Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1843

(g) Special requirements relating to

the Family and Medical Leave Act. An

employee taking leave under the Family

and Medical Leave Act (FMLA) (Public

Law 103–3 (107 Stat. 6)) may revoke an

existing election of accident or health

plan coverage and make such other

election for the remaining portion of the

period of coverage as may be provided

for under the FMLA.

* * * * *

(i) * * *

(3) Dependent. A dependent means a

dependent as defined in section 152,

except that, for purposes of accident or

health coverage, any child to whom

section 152(e) applies is treated as a

dependent of both parents, and, for

purposes of dependent care assistance

provided through a cafeteria plan, a

dependent means a qualifying

individual (as defined in section

21(b)(1)) with respect to the employee.

(4) Disability coverage. Disability

coverage means coverage under an

accident or health plan that provides

benefits due to personal injury or

sickness, but does not reimburse

expenses incurred for medical care (as

defined in section 213(d)) of the

employee or the employee’s spouse and

dependents. For purposes of this

section, disability coverage includes

payments described in section 105(c).

* * * * *

(8) Qualified benefits plan. * * * A

plan does not fail to be a qualified

benefits plan merely because it includes

an FSA, assuming that the FSA meets

the requirements of section 125 and the

regulations thereunder.

(9) Similar coverage. Coverage for the

same category of benefits for the same

individuals (e.g., family to family or

single to single). For example, two plans

that provide coverage for major medical

are considered to be similar coverage.

For purposes of this definition, a health

FSA is not similar coverage with respect

to an accident or health plan that is not

a health FSA. A plan may treat coverage

by another employer, such as a spouse’s

or dependent’s employer, as similar

coverage.

(j) Effective date—(1) General rule.

Except as provided in paragraph (j)(2) of

this section, this section is applicable

for cafeteria plan years beginning on or

after January 1, 2001.

(2) Delayed effective date for certain

provisions. The following provisions are

applicable for cafeteria plan years

beginning on or after January 1, 2002:

paragraph (c) of this section to the

extent applicable to qualified benefits

other than an accident or health plan or

a group-term life insurance plan;

paragraph (d)(1)(ii)(B) of this section

(relating to a spouse, former spouse, or

other individual obtaining accident or

health coverage for an employee’s child

in response to a judgment, decree, or

order); paragraph (f) of this section

(rules for election changes as a result of

cost or coverage changes); and

paragraph (i)(9) of this section (defining

similar coverage).

§ 1.125–4T [Removed]

Par. 3. Section 1.125–4T is removed.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: December 15, 2000.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury

(Tax Policy).

[FR Doc. 01–258 Filed 1–9–01; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 8928]

RIN 1545–AW94

Continuation Coverage Requirements

Applicable to Group Health Plans

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations that provide guidance on

certain issues that arise in connection

with the COBRA continuation coverage

requirements applicable to group health

plans. The regulations in this document

supplement final COBRA regulations

published on February 3, 1999, in the

Federal Register. The regulations will

generally affect sponsors and

administrators of, and participants in,

group health plans, and they provide

plan sponsors and plan administrators

with guidance necessary to comply with

the law.

DATES: Effective date: These regulations

are effective January 10, 2001.

Applicability dates: For dates of

applicability, see the discussion under

the heading EFFECTIVE DATE in this

preamble.

FOR FURTHER INFORMATION CONTACT:

Yurlinda Mathis at 202–622–6080 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The Consolidated Omnibus Budget

Reconciliation Act of 1985 (COBRA)

imposes continuation coverage

requirements on group health plans in

certain situations. This document

contains amendments to the COBRA

health care continuation coverage

regulations in 26 CFR part 54. Proposed

regulations interpreting COBRA were

published in the Federal Register on

June 15, 1987 (52 FR 22716). On

February 3, 1999, final COBRA

regulations were published in the

Federal Register (64 FR 5160) (the 1999

final regulations), and a notice of

proposed rulemaking (REG–121865–98)

was published the same day (64 FR

5237) for certain issues not addressed in

the final regulations (the 1999 proposed

regulations). A public hearing was held

on June 8, 1999. In addition, written

comments responding to the notice of

proposed rulemaking and to the final

regulations were received. After

consideration of all the comments, the

proposed regulations are adopted as

amended by this Treasury decision. The

revisions are discussed below.

Explanation and Summary of

Comments

Small Employer Plan Exception

Group health plans maintained by an

employer that had fewer than 20

employees on a typical business day in

the previous calendar year are not

subject to COBRA. The 1999 proposed

regulations relating to plans maintained

by an employer with fewer than 20

employees in the previous calendar year

are adopted as final regulations without

change. Unlike the 1987 proposed

regulations, the 1999 proposed

regulations use a full-time equivalency

method in counting part-time

employees for purposes of determining

if an employer had fewer than 20

employees. Several commenters

expressed disapproval of this approach

or inquired why it was being

considered.

The 1987 proposed regulations

contained rules about how to count

part-time employees. An example can

be used to illustrate how the 1987 rules

were proposed to apply. In a calendar

year two employers each employ 15

full-time employees and 12 part-time

employees. Each part-time employee

works 15 hours per week. Each

employer has six typical business days

each week. One employer schedules all

12 of the part-time employees to work

two-and-a-half hours each typical

business day per week. The other

employer staggers the schedule of the

part-time employees so that they each

work seven-and-a-half hours on two

typical business days per week, so that

four part-time employees work on each

typical business day. Under the 1987

1844 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

proposed regulations, the part-time

employees of the first employer counted

as 12 employees whereas the part-time

employees of the second employer

counted only as four employees. In the

following calendar year, a group health

plan maintained by the first employer

would have been subject to COBRA

(because the first employer employed 27

employees on a typical business day in

the preceding calendar year) but a group

health plan maintained by the second

employer would not have been subject

to COBRA (because the second

employer employed only 19 employees

on a typical business day in the

preceding calendar year).

The exception for employers with

fewer than 20 employees reflects

Congress’ judgment that the costs and

administrative burden associated with

COBRA should not be imposed on small

employers and that imposing such

requirements on small employers may

discourage them from providing group

health coverage to their employees.

There is no reason to distinguish, as the

approach in the 1987 proposed

regulations would have done, between

two employers with identical numbers

of full- and part-time employees based

on the particular days that the part-time

employees work.

In contrast to the result under the

1987 proposed regulations, the 1999

proposed regulations and these final

regulations provide for the uniform

treatment of employers employing the

same number of part-time employees for

equivalent periods, regardless of how

the hours are scheduled. The full-time

equivalency approach therefore avoids

creating an incentive for employers to

schedule the work of their part-time

employees in a manner that is

inconsistent with the convenience of the

employees or the needs of the business.

One commenter asked if it is

permissible to count part-time

employees on an aggregate basis rather

than an individual basis. On an

individual basis, the number of parttime employees is computed by

dividing the hours worked by each parttime employee by the hours required to

be considered working full-time and

then by adding all the quotients

together. On an aggregate basis, the

number of part-time employees is

computed by adding all the hours

worked by part-time employees and

dividing that sum by the number of

hours required for one worker to be

considered working full-time. Because

the two methods produce identical

results, both methods are permissible.

Determination of Number of Plans

The 1999 proposed regulations

relating to the determination of the

number of plans that an employer or

employee organization maintains are

modified and reorganized. Under the

1999 proposed regulations, the number

of plans is determined by the

instruments governing the employer’s or

employee organization’s arrangement or

arrangements to provide health care

benefits (the instruments rule). Another

rule (the default rule) in the 1999

proposed regulations provides that if

there are no instruments or if the

instruments are unclear about whether

there is one plan or more than one plan,

all health care benefits (except benefits

for long-term care) provided by a

corporation, partnership, or other entity

or trade or business, or by an employee

organization, constitute one group

health plan.

Under these final regulations, these

rules are reorganized so that the default

rule, under which all health care

benefits provided by one entity or trade

or business are treated as one plan, is

presented first. The default rule applies

unless it is clear from the instruments

governing an arrangement or

arrangements to provide health care

benefits that the benefits are being

provided under separate plans and the

arrangement or arrangements are

operated pursuant to such instruments

as separate plans. In effect, this rule

revises the instruments rule in the 1999

proposed regulations by adding the

requirement that the arrangement or

arrangements must be operated

pursuant to the instruments as separate

plans to avoid the application of the

default rule. These organizational and

substantive changes from the 1999

proposed regulations were developed at

the suggestion of and with substantial

assistance from the U.S. Department of

Labor, Pension and Welfare Benefits

Administration.

Health Flexible Spending Arrangements

The 1999 proposed regulations

relating to health flexible spending

arrangements (health FSAs) are adopted

with one minor change and one

addition. The minor change is the crossreference in which a health FSA is

defined. The 1999 proposed regulations

cite the definition in proposed

regulations under section 125. These

final regulations cite the definition in

section 106(c)(2) of the Internal Revenue

Code. (Regulations published recently

under section 125 also use the section

106(c)(2) definition. See 65 FR 15548,

15553 (March 23, 2000).)

The one addition is a clarification

that, to the extent a health FSA is

obligated to make COBRA continuation

coverage available to a qualified

beneficiary, all the general COBRA

continuation coverage rules apply in the

same way that they apply to coverage

under other group health plans,

including the rule for how plan limits

on coverage apply to someone on

COBRA continuation coverage. This

addition was made in response to the

request of one commenter and

numerous inquiries about how the

annual election of a certain dollar

amount by an employee under a health

FSA applies once there is a qualifying

event.

