On January 12, 2001, the IRS issued new final regulations regarding COBRA continuation coverage. These are the second set of final regulations issued by the IRS on COBRA in two years. In February 1999, the IRS issued final regulations and new proposed regulations. After waiting nearly twelve years to finalize the previous proposed regulations, the IRS has gotten downright speedy in providing COBRA-related guidance.
The new regulations adopt the regulations proposed in February 1999, with a few changes and clarifications and are generally applicable to qualifying events occurring on or after January 1, 2002. The following proposed rules became final when the new regulations were issued:
Small Employer Exception. The small-employer exception excepts a plan from COBRA for any calendar year if all employers maintaining the plan employed fewer than 20 employees on a typical business day during the preceding calendar year. For purposes of this exception, the final regulations adopt the full-time equivalency rule proposed in 1999, under which a part-time employee counts as a fraction of a full-time employee.
Health Flexible Spending Accounts. Generally, a health flexible spending account ("FSA") must provide COBRA to qualified beneficiaries who lose coverage as a result of a qualifying event. The 1999 proposed regulations included two limited exceptions for health FSAs that are excepted from HIPAA and have a particular premium structure. Under the first exception, COBRA does not need to be offered to a qualified beneficiaries who has overspent his or her account as of the date of their qualifying event. Under the second exception, COBRA must be offered to a qualified beneficiary with an underspent account, but coverage can be cut off at the end of the year in which a qualifying event occurs. This set of exceptions has been adopted in final form essentially as proposed. In addition, a sentence has been added to clarify that health FSAs required to offer COBRA are subject to all the other requirements of COBRA that apply to a group health plan.
Asset Sales or Transfers. The detailed provisions governing COBRA responsibility in mergers and acquisitions in the 1999 proposed rules have been adopted with two clarifications. First, the final regulations clarify that asset sales include not only sales but other transfers as well. Second, the final regulations clarify that the rules applicable in an asset sale for determining whether the purchaser of...