A Summary of the Ruling

The facts addressed in the Revenue Ruling concern an employee who terminates employment. The employee and his or her spouse are both eligible to elect COBRA for up to 18 months. The spouse, but not the employee, chooses to elect COBRA.* Before the end of the 18-month COBRA period the former employee reaches age 65 and becomes entitled to Medicare benefits. The former employee's spouse notifies the plan of Medicare entitlement. The question is whether the spouse can extend his or her COBRA coverage from 18 months to 36 months due to the Medicare entitlement.

The COBRA statute provides a special rule for multiple qualifying events. ** Generally, if a qualifying event, which is the termination or reduction in hours of an employee, is followed within the initial 18 month period by a second qualifying event (other than the employer's bankruptcy), then the maximum COBRA coverage period is extended from 18 months to 36 months for qualified beneficiaries.

In the scenario addressed by Revenue Ruling 2004-22, the spouse elected COBRA after the employee terminated employment. He or she was, therefore, entitled to 18 months of coverage. Pursuant to the COBRA statute, if Medicare entitlement were a qualifying event in this instance, then the spouse would be allowed to extend COBRA coverage to a total of 36 months. The IRS, however, concluded that an extension of COBRA to 36 months did not apply in this situation because the employee's Medicare entitlement was not a qualifying event.

The IRS states that in this case the plan must look at the situation as if the first qualifying event (the termination of employment) did not occur and the employee was still working. If the employee were still working, Medicare entitlement would not have been a qualifying event because the Medicare entitlement would not have resulted in a loss of coverage for the employee and his or her dependents. In order to comply with the Medicare Secondary Payer (MSP) provisions of the Social Security Act, the plan could not have terminated the employee's coverage because he or she reached age 65. MSP prohibits certain group health plans from taking into account the Medicare entitlement of current employees due to age in providing health benefits. In the scenario addressed in Revenue Ruling 2004-22, the plan complied with the MSP provisions. The IRS reasoned that because Medicare entitlement would not have been a qualifying event if it had occurred while the employee was working, it could not be a second qualifying event that would allow the spouse to extend her COBRA coverage to 36 months.

Implications for Plan Sponsors

Some plans may currently have summary plan descriptions (SPDs), COBRA notices and plan documents that include specific language allowing qualified beneficiaries to extend COBRA coverage to 36 months in the situation addressed in Revenue Ruling 2004-22. The Revenue Ruling's holding that plans must look at the second qualifying event, "in the absence of the first qualifying event," (i.e., pretend that the first qualifying event never occurred) may not be something that plan administrators have done in the past. This standard is not set out in the COBRA statute or its regulations.

This Ruling seems to indicate that the IRS would allow plans to refuse to extend coverage to 36 months in the circumstance set out (provided plan documents are consistent). Plans may wish to change their terms to reflect the substance of this Revenue Ruling. However, the advice of legal counsel should be sought before making any amendments. A court may reject the IRS' interpretation of the COBRA statute and require that a plan provide 36 months of COBRA coverage.

In addition to legal issues associated with changing plan language, plans should be aware that this issue might have significant implications for employees who are thinking about retiring before age 65. For these employees, deciding how they will bridge the gap between private coverage and Medicare for themselves and their families is crucial. These employees need to know the exact duration of COBRA coverage for themselves and their dependents prior to retiring. It is important that plan information is clear on this point, including the information included in a COBRA election form.***

Finally, plans can always be more generous than COBRA. They can provide the 36 months of coverage in this situation regardless of the conclusion in the Ruling.****

Segal can be retained to work with plan sponsors and their attorneys to determine whether and how to modify COBRA coverage in response to Revenue Ruling 2004-22.

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