Several commenters were pleased

with the limited exception from the

COBRA rules for health FSAs under the

1999 proposed regulations and asked

that the final regulations go even

further. They requested that when

participants under a health FSA

experience a qualifying event (and the

benefits under the health FSA are

excepted benefits under sections 9831

and 9832), the final regulations should

allow the health FSA to compute the

contributions made during that plan

year on the participant’s behalf, reduce

that amount by reimbursements already

made during the plan year, and—

instead of requiring the health FSA to

offer COBRA continuation coverage in

those cases in which there is a positive

balance—allow the participant to spend

whatever balance remains during the

remainder of the plan year without

requiring or allowing additional

contributions. However, such an

approach is inconsistent with the

requirements under sections 125 and

4980B and thus has not been adopted.

One commenter requested that the

final regulations clarify that the

applicable premium includes any

employer subsidy. The statute makes

clear that the applicable premium is

computed based on the total cost of

coverage, regardless of whether paid by

the employer or employee. The

regulations generally do not address

how to calculate the applicable

premium. However, the example for the

health FSA exception makes clear that

the maximum amount a plan is

permitted to charge for COBRA coverage

under a health FSA includes any

employer subsidy.

One commenter requested that the

final regulations clarify that a health

FSA is obligated to make COBRA

continuation coverage available only in

connection with qualifying events that

are a termination of employment or

reduction of hours of employment. This

suggestion is not adopted in the final

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1845

regulations because it is inconsistent

with the statute. If health care expenses

incurred for a spouse or dependent

child of an active employee can be

reimbursed under a health FSA, but,

were it not for the COBRA continuation

coverage rules, would not be reimbursed

after the death of the employee, the

divorce from the employee, or a

dependent child’s ceasing to be a

dependent child under the generally

applicable requirements under the

health FSA, then the spouse or

dependent child has experienced a

qualifying event and is entitled to

continue coverage under the health FSA

to the same extent as they would

following termination of the employee’s

employment.

Increase in Premium Loss of Coverage

The 1999 final regulations provide, in

describing what constitutes a loss of

coverage for determining whether a

qualifying event has occurred, that any

increase in premium or contribution

that must be paid for coverage as a

result of one of the events that can be

a qualifying event is a loss of coverage.

Several commenters questioned why

this rule was adopted and pointed out

that it creates administrative burdens in

two situations without apparently

providing any advantage to the people

whose premium is being increased. The

two situations concern retiring

employees and full-time employees

reducing their work hours to become

part-time employees. In both situations,

often employers will grant the

employees access to the same coverage

but will require them to pay a premium

that is higher than what active

employees pay though still significantly

less than the 102 percent rate permitted

under COBRA. The commenters

wondered why it is necessary to provide

these individuals with a COBRA notice

if it is always advantageous for the

individual to take the other coverage.

They suggested that a loss of coverage

should not be considered to have

occurred if employees (or other

qualified beneficiaries) can get access to

the same coverage for less than the

applicable premium under COBRA.

The IRS and Treasury were mindful of

these situations before they adopted the

rule in the 1999 final regulations.

However, if a mere increase in premium

were not considered a loss in coverage,

the person whose premium is being

increased would not be entitled by law

to a 60-day election period nor to a 45-

day period after the election for making

the first premium payment. Although in

many cases a qualified beneficiary

might prefer a lower premium over

these procedural protections under

COBRA, in some cases these procedural

protections might be more valuable. The

likelihood of the COBRA procedural

protections being more valuable than

the lower premium becomes substantial

as the amount required to be paid for

part-time or retiree coverage approaches

the amount of the applicable premium.

Accordingly, the final regulations retain

the rule in the 1999 final regulations so

as not to deprive qualified beneficiaries

of potentially valuable rights.

Termination of Coverage in Anticipation

of a Qualifying Event

The 1999 final regulations provide

that if coverage is reduced or eliminated

in anticipation of an event, the

elimination or reduction is disregarded

in determining whether the event causes

a loss of coverage. The regulations

provide examples of an employer

eliminating an employee’s coverage in

anticipation of a termination of

employment and of an employee

eliminating a spouse’s coverage in

anticipation of a divorce.

One commenter requested a

clarification that a reduction or

elimination more than six months

before an event could not be considered

to be in anticipation of the event.

However, in many cases where coverage

is eliminated by an employee in

anticipation of a divorce, the divorce

will follow the elimination by more

than six months. Whether a reduction or

elimination of coverage is in

anticipation of a qualifying event is a

question to be resolved based on all the

relevant facts and circumstances. Thus,

these final regulations do not amend the

rule in the 1999 final regulations to

limit the window during which an

anticipatory reduction or elimination

can be considered to have occurred.

The commenter also requested a

clarification that the coverage the

qualified beneficiary is entitled to in

such a situation is the coverage the

qualified beneficiary had before

coverage was reduced or eliminated.

The general rule in the 1999 final

regulations for determining what is

COBRA continuation coverage applies

in this situation. Under the rule in the

1999 final regulations, the qualified

beneficiary will generally be entitled to

the coverage that the qualified

beneficiary had before the qualifying

event. However, if between the date of

the elimination or reduction in coverage

and the date of the qualifying event

coverage is modified for similarly

situated nonCOBRA beneficiaries, then

the modified coverage must be made

available to the qualified beneficiary.

Moving Outside Region of RegionSpecific Coverage

The 1999 final regulations require

employers and employee organizations

to make alternative coverage available to

qualified beneficiaries moving outside

the service area of a region-specific

benefit package. One commenter asked

for a clarification that the alternative

coverage must be made available

immediately and cannot be deferred

until the beginning of the plan’s next

open enrollment period. These final

regulations clarify that the alternative

coverage must be made available not

later than the date of the qualified

beneficiary’s relocation, or, if later, the

first day of the month following the

month in which the qualified

beneficiary requests the alternative

coverage.

Another commenter expressed

concern that a plan might have to incur

extraordinary costs (such as negotiating

for a separate network of providers in an

indemnity plan with a preferred

provider organization, or establishing a

separate schedule of usual, customary,

and reasonable costs) to provide

coverage in areas to which a qualified

beneficiary might relocate but in which

there were no active employees of the

employer or employee organization. The

rule in the 1999 final regulations does

not require employers or employee

organizations to incur extraordinary

costs to extend coverage to qualified

beneficiaries in areas in which the

employer or employee organization does

not have active employees. In the case

of an indemnity plan with a preferred

provider organization, the plan need

only provide benefits at the standard

rate (that is, not at the rate for preferred

providers) to a qualified beneficiary

who moves outside the service area of

the preferred provider network.

Similarly, a plan is not required to

establish a separate schedule of usual,

customary, and reasonable costs solely

for qualified beneficiaries who reside in

a region where no active employees

work or reside (regardless of whether

this is to the qualified beneficiary’s

benefit or detriment based on prevailing

costs in the region where the qualified

beneficiary resides). Accordingly, these

final regulations do not modify the rule

in the 1999 final regulations based on

this commenter’s concern.

When COBRA Continuation Coverage

Must Become Effective

The 1999 final regulations provide

that, in the case of an indemnity or

reimbursement arrangement, claims

incurred during the election period do

not have to be paid before the election

1846 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

(and, if applicable, payment for the

coverage) is made. In the case of

indemnity or reimbursement

arrangements that allow retroactive

reinstatement of coverage, the 1999 final

regulations provide that coverage for

qualified beneficiaries can be

terminated and then reinstated when

the election is made. One commenter

asked if these two rules mean that

coverage must be reinstated at the time

of the election even if payment is not

made but that no claims need be paid

under that coverage until payment for

the coverage is made. The commenter

pointed out that this would a pose a

problem for employers and employee

organizations maintaining insured plans

in that they would have to pay the

insurer premiums for the coverage even

if payment for the coverage was never

made (whereas the insurer would never

have to pay any claim under the

coverage). These final regulations clarify

this rule by explicitly providing that in

the case of indemnity plans and

reimbursement arrangements that allow

retroactive reinstatement of coverage,

coverage can be terminated and later

reinstated when the election (and, if

applicable, payment for the coverage) is

made. Thus, under these final

regulations, the rules for when coverage

must be reinstated and when claims

must be paid are the same.

Maximum Coverage Period

The 1999 proposed regulations

relating to the maximum coverage

period are adopted as final regulations

with a minor change to a crossreference.

Insignificant Underpayments

The 1999 final regulations prescribe

how plans are to treat payments for

COBRA continuation coverage that are

short by an amount that is not

significant. They require the plan to

treat the payment as full payment unless

the plan notifies the qualified

beneficiary of the amount of the

deficiency and grants a reasonable

period for payment of the deficiency.

The regulations provide as a safe harbor

that a period of 30 days after the notice

is provided is a reasonable period for

this purpose.

Many commenters requested that the

regulations specify what is considered a

significant amount. These final

regulations provide that a shortfall is

not significant if it is no greater than the

lesser of $50 (or another amount

specified by the Commissioner in

guidance of general applicability) or 10

percent of the required amount.

Several commenters also requested

that the regulations specify a period

shorter than 30 days for payment of the

deficiency to be considered timely, but

these final regulations do not adopt this

suggestion. The regulations require only

that a plan grant a reasonable period for

payment of the deficiency. In some

circumstances, a period shorter than 30

days may be reasonable. However, in

other circumstances, a shorter period

might not be reasonable. The IRS and

Treasury believe it is useful to provide

the certainty of a safe harbor, but they

do not believe that a period shorter than

30 days is sufficiently long in all cases.

Business Reorganizations

The 1999 proposed regulations

relating to business reorganizations are

adopted as final regulations with two

clarifications. The proposed regulations

provide that, in an asset sale (which is

defined as the sale of substantial assets

such as a plant or division or

substantially all the assets of a trade or

business), a purchaser of assets is

considered a successor employer if the

seller ceases to provide any group

health plan to any employee in

connection with the sale and if the

buyer continues the business operations

associated with those assets without

substantial change or interruption.

