Amwins Connect - September Question of the Month

Amwins Connect - September Question of the Month

Changing COBRA Rates During Determination Period

Question:

Due to an administrative oversight, an employer failed to adjust its COBRA rates for its new plan year. Does the 12-month determination period for COBRA rates, which runs concurrently to this employer’s plan year, prevent the employer from making any desired adjustments after the plan year begins? And if it makes changes, will it still be able to make additional adjustments for the next plan year?

Answer:

In certain cases, if an employer fails to adjust COBRA rates upon renewal, it is possible to increase the COBRA rates prospectively after the start of the determination period and still make adjustments again at the next renewal.

Typically, COBRA rates must be determined prior to and held constant for a 12-month determination period. However, there are some exceptions to this general rule. Specifically, a plan may increase the COBRA premium charged to a qualified beneficiary during the determination period if:

1. The plan adjusts them, as permitted, during a disability extension;
2. The plan is requiring payment of less than 102% (or 150% during a disability extension) of the applicable premium* and wants to increase the payment to the maximum level; and
3. A qualified beneficiary changes coverage from one benefit package/coverage unit to another, and a higher applicable premium was fixed for the new benefit/coverage before the determination period began. In this case, the plan may increase the qualified beneficiary’s premium up to 102% (or 150% during a disability extension) for the new benefit/coverage.

Based on the second exception above, if a plan is currently charging less than 102% of the applicable premium, it should be permitted to adjust its rates up to 102% of the current rate for the year. It should ensure that this change is made prospectively and that the change is communicated to qualified beneficiaries. (While there is no formal guidance requiring advance notice of a rate change, the DOL has indicated informally that COBRA continuation coverage should not be terminated for insufficient payment if qualified beneficiaries are not provided with reasonable advance notice of increased premiums and a reasonable opportunity to pay such premiums.)

Looking at an example of an employer with a calendar year plan, whose determination period is the same as the plan year: If this employer is currently charging less than 102% of the applicable premium for COBRA and decides to make an adjustment effective April 1 to apply COBRA rates that are 102% of the applicable premium, arguably the employer is using the new (higher) rates as the chosen rate for the determination period that began 1/1 and simply chose not to apply the full amount right away. The determination period is not necessarily tied to when the COBRA premiums are actually adjusted for the qualified beneficiaries.

*Applicable premium generally refers to the cost to the plan for such period of coverage for similarly situated beneficiaries with respect to whom a qualifying event has not occurred.

While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it. This publication is distributed on the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice or services. Readers should always seek professional advice before entering into any commitments.