We got so many questions about spouses and dependents being dropped during open enrollment, we wrote a separate page for it.
When an employee makes a voluntary choice to drop dependents from the health insurance plan during open enrollment, there is no qualifying event that would trigger COBRA eligibility.
But the COBRA administrator must consider if the employee drops his or her spouse during open enrollment in anticipation of divorce or legal separation. Divorce or legal separation is a qualifying event for COBRA, but not until the divorce or legal separation is final. In this case, the IRS decided that a spouse or dependents is dropped in anticipation of divorce or legal separation will be entitled to COBRA upon the finalization of the divorce or legal separation even if the spouse was not covered under the plan immediately preceding the event.
It is difficult to know an employee's motivation when they are making an open enrollment changes. It is the employer’s responsibility to take reasonable measures to determine if the anticipation of divorce rule applies. The employer should have asked questions of the employee at the time of the open enrollment change, adding related questions to the coverage change forms or sending notice to the employee’s spouse advising the spouse of his or her rights if a divorce or legal separation is pending. Because of unforeseen COBRA liabilty, as well as possible conflicts with insurance carriers, employers should consult their lawyer for specific guidance on how their COBRA obligations can be fulfilled.
IRS Revenue Ruling 2002–88:
If an employee eliminates the coverage
of the employee's spouse under a group
health plan in anticipation of their divorce,
when must a plan that is required to make
COBRA continuation coverage available to
the spouse begin to make that coverage
available?
FACTS
A group health plan subject to COBRA
allows eligible employees to elect coverage
for themselves and their spouses. An
employee who has elected coverage for the
employee's spouse can notify the plan to
eliminate the spouse's coverage, and the
spouse's coverage will be terminated as of
the end of the month in which the notice
is provided. Under the terms of the plan,
a spouse loses eligibility for coverage on
the date of divorce from an eligible employee.
Employee E is enrolled in the group
health plan and elected coverage for E's
spouse. A decree of divorce is issued dissolving
the marriage of E and E's spouse.
In anticipation of their divorce, E notified
the plan administrator to eliminate the
coverage for E's spouse, and coverage for
E's spouse was terminated as of the last day
of the month. There are no facts to indicate
that E's spouse would have otherwise
lost coverage under the plan before the
divorce. The plan administrator is provided
notice of the divorce within 60 days
after the issuance of the divorce decree.
LAW AND ANALYSIS
Section 4980B of the Internal Revenue
Code requires certain group health plans to
make continuation coverage available to certain
individuals who would otherwise lose
their coverage under the plan as a result of certain occurrences (the "COBRA continuation
coverage requirements"). Section
4980B imposes an excise tax if a plan subject
to the COBRA continuation coverage
requirements fails to comply with those requirements.
Under section 4980B, the obligation of
a plan to make COBRA continuation coverage
available arises in connection with a
qualifying event. The individuals to whom
the COBRA continuation coverage must be
made available are qualified beneficiaries.
Under Q&A–1 of § 54.4980B–3 of the
Miscellaneous Excise Tax Regulations, an
individual generally is a qualified beneficiary
if the individual is covered under a
group health plan on the day before a qualifying
event by virtue of being on that day
the spouse of a covered employee.
Under Q&A–1 of § 54.4980B–4, a divorce
or legal separation of a covered employee
from the covered employee's spouse
is a qualifying event if, under the terms of
the plan, the divorce or legal separation
causes the spouse (or a dependent child of
the covered employee) to lose coverage under
the plan. Paragraph (c) in Q&A–1 of
§ 54.4980B–4 states that if coverage is
eliminated in anticipation of a qualifying
event, such as an employee's eliminating the
coverage of the employee's spouse in anticipation
of a divorce or legal separation,
the elimination is disregarded in
determining whether the qualifying event
causes a loss of coverage.
Q&A–1 of § 54.4980B–7 states that
COBRA continuation coverage must be provided
for a period that begins on the date
of the qualifying event. Under Q&A–1 and
Q&A–4 of § 54.4980B–7, a plan generally
has the obligation to make COBRA
continuation coverage available to a qualified
beneficiary in the case of a divorce or
legal separation for 36 months after the date
of the divorce or legal separation. This obligation
can end earlier for a variety of reasons,
such as failure to make timely
payment to the plan for the qualified beneficiary's
coverage.
Q&A–2 of § 54.4980B–6 provides that
a group health plan is not required to offer
a qualified beneficiary the opportunity
to elect COBRA continuation coverage
in the case of a divorce or legal separation
if notice of the divorce or legal separation
is not provided to the plan
administrator within 60 days after the later of the date of the divorce or legal separation
or the date the qualified beneficiary
would lose coverage on account of the divorce
or legal separation.
E eliminated the coverage of E's spouse
in anticipation of their divorce. Under the
regulations, this elimination is ignored in
determining whether the divorce is a qualifying
event. There are no facts to indicate
that E's spouse would have otherwise
lost coverage under the plan before the divorce.
Thus, if the elimination in anticipation
of the divorce is ignored, E's spouse
would have remained covered until the divorce
and then lost coverage because of it.
Consequently, the divorce is a qualifying
event and E's former spouse is a qualified
beneficiary. Because notice of the divorce
was provided to the plan administrator
within 60 days after the issuance of the divorce
decree, the plan has an obligation to
make COBRA continuation coverage available
to E's former spouse for a period of
up to 36 months.
The period of COBRA continuation coverage
begins on the date of the qualifying
event. There is no authority under the statute
or regulations for requiring a plan to
make COBRA continuation coverage available
before the date of a qualifying event.
Thus, the group health plan in the facts described
above has the obligation to make
COBRA continuation coverage available to
E's former spouse effective as of the date
of the divorce for a period of up to 36
months.
HOLDING
If an employee eliminates the coverage
of the employee's spouse under a group
health plan in anticipation of their divorce,
a plan that is required to make COBRA
continuation coverage available to the
spouse must begin to make that coverage
available as of the date of the divorce.
DRAFTING INFORMATION
The principal author of this revenue ruling
is Russ Weinheimer of the Office of Division
Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). For
further information regarding this revenue
ruling, contact Russ Weinheimer or
Yurlinda Mathis at (202) 622–6080 (not a
toll-free number).
Craig Casey is an Writer, Coach, Blogger, Husband, and Former Health Insurance Agent helping people on the web since 1999 with their health insurance problems.
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