Several inquiries raised the question

whether this rule applies if the assets

are purchased as part of a bankruptcy

proceeding. The final regulations clarify

this rule for assets purchased in

bankruptcy by providing that a buying

group does not fail to be a successor

employer in connection with an asset

sale merely because the sale takes place

in connection with a bankruptcy

proceeding. Thus, the general rule for

determining whether a buyer is a

successor employer applies in

bankruptcy the same way that it does

outside of bankruptcy.

These final regulations also clarify

that asset sale includes not only sales

but other transfers as well.

Comments were received about other

aspects of the proposed rules for

business reorganizations. Several

commenters requested additional

guidance on the amount of assets that

would constitute ‘‘substantial assets’’ for

purposes of the asset sale rules. The

final regulations retain the definition in

the proposed regulations. This

definition is intended to be flexible

enough to apply reasonably to the

myriad situations in which this issue

arises. The asset sale rules, including

the definition of asset sale, are similar

to the various formulations of successor

employer rules that have been fashioned

by the courts for various labor law

purposes, adapted to the peculiar

circumstances that the COBRA

continuation coverage requirements

create. In those cases, as in the final

rule, a case-by-case approach is favored.

See, for example, Golden State Bottling

Co. v. NLRB, 414 U.S. 168 (1973);

Howard Johnson Co. v. Detroit Local

Joint Executive Board, Hotel &

Restaurant Employees & Bartenders

International Union, 417 U.S. 249

(1974); John Wiley & Sons, Inc. v.

Livingston, 376 U.S. 543 (1964); NLRB v.

Burns International Security Services,

Inc., 406 U.S. 272 (1972); Fall River

Dyeing & Finishing Corp. v. NLRB, 482

U.S. 27 (1987); EEOC v. MacMillan

Bloedel Containers, Inc., 503 F.2d 1086

(6th Cir. 1974); In re National Airlines,

Inc., 700 F.2d 695 (11th Cir. 1983);

Upholsterers’ International Union

Pension Fund v. Artistic Furniture of

Pontiac, 920 F.2d 1323 (7th Cir. 1990);

Central States, Southeast & Southwest

Areas Pension Fund v. PYA/Monarch of

Texas, Inc., 851 F.2d 780 (5th Cir. 1988).

One commenter requested

clarification that the cessation of a plan

shortly before an asset sale is in

connection with the sale (and thus that

the buying group would be responsible

for making COBRA continuation

coverage available to M&A qualified

beneficiaries in connection with the sale

if the buying group is a successor

employer). The regulations have not

been modified for this request. In many

circumstances, cessation of a plan

shortly before an asset sale would be

considered to be in connection with the

sale. However, there may be cases in

which the plan was being terminated for

an unrelated reason. The application of

this rule in any particular case depends

on all the relevant facts and

circumstances.

The preamble to the 1999 proposed

regulations included a description of a

potential rule that the IRS and Treasury

were considering adopting and solicited

comments on that potential rule. The

rule would have provided that no loss

of coverage occurs, and thus no

qualifying event occurs, if a purchaser

of assets maintains substantially the

same plan for continuing employees for

what would otherwise be the maximum

coverage period (generally 18 months).

The IRS and Treasury also

acknowledged in the 1999 preamble

concerns about protecting the rights of

qualified beneficiaries in this situation.

After consideration of the comments,

the IRS and Treasury have determined

not to adopt such a special rule. Thus,

under these final regulations, in an asset

sale, employees who terminate

employment with the seller and who no

longer get health coverage from the

seller experience a qualifying event with

respect to the seller’s plan even though

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1847

they are employed by the buyer at the

same jobs they had with the seller and

have the same health coverage through

the buyer.

Like the 1999 proposed regulations,

these final regulations do not address

how the obligation to make COBRA

continuation coverage available is

affected by the transfer of an ownership

interest in a noncorporate entity.

However, it is intended that, in general,

the principles reflected in the rules in

the final regulations for transfers of

ownership interests in corporate entities

should apply in a similar fashion in

analogous cases involving the transfer of

ownership interests in noncorporate

entities.

Employer Withdrawals From

Multiemployer Plans

The 1999 proposed regulations

relating to employer withdrawals from a

multiemployer plan are adopted with

two changes and two additional

examples to illustrate the rules as

changed. The general approach of the

1999 proposed regulations is retained.

However, the proposed rule renders an

employer who stops contributing to a

multiemployer plan responsible for

making COBRA continuation coverage

available to qualified beneficiaries

associated with that employer only if

the employer establishes a new plan to

cover active employees formerly

covered under the multiemployer plan.

Several commenters suggested that the

employer should also be responsible for

COBRA if the coverage provided to

employees formerly covered under the

multiemployer plan comes from an

existing plan of the employer (rather

than from a new plan). The final rules

have been revised to apply the general

approach to existing plans as well as to

new plans.

The 1999 proposed regulations also

place a threshold condition on the

obligation of an employer or subsequent

multiemployer plan to make COBRA

coverage available to existing qualified

beneficiaries associated with the

withdrawing employer. That threshold

is that the employer or subsequent

multiemployer plan must cover a

significant number of the employer’s

employees formerly covered under the

multiemployer plan. Several

commenters requested further guidance

on what a significant number was in

this context. Some of them also wanted

to know what purpose this threshold

condition serves. The intent in imposing

this threshold condition in the proposed

regulations was to leave responsibility

for COBRA compliance with the

existing multiemployer plan in a case

where, for example, only one or two of

the employees formerly covered under

the multiemployer plan were transferred

into management and became covered

under a plan of the employer for which

union employees were not eligible. The

final rule has been revised to more

clearly accomplish this intent. This

threshold condition has been revised so

that the employer plan or subsequent

multiemployer plan has responsibility

for COBRA compliance once coverage

under the plan is available to a class of

employees formerly covered under the

multiemployer plan. New examples

illustrate the application of this

standard.

Several commenters expressed

concern that the proposed regulations

would require multiemployer plans to

begin investigating why an employer

stops contributing to the multiemployer

plan and to determine whether the

withdrawing employer subsequently

covered union (or former union)

employees under a single employer

plan. Concern was also expressed that

the proposed regulations would require

the multiemployer plan to keep

employer-by-employer data for qualified

beneficiaries receiving COBRA

continuation coverage. The IRS and

Treasury recognized when they

proposed these rules that in many

industries it is impracticable for

multiemployer plans to determine

whether an employer that stops

contributing to a multiemployer plan

covers union employees under its own

plan and that it is impracticable to

maintain employer-specific data on

employees and qualified beneficiaries. If

a multiemployer plan finds it easier to

make COBRA coverage available for the

maximum coverage period, these final

regulations do not require the plan to

start gathering information that is

difficult to assemble. Such a plan can

comply with the COBRA continuation

coverage requirements by making

COBRA continuation coverage available

to existing qualified beneficiaries in

accordance with the general rules for

the duration of COBRA continuation

coverage (in § 54.4980B–7).

One commenter requested

clarification of the proposed rules if an

employer establishes a plan for

employees formerly covered under the

multiemployer plan but applies a

waiting period before the employees are

eligible for coverage under that plan.

These final regulations clarify that the

employer’s obligation does not arise

until the employer makes coverage

available. Thus, the multiemployer plan

would be responsible for COBRA

coverage until the waiting period under

the employer’s plan had expired for a

class of employees formerly covered

under the multiemployer plan.

Several commenters submitted

substantially similar comments

requesting that the rules be revised so

that a multiemployer plan no longer

receiving contributions from a certain

employer would not be required to

make COBRA continuation coverage

available to any qualified beneficiaries

affiliated with that employer. Such an

approach, however, would not resolve

the problem of qualified beneficiaries

not having access to COBRA coverage,

and the statutory basis for such a

position is questionable in situations in

which none of the statutory reasons for

ending a plan’s obligation to make

COBRA coverage available to a

particular qualified beneficiary is

present. The final regulations do not

adopt this suggestion.

The IRS and Treasury received an

inquiry about who has the obligation to

make COBRA continuation coverage

available to existing qualified

beneficiaries in a situation that reverses

the situation addressed in the proposed

rules, one in which employees cease to

be covered under a plan maintained by

their employer and commence to be

covered under a multiemployer plan. In

such a situation, the existing qualified

beneficiaries should get the same

coverage that similarly situated

nonCOBRA beneficiaries are receiving,

that is, the coverage under the

multiemployer plan. The 1999 final

regulations suggest this result in

describing what COBRA continuation

coverage is. However, the language used

in the 1999 final regulations can be read

to suggest that this is the result only

when coverage is under the same plan:

‘‘If coverage under the plan is modified

for similarly situated nonCOBRA

beneficiaries, then the coverage made

available to qualified beneficiaries is

modified in the same way.’’ (Q&A–1(a)

of § 54.4980B–5; emphasis added.)

These final regulations delete the phrase

‘‘under the plan’’ from the quoted

language to make clear that if coverage

for the similarly situated nonCOBRA

beneficiaries is modified by switching

from one plan to another, then coverage

for the qualified beneficiaries is

modified by switching to the other plan

too. Although this amendment is being

made due to an inquiry about a switch

from a single-employer plan to a

multiemployer plan, it applies in any

situation in which coverage for

nonCOBRA beneficiaries is terminated

under one plan and commences under

another, including those situations in

which a single employer maintains both

plans.

1848 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

COBRA and FMLA

The 1999 proposed regulations

relating to how COBRA applies in

connection with leave taken under the

Family and Medical Leave Act of 1993

(FMLA) are adopted as final regulations

with one minor addition. One

commenter observed that the 1999

proposed regulations suggest by way of

cross reference in an example that the

Labor regulations in 29 CFR part 825,

not the COBRA regulations, determine

when FMLA leave ends. This

commenter requested that this

suggestion in an example be made

express in the text of the rules. The final

regulations add in the text of the rules

(preceding the examples) that the end of

FMLA leave is not determined under

these regulations but under the

regulations in 29 CFR part 825.

