Most plan administrators know that the recipe for a group health plan’s COBRA obligation includes three ingredients – a qualifying event that occurs while the individual is covered by the plan that triggers a loss of such coverage.
One of the more common qualifying events is a divorce or legal separation from the covered employee. In most cases, this is fairly straightforward in practice – for example, employee’s spouse is covered under the plan, employees gets a divorce and, as a result of the divorce, the spouse loses coverage, and so the plan is obligated to offer 36-months of COBRA coverage to the ex-spouse. This assumes, of course, that one of the parties notified the plan or COBRA administrator within 60 days of the date of the divorce or legal separation.
However, an employee’s separation or divorce is not always this straightforward in real life. For example, take the following set of facts:
Employee legally separates from his spouse in September 2013, but because the terms of the employee’s health plan do not provide for termination of coverage on legal separation, the spouse remains covered by the plan. No COBRA obligation here, because there’s been no loss of coverage
Employee drops spouse from coverage during the annual open enrollment election period, effective January 1, 2014. Again, no COBRA obligation, because the loss of coverage arose due to the employee’s election during open enrollment, which is not a COBRA qualifying event
The employee and spouse finalize their divorce on April 1, 2014, at which point the ex-spouse notifies the plan administrator of the divorce within 60 days and requests COBRA continuation coverage. Even though the ex-spouse was not covered by the plan at the time of the divorce, the plan will likely have an obligation to extend COBRA at this point under the “In Anticipation of Divorce” rule
The “In Anticipation of Divorce” rule is often a surprise to plan administrators. Under this rule, which is included in the COBRA regulations (but not the COBRA statute), a plan is required to make COBRA continuation coverage available to a spouse following a divorce – even if that spouse is not enrolled in the plan at the time of the divorce – if the spouse’s coverage was eliminated by the covered employee in anticipation of the divorce (or legal separation if the separation would trigger a loss of coverage under the terms of the plan).
One of the reasons that this rule is commonly overlooked may be because the Internal Revenue Service has never issued additional guidance about the definition of “in anticipation of divorce” and the Department of Labor has never included this rule in any of its model COBRA notices. Even if not overlooked, the rule is difficult to administer because it requires the plan administrator to make a judgment call about why the employee dropped his or her spouse from coverage. Was it in anticipation of the divorce or legal separation? Or was it for another reason, such as the spouse getting a new job which offered her more affordable or more comprehensive health coverage?
Given the lack of guidance from the IRS, our recommendation to plan administrators is to adopt the following practices:
Be familiar with the “In Anticipation of Divorce Rule” (check!)
Include information about the rule in your summary plan description and/or COBRA election materials
If the employee’s rationale for dropping coverage is not entirely clear, then gather additional information from the employee or ex-spouse that will be helpful in making your determination
If you conclude that coverage was cancelled for a reason other than the anticipated divorce, then document your decision, including the rationale behind your conclusion, in a memorandum that you file with your plan records
The 36-month maximum COBRA coverage period starts to run from the date of the divorce, not the date of the termination of coverage. So, you are not required to cover claims incurred between the date the employee dropped the spouse’s coverage and the date of the divorce/legal separation
The potential non-compliance consequences include excise tax penalties that may be assessed by the IRS for each day on which the plan fails to comply with COBRA (up to $200 per day) and the risk that the ex-spouse may sue for COBRA coverage, which carries the potential for damages equal to the claims that should have been paid by the plan and the award of attorneys’ fees for the prevailing party.