As a result, individuals covered by insured group health plans in California (including insured ERISA plans) will be allowed to extend their COBRA or Cal-COBRA coverage period from the 18 or 29 months provided by federal law to 36 months. However, sponsors of self-insured plans are most likely not subject to the extension because, as applied to them, the state law is likely to be preempted by ERISA. Plan sponsors should consult with legal counsel regarding application of the new Cal-COBRA requirements to their benefit plans.

This change is effective September 1, 2003 for those individuals who began COBRA coverage on or after January 1, 2003. For example, an individual who began 18 months of COBRA on January 1, 2003 will be entitled to extend that coverage for another 18 months beyond June 30, 2004 (through December 31, 2006).

Background on Cal-COBRA

Cal-COBRA generally follows the same basic rules as federal COBRA except that it applies to certain individuals who do not qualify for federal COBRA benefits, including individuals who work for small employers (i.e., those that have between 2 and 19 employees) and older workers ("Senior COBRA").

Senior COBRA is available if an employee is 60 or older when he or she becomes eligible for Cal-COBRA or COBRA and if he or she had worked for the same company for at least five years. In that case, an employee and spouse may extend continuation coverage until the earliest of the following dates:

• When the individual turns age 65,
• When the individual becomes entitled to Medicare,
• The date the individual is covered under any group health plan not maintained by the employer or any other health plan, regardless of whether that coverage is less valuable,
• For a spouse, five years from the date on which continuation coverage under COBRA or Cal-COBRA was scheduled to end for the spouse, or
• The date on which the former employer terminates its group subscriber agreement with the health care service plan and ceases to provide coverage for any active employees through that plan.

The premium for Cal-COBRA coverage is 110 percent of the applicable group rate charged for similarly situated non-COBRA beneficiaries. If the individual is disabled the premium can be 150 percent of the applicable group rate for the months of disability extension beyond the first 18 months. The premiums for Cal-COBRA may be as high as 213 percent for Senior COBRA if the premium charged to the employer for a specific employee or spouse is not adjusted for age.

Under Cal-COBRA, but not federal COBRA, plans must notify individuals when their extended coverage terminates. Additional continuation of coverage may be available under Senior COBRA, through a guaranteed-issue individual policy, or through a conversion right.

Cal-COBRA Changes

Under the new Cal-COBRA rules, insured plans and HMOs, and employers that sponsor them, should be aware of the following rules:

• Employees eligible for Cal-COBRA (seniors and small employers) will have continued coverage available for 36 months.
• Employees of employers with 20 or more employees who began receiving federal COBRA on or after January 1, 2003 through an insured plan or HMO will be eligible for Cal-COBRA coverage for an additional 18 months (total 36 months).
• The 18-month additional Cal-COBRA coverage period after federal COBRA applies only to medical benefits, not to non-medical (e.g., dental or vision) benefits.
• Individuals must exhaust federal COBRA to be eligible for the 18-month Cal-COBRA extension.
• Premiums for the extra 18-month Cal-COBRA extension are set under the state law, not federal COBRA, and are generally 110 percent of the cost of active coverage.
• It is not clear how Cal-COBRA will affect individuals eligible for an extension of federal COBRA based on disability. Under current federal law, a disabled individual must apply for a disability extension within certain time frames, and provide evidence that they are disabled under Social Security law. These individuals receive an 11-month extension that entitles them to COBRA for a total of 29 months. They pay premiums at the rate of 150 percent instead of 102 percent. It is unclear whether disabled individuals would certify that they are eligible for a federal COBRA extension, or would simply obtain the 18-month Cal-COBRA extension. If they obtain the Cal-COBRA extension, it is not clear whether premium costs would be 110 percent or 150 percent.

Implications for Sponsors of Group Health Plans that Cover California Residents

The new law indirectly affects employers with individuals in insured arrangements in California because they will have to allow an extended period of continuation coverage beyond what they are currently required to provide under the federal COBRA law. In addition, California law requires employers to disclose information about conversion rights.

Because of ERISA's state law preemption provisions, plan sponsors of self-insured group health plans governed by ERISA will not be required to offer Cal-COBRA or the right to convert to an individual policy under state law to participants and beneficiaries enrolled in a self-funded plan. Plan sponsors should review with legal counsel what their legal obligations are under Cal-COBRA, if any, and whether the law would be preempted with respect to their plan.

Plan sponsors that provide insured benefits or HMOs to employees in California should consider the following actions:

• Include language in the summary plan description (SPD) to alert participants and beneficiaries receiving group health coverage through an insurer or HMO of the need to contact their insurer or HMO for more information about Cal-COBRA or the right to convert to individual coverage. (If such language is added to the SPD, it should make clear that Cal-COBRA and the right to convert to individual coverage are not provided with respect to any self-insured benefits of the group health plan.)
• Revise COBRA Notices to insure that they describe state-mandated rights to extend coverage under Cal-COBRA or to convert to an individual policy.
• Consider issuing a COBRA notice at the termination of COBRA coverage, which reminds individuals of their state law conversion rights. These notices will need to be issued for individuals who began receiving COBRA after January 1, 2003. (If proposed Department of Labor COBRA Notice regulations become final, they will require group health plans to describe any alternative and additional coverage that may be elected in the COBRA election notice and in the new notice of termination of COBRA. For more information, see The Segal Company's July 2003 Bulletin, "DOL Issues Proposed Rules for Six COBRA Notices.")
• Plan sponsors are likely to receive questions from individuals contemplating a disability extension. Sponsors should be prepared to discuss the advantages and disadvantages of the individual's election of a disability extension under federal COBRA v. selection of Cal-COBRA.
• Review with insurance carriers, HMOs and third-party administrators their policies on issues like disability extension, and whether any other administrative or contractual changes are necessary in light of Cal-COBRA.

More information about Cal-COBRA can be found in the list of Frequently Asked Questions on the California Department of Managed Health Care's Web site.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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