Effective Date

This Treasury decision applies with

respect to qualifying events occurring

on or after January 1, 2002, except as

provided in the following paragraphs.

Paragraphs (d), (e), and (f) in Q&A–5

of § 54.4980B–2 (relating to the counting

of employees for purposes of the small

employer plan exception) are applicable

beginning January 1, 2002 for

determinations made with reference to

the number of employees in calendar

year 2001 or later.

Q&A–4 of § 54.4980B–7 (describing

the maximum coverage period) is

applicable with respect to individuals

who are qualified beneficiaries on or

after January 1, 2002. (See Q&A–1(f) of

§ 54.4980B–3, under which an

individual ceases to be a qualified

beneficiary once the plan’s obligation to

provide COBRA continuation coverage

to the individual has ended.)

Q&A–1 through Q&A–8 of

§ 54.4980B–9 (containing rules for

business reorganizations) are applicable

with respect to business reorganizations

that take effect on or after January 1,

2002.

Q&A–9 and Q&A–10 of § 54.4980B–9

(containing rules for employer

withdrawals from a multiemployer

plan) are applicable with respect to

cessations of contributions that occur on

or after January 1, 2002. For this

purpose, a cessation of contributions

occurs on or after January 1, 2002 if the

employer’s last contribution to the plan

is made on or after January 1, 2002.

Section 54.4980B–10 (relating to the

interaction of COBRA and FMLA leave)

is applicable with respect to FMLA

leave that begins on or after January 1,

2002.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in

Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply

to these regulations, and because the

regulations do not impose a collection

of information requirement on small

entities, the Regulatory Flexibility Act

(5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Code, the notice

of proposed rulemaking preceding these

regulations was submitted to the Small

Business Administration for comment

on its impact on small business.

Drafting Information

The principal author of these

regulations is Russ Weinheimer, Office

of the Division Counsel/Associate Chief

Counsel (Tax Exempt and Government

Entities). However, other personnel

from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 54

Excise taxes, Health care, Health

insurance, Pensions, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 54 is

amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation

for part 54 is amended in part by adding

entries in numerical order to read as

follows:

Authority: 26 U.S.C. 7805 * * *

Section 54.4980B–9 also issued under

26 U.S.C. 4980B.

Section 54.4980B–10 also issued

under 26 U.S.C. 4980B.

* * * * *

Par. 2. Section 54.4980B–0 is

amended by:

1. Revising the introductory text.

2. Adding entries for §§ 54.4980B–9

and 54.4980B–10 at the end of the ‘‘List

of Sections’’.

3. Revising the entry for Q–2 of

§ 54.4980B–1 in the ‘‘List of Questions’’.

4. Revising the entries for Q–3 and Q–

6 of § 54.4980B–2 in the ‘‘List of

Questions’’.

5. Revising the entry for Q–4 of

§ 54.4980B–7 in the ‘‘List of Questions’’.

6. Adding entries for the section

headings for §§ 54.4980B–9 and

54.4980B–10 in the ‘‘List of Questions’’.

The additions and revisions read as

follows:

§ 54.4980B–0 Table of contents.

This section contains first a list of the

section headings and then a list of the

questions in each section in

§§ 54.4980B–1 through 54.4980B–10.

List of Sections

* * * * *

§ 54.4980B–9 Business reorganizations

and employer withdrawals from

multiemployer plans.

§ 54.4980B–10 Interaction of FMLA

and COBRA.

List of Questions

§ 54.4980B–1 COBRA in general.

* * * * *

Q–2: What standard applies for topics

not addressed in §§ 54.4980B–1 through

54.4980B–10?

* * * * *

§ 54.4980B–2 Plans that must comply.

* * * * *

Q–3: What is a multiemployer plan?

* * * * *

Q–6: How is the number of group

health plans that an employer or

employee organization maintains

determined?

* * * * *

§ 54.4980B–7 Duration of COBRA

continuation coverage.

* * * * *

Q–4: When does the maximum

coverage period end?

* * * * *

§ 54.4980B–9 Business reorganizations

and employer withdrawals from

multiemployer plans.

Q–1: For purposes of this section,

what are a business reorganization, a

stock sale, and an asset sale?

Q–2: In the case of a stock sale, what

are the selling group, the acquired

organization, and the buying group?

Q–3: In the case of an asset sale, what

are the selling group and the buying

group?

Q–4: Who is an M&A qualified

beneficiary?

Q–5: In the case of a stock sale, is the

sale a qualifying event with respect to

a covered employee who is employed by

the acquired organization before the sale

and who continues to be employed by

the acquired organization after the sale,

or with respect to the spouse or

dependent children of such a covered

employee?

Q–6: In the case of an asset sale, is the

sale a qualifying event with respect to

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1849

a covered employee whose employment

immediately before the sale was

associated with the purchased assets, or

with respect to the spouse or dependent

children of such a covered employee

who are covered under a group health

plan of the selling group immediately

before the sale?

Q–7: In a business reorganization, are

the buying group and the selling group

permitted to allocate by contract the

responsibility to make COBRA

continuation coverage available to M&A

qualified beneficiaries?

Q–8: Which group health plan has the

obligation to make COBRA continuation

coverage available to M&A qualified

beneficiaries in a business

reorganization?

Q–9: Can the cessation of

contributions by an employer to a

multiemployer group health plan be a

qualifying event?

Q–10: If an employer stops

contributing to a multiemployer group

health plan, does the multiemployer

plan have the obligation to make

COBRA continuation coverage available

to a qualified beneficiary who was

receiving coverage under the

multiemployer plan on the day before

the cessation of contributions and who

is, or whose qualifying event occurred

in connection with, a covered employee

whose last employment prior to the

qualifying event was with the employer

that has stopped contributing to the

multiemployer plan?

§ 54.4980B–10 Interaction of FMLA

and COBRA.

Q–1: In what circumstances does a

qualifying event occur if an employee

does not return from leave taken under

FMLA?

Q–2: If a qualifying event described in

Q&A–1 of this section occurs, when

does it occur, and how is the maximum

coverage period measured?

Q–3: If an employee fails to pay the

employee portion of premiums for

coverage under a group health plan

during FMLA leave or declines coverage

under a group health plan during FMLA

leave, does this affect the determination

of whether or when the employee has

experienced a qualifying event?

Q–4: Is the application of the rules in

Q&A–1 through Q&A–3 of this section

affected by a requirement of state or

local law to provide a period of coverage

longer than that required under FMLA?

Q–5: May COBRA continuation

coverage be conditioned upon

reimbursement of the premiums paid by

the employer for coverage under a group

health plan during FMLA leave?

Par. 3. Section 54.4980B–1 is

amended by:

1. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the last sentence of paragraph

(a) in A–1.

2. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the third sentence and the last

sentence of paragraph (b) in A–1.

3. Removing the last sentence of

paragraph (c) in A–1 and adding two

sentences in its place.

4. Revising Q&A–2.

The addition and revision read as

follows:

§ 54.4980B–1 COBRA in general.

* * * * *

A–1: * * *

(c) * * * Section 54.4980B–9 contains

special rules for how COBRA applies in

connection with business

reorganizations and employer

withdrawals from a multiemployer plan,

and § 54.4980B–10 addresses how

COBRA applies for individuals who

take leave under the Family and

Medical Leave Act of 1993. Unless the

context indicates otherwise, any

reference in §§ 54.4980B–1 through

54.4980B–10 to COBRA refers to section

4980B (as amended) and to the parallel

provisions of ERISA.

Q–2: What standard applies for topics

not addressed in §§ 54.4980B–1 through

54.4980B-10?

A–2: For purposes of section 4980B,

for topics relating to the COBRA

continuation coverage requirements of

section 4980B that are not addressed in

§§ 54.4980B–1 through 54.4980B–10

(such as methods for calculating the

applicable premium), plans and

employers must operate in good faith

compliance with a reasonable

interpretation of the statutory

requirements in section 4980B.

Par. 4. Section 54.4980B–2 is

amended by:

1. Revising paragraph (a) in A–1.

2. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the first sentence of paragraph

(b) in A–1.

3. Revising A–2.

4. Adding Q&A–3.

5. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the last sentence of paragraph

(a) in A–4.

6. Adding a sentence immediately

before the last sentence of the

introductory text of paragraph (a) in A–

5.

7. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the last sentence of the

introductory text of paragraph (c) in A–

5.

8. Adding paragraphs (d), (e), and (f)

in A–5.

9. Adding Q&A–6.

10. Revising A–8.

11. Revising paragraph (a) in A–10.

The additions and revisions read as

follows:

§ 54.4980B–2 Plans that must comply.

* * * * *

A–1: (a) For purposes of section

4980B, a group health plan is a plan

maintained by an employer or employee

organization to provide health care to

individuals who have an employmentrelated connection to the employer or

employee organization or to their

families. Individuals who have an

employment-related connection to the

employer or employee organization

consist of employees, former employees,

the employer, and others associated or

formerly associated with the employer

or employee organization in a business

relationship (including members of a

union who are not currently

employees). Health care is provided

under a plan whether provided directly

or through insurance, reimbursement, or

otherwise, and whether or not provided

through an on-site facility (except as set

forth in paragraph (d) of this Q&A–1), or

through a cafeteria plan (as defined in

section 125) or other flexible benefit

arrangement. (See paragraphs (b)

through (e) in Q&A–8 of this section for

rules regarding the application of the

COBRA continuation coverage

requirements to certain health flexible

spending arrangements.) For purposes

of this Q&A–1, insurance includes not

only group insurance policies but also

one or more individual insurance

policies in any arrangement that

involves the provision of health care to

two or more employees. A plan

maintained by an employer or employee

organization is any plan of, or

contributed to (directly or indirectly) by,

an employer or employee organization.

