final regulations governing cafeteria plan elections (Treas. Reg. § 1.125-4) generally bar mid-year changes other than in the case of changes in status or changes in cost-or-coverage. There is no change in status since the employee is still on the job. If the employer charges a higher premium to part-time folks—a less than ideal solution, to be sure—then there may be a change in cost, which would permit the employee to make a mid-year change in his or her cafeteria plan election. But even if the employee could drop coverage under the terms of the plan, and even if he or she could change his or her cafeteria plan election, he or she would still be unable to enroll in Marketplace coverage outside of an open enrollment period.

Terminated employees, and employees who reduce hours, present a sympathetic case. That the current rules foster brief but potentially debilitating coverage gaps is an issue that ought to be addressed. Making timely-elected Marketplace coverage retroactive to the date of termination, for example, would go a long way toward easing the transition from employer coverage to coverage under a qualified health plan. Similarly, expanding the cafeteria plan mid-year election rules to permit the employee to move from the employer plan to Marketplace coverage makes a good deal of sense. Employers too would need to ensure that their plans accommodated the transition. None of this sounds too difficult.

This post updates an earlier version.

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