Thus, a group health plan is maintained

by an employer or employee

organization even if the employer or

employee organization does not

contribute to it if coverage under the

plan would not be available at the same

cost to an individual but for the

individual’s employment-related

connection to the employer or employee

organization. These rules are further

explained in paragraphs (b) through (d)

of this Q&A–1. An exception for

qualified long-term care services is set

forth in paragraph (e) of this Q&A–1,

and for medical savings accounts in

paragraph (f) of this Q&A–1. See Q&A–

6 of this section for rules to determine

the number of group health plans that

an employer or employee organization

maintains.

* * * * *

1850 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

A–2: (a) For purposes of section

4980B, employer refers to—

(1) A person for whom services are

performed;

(2) Any other person that is a member

of a group described in section 414(b),

(c), (m), or (o) that includes a person

described in paragraph (a)(1) of this

Q&A–2; and

(3) Any successor of a person

described in paragraph (a)(1) or (2) of

this Q&A–2.

(b) An employer is a successor

employer if it results from a

consolidation, merger, or similar

restructuring of the employer or if it is

a mere continuation of the employer.

See paragraph (c) in Q&A–8 of

§ 54.4980B–9 for rules describing the

circumstances in which a purchaser of

substantial assets is a successor

employer to the employer selling the

assets.

Q–3: What is a multiemployer plan?

A–3: For purposes of §§ 54.4980B–1

through 54.4980B–10, a multiemployer

plan is a plan to which more than one

employer is required to contribute, that

is maintained pursuant to one or more

collective bargaining agreements

between one or more employee

organizations and more than one

employer, and that satisfies such other

requirements as the Secretary of Labor

may prescribe by regulation. Whenever

reference is made in §§ 54.4980B–1

through 54.4980B–10 to a plan of or

maintained by an employer or employee

organization, the reference includes a

multiemployer plan.

* * * * *

A–5: (a) * * * See Q&A–6 of this

section for rules to determine the

number of plans that an employer or

employee organization maintains. * * *

* * * * *

(d) In determining the number of the

employees of an employer, each fulltime employee is counted as one

employee and each part-time employee

is counted as a fraction of an employee,

determined in accordance with

paragraph (e) of this Q&A–5.

(e) An employer may determine the

number of its employees on a daily basis

or a pay period basis. The basis used by

the employer must be used with respect

to all employees of the employer and

must be used for the entire year for

which the number of employees is being

determined. If an employer determines

the number of its employees on a daily

basis, it must determine the actual

number of full-time employees on each

typical business day and the actual

number of part-time employees and the

hours worked by each of those part-time

employees on each typical business day.

Each full-time employee counts as one

employee on each typical business day

and each part-time employee counts as

a fraction, with the numerator of the

fraction equal to the number of hours

worked by that employee and the

denominator equal to the number of

hours that must be worked on a typical

business day in order to be considered

a full-time employee. If an employer

determines the number of its employees

on a pay period basis, it must determine

the actual number of full-time

employees employed during that pay

period and the actual number of parttime employees employed and the hours

worked by each of those part-time

employees during the pay period. For

each day of that pay period, each fulltime employee counts as one employee

and each part-time employee counts as

a fraction, with the numerator of the

fraction equal to the number of hours

worked by that employee during that

pay period and the denominator equal

to the number of hours that must be

worked during that pay period in order

to be considered a full-time employee.

The determination of the number of

hours required to be considered a fulltime employee is based upon the

employer’s employment practices,

except that in no event may the hours

required to be considered a full-time

employee exceed eight hours for any

day or 40 hours for any week.

(f) In the case of a multiemployer

plan, the determination of whether the

plan is a small-employer plan on any

particular date depends on which

employers are contributing to the plan

on that date and on the workforce of

those employers during the preceding

calendar year. If a plan that is otherwise

subject to COBRA ceases to be a smallemployer plan because of the addition

during a calendar year of an employer

that did not normally employ fewer

than 20 employees on a typical business

day during the preceding calendar year,

the plan ceases to be excepted from

COBRA immediately upon the addition

of the new employer. In contrast, if the

plan ceases to be a small-employer plan

by reason of an increase during a

calendar year in the workforce of an

employer contributing to the plan, the

plan ceases to be excepted from COBRA

on the January 1 immediately following

the calendar year in which the

employer’s workforce increased.

* * * * *

Q–6: How is the number of group

health plans that an employer or

employee organization maintains

determined?

A–6: (a) The rules of this Q&A–6

apply in determining the number of

group health plans that an employer or

employee organization maintains. All

references elsewhere in §§ 54.4980B–1

through 54.4980B–10 to a group health

plan are references to a group health

plan as determined under Q&A–1 of this

section and this Q&A–6. Except as

provided in paragraph (b) or (c) of this

Q&A–6, all health care benefits, other

than benefits for qualified long-term

care services (as defined in section

7702B(c)), provided by a corporation,

partnership, or other entity or trade or

business, or by an employee

organization, constitute one group

health plan, unless—

(1) It is clear from the instruments

governing an arrangement or

arrangements to provide health care

benefits that the benefits are being

provided under separate plans; and

(2) The arrangement or arrangements

are operated pursuant to such

instruments as separate plans.

(b) A multiemployer plan and a

nonmultiemployer plan are always

separate plans.

(c) If a principal purpose of

establishing separate plans is to evade

any requirement of law, then the

separate plans will be considered a

single plan to the extent necessary to

prevent the evasion.

(d) The significance of treating an

arrangement as two or more separate

group health plans is illustrated by the

following examples:

Example 1. (i) Employer X maintains a

single group health plan, which provides

major medical and prescription drug benefits.

Employer Y maintains two group health

plans; one provides major medical benefits

and the other provides prescription drug

benefits.

(ii) X’s plan could comply with the COBRA

continuation coverage requirements by giving

a qualified beneficiary experiencing a

qualifying event with respect to X’s plan the

choice of either electing both major medical

and prescription drug benefits or not

receiving any COBRA continuation coverage

under X’s plan. By contrast, for Y’s plans to

comply with the COBRA continuation

coverage requirements, a qualified

beneficiary experiencing a qualifying event

with respect to each of Y’s plans must be

given the choice of electing COBRA

continuation coverage under either the major

medical plan or the prescription drug plan or

both.

Example 2. If a joint board of trustees

administers one multiemployer plan, that

plan will fail to qualify for the smallemployer plan exception if any one of the

employers whose employees are covered

under the plan normally employed 20 or

more employees during the preceding

calendar year. However, if the joint board of

trustees maintains two or more

multiemployer plans, then the exception

would be available with respect to each of

those plans in which each of the employers

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1851

whose employees are covered under the plan

normally employed fewer than 20 employees

during the preceding calendar year.

* * * * *

A–8: (a)(1) The provision of health

care benefits does not fail to be a group

health plan merely because those

benefits are offered under a cafeteria

plan (as defined in section 125) or under

any other arrangement under which an

employee is offered a choice between

health care benefits and other taxable or

nontaxable benefits. However, the

COBRA continuation coverage

requirements apply only to the type and

level of coverage under the cafeteria

plan or other flexible benefit

arrangement that a qualified beneficiary

is actually receiving on the day before

the qualifying event. See paragraphs (b)

through (e) of this Q&A–8 for rules

limiting the obligations of certain health

flexible spending arrangements.

(2) The rules of this paragraph (a) are

illustrated by the following example:

Example: (i) Under the terms of a cafeteria

plan, employees can choose among life

insurance coverage, membership in a health

maintenance organization (HMO), coverage

for medical expenses under an indemnity

arrangement, and cash compensation. Of

these available choices, the HMO and the

indemnity arrangement are the arrangements

providing health care. The instruments

governing the HMO and indemnity

arrangements indicate that they are separate

group health plans. These group health plans

are subject to COBRA. The employer does not

provide any group health plan outside of the

cafeteria plan. B and C are unmarried

employees. B has chosen the life insurance

coverage, and C has chosen the indemnity

arrangement.

(ii) B does not have to be offered COBRA

continuation coverage upon terminating

employment, nor is a subsequent open

enrollment period for active employees

required to be made available to B. However,

if C terminates employment and the

termination constitutes a qualifying event, C

must be offered an opportunity to elect

COBRA continuation coverage under the

indemnity arrangement. If C makes such an

election and an open enrollment period for

active employees occurs while C is still

receiving the COBRA continuation coverage,

C must be offered the opportunity to switch

from the indemnity arrangement to the HMO

(but not to the life insurance coverage

because that does not constitute coverage

provided under a group health plan).

(b) If a health flexible spending

arrangement (health FSA), within the

meaning of section 106(c)(2), satisfies

the two conditions in paragraph (c) of

this Q&A–8 for a plan year, the

obligation of the health FSA to make

COBRA continuation coverage available

to a qualified beneficiary who

experiences a qualifying event in that

plan year is limited in accordance with

paragraphs (d) and (e) of this Q&A–8, as

illustrated by an example in paragraph

(f) of this Q&A–8. To the extent that a

health FSA is obligated to make COBRA

continuation coverage available to a

qualified beneficiary, the health FSA

must comply with all the applicable

rules of §§ 54.4980B–1 through

54.4980B–10, including the rules of

Q&A–3 in § 54.4980B–5 (relating to

limits).

(c) The conditions of this paragraph

(c) are satisfied if—

(1) Benefits provided under the health

FSA are excepted benefits within the

meaning of sections 9831 and 9832; and

(2) The maximum amount that the

health FSA can require to be paid for a

year of COBRA continuation coverage

under Q&A–1 of § 54.4980B–8 equals or

exceeds the maximum benefit available

under the health FSA for the year.

(d) If the conditions in paragraph (c)

of this Q&A–8 are satisfied for a plan

year, then the health FSA is not

obligated to make COBRA continuation

coverage available for any subsequent

plan year to any qualified beneficiary

who experiences a qualifying event

during that plan year.

(e) If the conditions in paragraph (c)

of this Q&A–8 are satisfied for a plan

year, the health FSA is not obligated to

make COBRA continuation coverage

available for that plan year to any

qualified beneficiary who experiences a

qualifying event during that plan year

unless, as of the date of the qualifying

event, the qualified beneficiary can

become entitled to receive during the

remainder of the plan year a benefit that

exceeds the maximum amount that the

health FSA is permitted to require to be

paid for COBRA continuation coverage

for the remainder of the plan year. In

determining the amount of the benefit

that a qualified beneficiary can become

entitled to receive during the remainder

of the plan year, the health FSA may

deduct from the maximum benefit

available to that qualified beneficiary for

the year (based on the election made

under the health FSA for that qualified

beneficiary before the date of the

qualifying event) any reimbursable

claims submitted to the health FSA for

that plan year before the date of the

qualifying event.

(f) The rules of paragraphs (b), (c), (d),

and (e) of this Q&A–8 are illustrated by

the following example:

Example. (i) An employer maintains a

group health plan providing major medical

benefits and a group health plan that is a

health FSA, and the plan year for each plan

is the calendar year. Both the plan providing

major medical benefits and the health FSA

are subject to COBRA. Under the health FSA,

during an open season before the beginning

of each calendar year, employees can elect to

reduce their compensation during the

upcoming year by up to $1200 per year and

have that same amount contributed to a

health flexible spending account. The

employer contributes an additional amount

to the account equal to the employee’s salary

reduction election for the year. Thus, the

maximum amount available to an employee

under the health FSA for a year is two times

the amount of the employee’s salary

reduction election for the year. This amount

may be paid to the employee during the year

as reimbursement for health expenses not

covered by the employer’s major medical

plan (such as deductibles, copayments,

prescription drugs, or eyeglasses). The

employer determined, in accordance with

section 4980B(f)(4), that a reasonable

estimate of the cost of providing coverage for

similarly situated nonCOBRA beneficiaries

for 2002 under this health FSA is equal to

two times their salary reduction election for

2002 and, thus, that two times the salary

reduction election is the applicable premium

for 2002.

(ii) Because the employer provides major

medical benefits under another group health

plan, and because the maximum benefit that

any employee can receive under the health

FSA is not greater than two times the

employee’s salary reduction election for the

plan year, benefits under this health FSA are

excepted benefits within the meaning of

sections 9831 and 9832. Thus, the first

condition of paragraph (c) of this Q&A–8 is

satisfied for the year. The maximum amount

that a plan can require to be paid for coverage

(outside of coverage required to be made

available due to a disability extension) under

Q&A–1 of § 54.4980B–8 is 102 percent of the

applicable premium. Thus, the maximum

amount that the health FSA can require to be

paid for coverage for the 2002 plan year is

2.04 times the employee’s salary reduction

election for the plan year. Because the

maximum benefit available under the health

FSA is 2.0 times the employee’s salary

reduction election for the year, the maximum

benefit available under the health FSA for the

year is less than the maximum amount that

the health FSA can require to be paid for

coverage for the year. Thus, the second

condition in paragraph (c) of this Q&A–8 is

also satisfied for the 2002 plan year. Because

both conditions in paragraph (c) of this Q&A–

8 are satisfied for 2002, with respect to any

qualifying event occurring in 2002, the health

FSA is not obligated to make COBRA

continuation coverage available for any year

after 2002.

(iii) Whether the health FSA is obligated to

make COBRA continuation coverage

available in 2002 to a qualified beneficiary

with respect to a qualifying event that occurs

in 2002 depends upon the maximum benefit

that would be available to the qualified

beneficiary under COBRA continuation

coverage for that plan year. Case 1: Employee

B has elected to reduce B’s salary by $1200

for 2002. Thus, the maximum benefit that B

can become entitled to receive under the

health FSA during the entire year is $2400.

B experiences a qualifying event that is the

termination of B’s employment on May 31,

2002. As of that date, B had submitted $300

of reimbursable expenses under the health

1852 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

FSA. Thus, the maximum benefit that B

could become entitled to receive for the

remainder of 2002 is $2100. The maximum

amount that the health FSA can require to be

paid for COBRA continuation coverage for

the remainder of 2002 is 102 percent times

1/12 of the applicable premium for 2002

times the number of months remaining in

2002 after the date of the qualifying event. In

B’s case, the maximum amount that the

health FSA can require to be paid for COBRA

continuation coverage for 2002 is 2.04 times

$1200, or $2448. One-twelfth of $2448 is

$204. Because seven months remain in the

plan year, the maximum amount that the

health FSA can require to be paid for B’s

coverage for the remainder of the year is

seven times $204, or $1428. Because $1428

is less than the maximum benefit that B

could become entitled to receive for the

remainder of the year ($2100), the health FSA

is required to make COBRA continuation

coverage available to B for the remainder of

2002 (but not for any subsequent year).

(iv) Case 2: The facts are the same as in

Case 1 except that B had submitted $1000 of

reimbursable expenses as of the date of the

qualifying event. In that case, the maximum

benefit available to B for the remainder of the

year would be $1400 instead of $2100.

Because the maximum amount that the

health FSA can require to be paid for B’s

coverage is $1428, and because the $1400

maximum benefit for the remainder of the

year does not exceed $1428, the health FSA

is not obligated to make COBRA continuation

coverage available to B in 2002 (or any later

year). (Of course, the administrator of the

health FSA is permitted to make COBRA

continuation coverage available to every

qualified beneficiary in the year that the

qualified beneficiary’s qualifying event

occurs in order to avoid having to determine

the maximum benefit available for each

qualified beneficiary for the remainder of the

plan year.)

* * * * *

A–10: (a) In general, the excise tax is

imposed on the employer maintaining

the plan, except that in the case of a

multiemployer plan (see Q&A–3 of this

section for a definition of

multiemployer plan) the excise tax is

imposed on the plan.

* * * * *

§ 54.4980B–3 [Amended]

Par. 5. Section 54.4980B–3 is

amended by:

1. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the last sentence of paragraph

(a)(3) in A–1.

2. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the first sentence of paragraph

(g) in A–1.

3. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the first and second sentences

of paragraph (a)(1) in A–2.

4. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the first sentence of paragraph

(a)(2) in A–2.

5. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in the first and last sentences in

paragraph (b) in A–2.

6. Removing the language ‘‘54.4980B–

8’’ and adding ‘‘54.4980B–10’’ in its

place in A–3.

7. Removing the language ‘‘section

9801(f)(2), and § 54.9801–6T(b)’’ and

adding ‘‘and section 9801(f)(2)’’ in its

place in the last sentence of paragraph

(b) in A–1.

8. Removing the language ‘‘and

§ 54.9801–6T(b)’’ in the second sentence

of paragraph (i) in Example 1 of

paragraph (h) of A–1.

Par. 6. Section 54.4980B–4 is

amended by:

1. Adding a sentence at the end of

paragraph (a) in A–1.

2. Removing the language ‘‘Q&A–1’’

and adding ‘‘Q&A–4’’ in its place in the

fifth sentence of paragraph (c) of A–1.

3. Revising the third sentence in

paragraph (e) of A–1.

4. Removing the language ‘‘section

9801(f)(2), and § 54.9801–6T(b)’’ and

adding ‘‘and section 9801(f)(2)’’ in its

place in paragraph (i) in Example 4 of

paragraph (g) in A–1.

The addition and revision read as

follows:

§ 54.4980B–4 Qualifying events.

* * * * *

A–1: (a) * * * See Q&A–1 through

Q&A–3 of § 54.4980B–10 for special

rules in the case of leave taken under

the Family and Medical Leave Act of

1993 (29 U.S.C. 2601–2619).

* * * * *

(e) * * * For example, an absence

from work due to disability, a temporary

layoff, or any other reason (other than

due to leave that is FMLA leave; see

§ 54.4980B–10) is a reduction of hours

of a covered employee’s employment if

there is not an immediate termination of

employment. * * *

* * * * *

Par. 7. Section 54.4980B–5 is

amended by:

1. Revising paragraph (a) of A–1.

2. Revising paragraph (b) in A–4.

3. Removing the language ‘‘and

§ 54.9801–6T’’ in the second sentence of

paragraph (a) in A–5.

The revisions read as follows:

§ 54.4980B–5 COBRA continuation

coverage.

* * * * *

A–1: (a) If a qualifying event occurs,

each qualified beneficiary (other than a

qualified beneficiary for whom the

qualifying event will not result in any

immediate or deferred loss of coverage)

must be offered an opportunity to elect

to receive the group health plan

coverage that is provided to similarly

situated nonCOBRA beneficiaries

(ordinarily, the same coverage that the

qualified beneficiary had on the day

before the qualifying event). See Q&A–

3 of § 54.4980B–3 for the definition of

similarly situated nonCOBRA

beneficiaries. This coverage is COBRA

continuation coverage. If coverage is

modified for similarly situated

nonCOBRA beneficiaries, then the

coverage made available to qualified

beneficiaries is modified in the same

way. If the continuation coverage

offered differs in any way from the

coverage made available to similarly

situated nonCOBRA beneficiaries, the

coverage offered does not constitute

COBRA continuation coverage and the

group health plan is not in compliance

with COBRA unless other coverage that

does constitute COBRA continuation

coverage is also offered. Any

elimination or reduction of coverage in

anticipation of an event described in

paragraph (b) of Q&A–1 of § 54.4980B–

4 is disregarded for purposes of this

Q&A–1 and for purposes of any other

reference in §§ 54.4980B–1 through

54.4980B–10 to coverage in effect

immediately before (or on the day

before) a qualifying event. COBRA

continuation coverage must not be

conditioned upon, or discriminate on

the basis of lack of, evidence of

insurability.

* * * * *

A–4: * * *

(b) If a qualified beneficiary

participates in a region-specific benefit

package (such as an HMO or an on-site

clinic) that will not service her or his

health needs in the area to which she or

he is relocating (regardless of the reason

for the relocation), the qualified

beneficiary must be given, within a

reasonable period after requesting other

coverage, an opportunity to elect

alternative coverage that the employer

or employee organization makes

available to active employees. If the

employer or employee organization

makes group health plan coverage

available to similarly situated

nonCOBRA beneficiaries that can be

extended in the area to which the

qualified beneficiary is relocating, then

that coverage is the alternative coverage

that must be made available to the

relocating qualified beneficiary. If the

employer or employee organization does

not make group health plan coverage

available to similarly situated

nonCOBRA beneficiaries that can be

extended in the area to which the

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1853

qualified beneficiary is relocating but

makes coverage available to other

employees that can be extended in that

area, then the coverage made available

to those other employees must be made

available to the relocating qualified

beneficiary. The effective date of the

alternative coverage must be not later

than the date of the qualified

beneficiary’s relocation, or, if later, the

first day of the month following the

month in which the qualified

beneficiary requests the alternative

coverage. However, the employer or

employee organization is not required to

make any other coverage available to the

relocating qualified beneficiary if the

only coverage the employer or employee

organization makes available to active

employees is not available in the area to

which the qualified beneficiary

relocates (because all such coverage is

region-specific and does not service

individuals in that area).

* * * * *

Par. 8. Section 54.4980B–6 is

amended by:

1. Revising the Example in paragraph

(c) of A–1.

2. Revising the first sentence in

paragraph (b) of A–3.

The revisions read as follows:

§ 54.4980B–6 Electing COBRA

continuation coverage.

* * * * *

A–1: * * *

(c) * * *

Example. (i) An unmarried employee

without children who is receiving employerpaid coverage under a group health plan

voluntarily terminates employment on June

1, 2001. The employee is not disabled at the

time of the termination of employment nor at

any time thereafter, and the plan does not

provide for the extension of the required

periods (as is permitted under paragraph (b)

of Q&A–4 of § 54.4980B–7).

(ii) Case 1: If the plan provides that the

employer-paid coverage ends immediately

upon the termination of employment, the

election period must begin not later than

June 1, 2001, and must not end earlier than

July 31, 2001. If notice of the right to elect

COBRA continuation coverage is not

provided to the employee until June 15,

2001, the election period must not end earlier

than August 14, 2001.

(iii) Case 2: If the plan provides that the

employer-paid coverage does not end until 6

months after the termination of employment,

the employee does not lose coverage until

December 1, 2001. The election period can

therefore begin as late as December 1, 2001,

and must not end before January 30, 2002.

(iv) Case 3: If employer-paid coverage for

6 months after the termination of

employment is offered only to those qualified

beneficiaries who waive COBRA

continuation coverage, the employee loses

coverage on June 1, 2001, so the election

period is the same as in Case 1. The

difference between Case 2 and Case 3 is that

in Case 2 the employee can receive 6 months

of employer-paid coverage and then elect to

pay for up to an additional 12 months of

COBRA continuation coverage, while in Case

3 the employee must choose between 6

months of employer-paid coverage and

paying for up to 18 months of COBRA

continuation coverage. In all three cases,

COBRA continuation coverage need not be

provided for more than 18 months after the

termination of employment (see Q&A–4 of

§ 54.4980B–7), and in certain circumstances

might be provided for a shorter period (see

Q&A–1 of § 54.4980B–7).

* * * * *

A–3: * * *

(b) In the case of an indemnity or

reimbursement arrangement, the

employer or employee organization can

provide for plan coverage during the

election period or, if the plan allows

retroactive reinstatement, the employer

or employee organization can terminate

the coverage of the qualified beneficiary

and reinstate her or him when the

election (and, if applicable, payment for

the coverage) is made. * * *

* * * * *

Par. 9. Section 54.4980B–7 is

amended by:

1. Revising paragraph (a) of A–1.

2. Adding Q&A–4.

3. Revising the second sentence in

paragraph (c) of A–5.

4. Revising paragraph (b) of Q&A–6.

5. Removing the language ‘‘Q&A–1’’

and adding ‘‘Q&A–4’’ in its place in

paragraph (a) of A–7.

The addition and revisions read as

follows:

§ 54.4980B–7 Duration of COBRA

continuation coverage.

* * * * *

A–1: (a) Except for an interruption of

coverage in connection with a waiver, as

described in Q&A–4 of § 54.4980B–6,

COBRA continuation coverage that has

been elected for a qualified beneficiary

must extend for at least the period

beginning on the date of the qualifying

event and ending not before the earliest

of the following dates —

(1) The last day of the maximum

coverage period (see Q&A–4 of this

section);

(2) The first day for which timely

payment is not made to the plan with

respect to the qualified beneficiary (see

Q&A–5 in § 54.4980B–8);

(3) The date upon which the employer

or employee organization ceases to

provide any group health plan

(including successor plans) to any

employee;

(4) The date, after the date of the

election, upon which the qualified

beneficiary first becomes covered under

any other group health plan, as

described in Q&A–2 of this section;

(5) The date, after the date of the

election, upon which the qualified

beneficiary first becomes entitled to

Medicare benefits, as described in Q&A–

3 of this section; and

(6) In the case of a qualified

beneficiary entitled to a disability

extension (see Q&A–5 of this section),

the later of —

(i) Either 29 months after the date of

the qualifying event, or the first day of

the month that is more than 30 days

after the date of a final determination

under Title II or XVI of the Social

Security Act (42 U.S.C. 401–433 or

1381–1385) that the disabled qualified

beneficiary whose disability resulted in

the qualified beneficiary’s being entitled

to the disability extension is no longer

disabled, whichever is earlier; or

(ii) The end of the maximum coverage

period that applies to the qualified

beneficiary without regard to the

disability extension.

* * * * *

Q–4: When does the maximum

coverage period end?

A–4: (a) Except as otherwise provided

in this Q&A–4, the maximum coverage

period ends 36 months after the

qualifying event. The maximum

coverage period for a qualified

beneficiary who is a child born to or

placed for adoption with a covered

employee during a period of COBRA

continuation coverage is the maximum

coverage period for the qualifying event

giving rise to the period of COBRA

continuation coverage during which the

child was born or placed for adoption.

Paragraph (b) of this Q&A–4 describes

the starting point from which the end of

the maximum coverage period is

measured. The date that the maximum

coverage period ends is described in

paragraph (c) of this Q&A–4 in a case

where the qualifying event is a

termination of employment or reduction

of hours of employment, in paragraph

(d) of this Q&A–4 in a case where a

covered employee becomes entitled to

Medicare benefits under Title XVIII of

the Social Security Act (42 U.S.C. 1395–

1395ggg) before experiencing a

qualifying event that is a termination of

employment or reduction of hours of

employment, and in paragraph (e) of

this Q&A–4 in the case of a qualifying

event that is the bankruptcy of the

employer. See Q&A–8 of § 54.4980B–2

for limitations that apply to certain

health flexible spending arrangements.

See also Q&A–6 of this section in the

case of multiple qualifying events.

Nothing in §§ 54.4980B–1 through

54.4980B–10 prohibits a group health

plan from providing coverage that

continues beyond the end of the

maximum coverage period.

1854 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

(b)(1) The end of the maximum

coverage period is measured from the

date of the qualifying event even if the

qualifying event does not result in a loss

of coverage under the plan until a later

date. If, however, coverage under the

plan is lost at a later date and the plan

provides for the extension of the

required periods, then the maximum

coverage period is measured from the

date when coverage is lost. A plan

provides for the extension of the

required periods if it provides both—

(i) That the 30-day notice period

(during which the employer is required

to notify the plan administrator of the

occurrence of certain qualifying events

such as the death of the covered

employee or the termination of

employment or reduction of hours of

employment of the covered employee)

begins on the date of the loss of

coverage rather than on the date of the

qualifying event; and

(ii) That the end of the maximum

coverage period is measured from the

date of the loss of coverage rather than

from the date of the qualifying event.

(2) In the case of a plan that provides

for the extension of the required

periods, whenever the rules of

§§ 54.4980B–1 through 54.4980B–10

refer to the measurement of a period

from the date of the qualifying event,

those rules apply in such a case by

measuring the period instead from the

date of the loss of coverage.

(c) In the case of a qualifying event

that is a termination of employment or

reduction of hours of employment, the

maximum coverage period ends 18

months after the qualifying event if

there is no disability extension, and 29

months after the qualifying event if

there is a disability extension. See

Q&A–5 of this section for rules to

determine if there is a disability

extension. If there is a disability

extension and the disabled qualified

beneficiary is later determined to no

longer be disabled, then a plan may

terminate the COBRA continuation

coverage of an affected qualified

beneficiary before the end of the

disability extension; see paragraph (a)(6)

in Q&A–1 of this section.

(d)(1) If a covered employee becomes

entitled to Medicare benefits under Title

XVIII of the Social Security Act (42

U.S.C. 1395–1395ggg) before

experiencing a qualifying event that is a

termination of employment or reduction

of hours of employment, the maximum

coverage period for qualified

beneficiaries other than the covered

employee ends on the later of—

(i) 36 months after the date the

covered employee became entitled to

Medicare benefits; or

(ii) 18 months (or 29 months, if there

is a disability extension) after the date

of the covered employee’s termination

of employment or reduction of hours of

employment.

(2) See paragraph (b) of Q&A–3 of this

section regarding the determination of

when a covered employee becomes

entitled to Medicare benefits.

(e) In the case of a qualifying event

that is the bankruptcy of the employer,

the maximum coverage period for a

qualified beneficiary who is the retired

covered employee ends on the date of

the retired covered employee’s death.

The maximum coverage period for a

qualified beneficiary who is the spouse,

surviving spouse, or dependent child of

the retired covered employee ends on

the earlier of—

(1) The date of the qualified

beneficiary’s death; or

(2) The date that is 36 months after

the death of the retired covered

employee.

* * * * *

A–5: * * *

(c) * * * For this purpose, the period

of the first 60 days of COBRA

continuation coverage is measured from

the date of the qualifying event

described in paragraph (b) of this Q&A–

5 (except that if a loss of coverage would

occur at a later date in the absence of

an election for COBRA continuation

coverage and if the plan provides for the

extension of the required periods (as

described in paragraph (b) of Q&A–4 of

this section) then the period of the first

60 days of COBRA continuation

coverage is measured from the date on

which the coverage would be lost).

***

* * * * *

A–6: * * *

(b) The requirements of this paragraph

(b) are satisfied if a qualifying event that

gives rise to an 18-month maximum

coverage period (or a 29-month

maximum coverage period in the case of

a disability extension) is followed,

within that 18-month period (or within

that 29-month period, in the case of a

disability extension), by a second

qualifying event (for example, a death or

a divorce) that gives rise to a 36-month

maximum coverage period. (Thus, a

termination of employment following a

qualifying event that is a reduction of

hours of employment cannot be a

second qualifying event that expands

the maximum coverage period; the

bankruptcy of an employer also cannot

be a second qualifying event that

expands the maximum coverage period.)

In such a case, the original 18-month

period (or 29-month period, in the case

of a disability extension) is expanded to

36 months, but only for those

individuals who were qualified

beneficiaries under the group health

plan in connection with the first

qualifying event and who are still

qualified beneficiaries at the time of the

second qualifying event. No qualifying

event (other than a qualifying event that

is the bankruptcy of the employer) can

give rise to a maximum coverage period

that ends more than 36 months after the

date of the first qualifying event (or

more than 36 months after the date of

the loss of coverage, in the case of a plan

that provides for the extension of the

required periods; see paragraph (b) in

Q&A–4 of this section). For example, if

an employee covered by a group health

plan that is subject to COBRA

terminates employment (for reasons

other than gross misconduct) on

December 31, 2000, the termination is a

qualifying event giving rise to a

maximum coverage period that extends

for 18 months to June 30, 2002. If the

employee dies after the employee and

the employee’s spouse and dependent

children have elected COBRA

continuation coverage and on or before

June 30, 2002, the spouse and

dependent children (except anyone

among them whose COBRA

continuation coverage had already

ended for some other reason) will be

able to receive COBRA continuation

coverage through December 31, 2003.

See Q&A–8(b) of § 54.4980B–2 for a

special rule that applies to certain

health flexible spending arrangements.

* * * * *

Par. 10. Section 54.4980B–8 is

amended by:

1. Revising paragraph (c) in A–1.

2. Adding a new sentence at the end

of paragraph (d) and paragraphs (d)(1)

and (2) in A–5.

The revision and addition read as

follows:

§ 54.4980B–8 Paying for COBRA

continuation coverage.

* * * * *

A–1: * * *

* * * * *

(c) A group health plan does not fail

to comply with section 9802(b) (which

generally prohibits an individual from

being charged, on the basis of health

status, a higher premium than that

charged for similarly situated

individuals enrolled in the plan) with

respect to a qualified beneficiary

entitled to the disability extension

merely because the plan requires

payment of an amount permitted under

paragraph (b) of this Q&A–1.

* * * * *

A–5: * * *

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1855

(d) * * * An amount is not

significantly less than the amount the

plan requires to be paid for a period of

coverage if and only if the shortfall is no

greater than the lesser of the following

two amounts:

(1) Fifty dollars (or such other amount

as the Commissioner may provide in a

revenue ruling, notice, or other

guidance published in the Internal

Revenue Bulletin (see § 601.601(d)(2)(ii)

of this chapter)); or

(2) 10 percent of the amount the plan

requires to be paid.

* * * * *

Par. 11. Sections 54.4980B–9 and

54.4980B–10 are added to read as

follows:

§ 54.4980B–9 Business reorganizations

and employer withdrawals from

multiemployer plans.

The following questions-and-answers

address who has the obligation to make

COBRA continuation coverage available

to affected qualified beneficiaries in the

context of business reorganizations and

employer withdrawals from

multiemployer plans:

Q–1: For purposes of this section,

what are a business reorganization, a

stock sale, and an asset sale?

A–1: For purposes of this section:

(a) A business reorganization is a

stock sale or an asset sale.

(b) A stock sale is a transfer of stock

in a corporation that causes the

corporation to become a different

employer or a member of a different

employer. (See Q&A–2 of § 54.4980B–2,

which defines employer to include all

members of a controlled group of

corporations.) Thus, for example, a sale

or distribution of stock in a corporation

that causes the corporation to cease to

be a member of one controlled group of

corporations, whether or not it becomes

a member of another controlled group of

corporations, is a stock sale.

(c) An asset sale is a transfer of

substantial assets, such as a plant or

division or substantially all the assets of

a trade or business.

(d) The rules of § 1.414(b)–1 of this

chapter apply in determining what

constitutes a controlled group of

corporations, and the rules of

§§ 1.414(c)–1 through 1.414(c)–5 of this

chapter apply in determining what

constitutes a group of trades or

businesses under common control.

Q–2: In the case of a stock sale, what

are the selling group, the acquired

organization, and the buying group?

A–2: In the case of a stock sale—

(a) The selling group is the controlled

group of corporations, or the group of

trades or businesses under common

control, of which a corporation ceases to

be a member as a result of the stock sale;

(b) The acquired organization is the

corporation that ceases to be a member

of the selling group as a result of the

stock sale; and

(c) The buying group is the controlled

group of corporations, or the group of

trades or businesses under common

control, of which the acquired

organization becomes a member as a

result of the stock sale. If the acquired

organization does not become a member

of such a group, the buying group is the

acquired organization.

Q–3: In the case of an asset sale, what

are the selling group and the buying

group?

A–3: In the case of an asset sale—

(a) The selling group is the controlled

group of corporations or the group of

trades or businesses under common

control that includes the corporation or

other trade or business that is selling the

assets; and

(b) The buying group is the controlled

group of corporations or the group of

trades or businesses under common

control that includes the corporation or

other trade or business that is buying

the assets.

Q–4: Who is an M&A qualified

beneficiary?

A–4: (a) Asset sales: In the case of an

asset sale, an individual is an M&A

qualified beneficiary if the individual is

a qualified beneficiary whose qualifying

event occurred prior to or in connection

with the sale and who is, or whose

qualifying event occurred in connection

with, a covered employee whose last

employment prior to the qualifying

event was associated with the assets

being sold.

(b) Stock sales: In the case of a stock

sale, an individual is an M&A qualified

beneficiary if the individual is a

qualified beneficiary whose qualifying

event occurred prior to or in connection

with the sale and who is, or whose

qualifying event occurred in connection

with, a covered employee whose last

employment prior to the qualifying

event was with the acquired

organization.

(c) In the case of a qualified

beneficiary who has experienced more

than one qualifying event with respect

to her or his current right to COBRA

continuation coverage, the qualifying

event referred to in paragraphs (a) and

(b) of this Q&A–4 is the first qualifying

event.

Q–5: In the case of a stock sale, is the

sale a qualifying event with respect to

a covered employee who is employed by

the acquired organization before the sale

and who continues to be employed by

the acquired organization after the sale,

or with respect to the spouse or

dependent children of such a covered

employee?

A–5: No. A covered employee who

continues to be employed by the

acquired organization after the sale does

not experience a termination of

employment as a result of the sale.

Accordingly, the sale is not a qualifying

event with respect to the covered

employee, or with respect to the covered

employee’s spouse or dependent

children, regardless of whether they are

provided with group health coverage

after the sale, and neither the covered

employee, nor the covered employee’s

spouse or dependent children, become

qualified beneficiaries as a result of the

sale.

Q–6: In the case of an asset sale, is the

sale a qualifying event with respect to

a covered employee whose employment

immediately before the sale was

associated with the purchased assets, or

with respect to the spouse or dependent

children of such a covered employee

who are covered under a group health

plan of the selling group immediately

before the sale?

A–6: (a) Yes, unless—

(1) The buying group is a successor

employer under paragraph (c) of Q&A–

8 of this section or Q&A–2 of

§ 54.4980B–2, and the covered

employee is employed by the buying

group immediately after the sale; or

(2) The covered employee (or the

spouse or any dependent child of the

covered employee) does not lose

coverage (within the meaning of

paragraph (c) in Q&A–1 of § 54.4980B4) under a group health plan of the

selling group after the sale.

(b) Unless the conditions in paragraph

(a)(1) or (2) of this Q&A–6 are satisfied,

such a covered employee experiences a

termination of employment with the

selling group as a result of the asset sale,

regardless of whether the covered

employee is employed by the buying

group or whether the covered

employee’s employment is associated

with the purchased assets after the sale.

Accordingly, the covered employee, and

the spouse and dependent children of

the covered employee who lose

coverage under a plan of the selling

group in connection with the sale, are

M&A qualified beneficiaries in

connection with the sale.

Q–7: In a business reorganization, are

the buying group and the selling group

permitted to allocate by contract the

responsibility to make COBRA

continuation coverage available to M&A

qualified beneficiaries?

A–7: Yes. Nothing in this section

prohibits a selling group and a buying

group from allocating to one or the other

1856 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

of the parties in a purchase agreement

the responsibility to provide the

coverage required under §§ 54.4980B–1

through 54.4980B–10. However, if and

to the extent that the party assigned this

responsibility under the terms of the

contract fails to perform, the party who

has the obligation under Q&A–8 of this

section to make COBRA continuation

coverage available to M&A qualified

beneficiaries continues to have that

obligation.

Q–8: Which group health plan has the

obligation to make COBRA continuation

coverage available to M&A qualified

beneficiaries in a business

reorganization?

A–8: (a) In the case of a business

reorganization (whether a stock sale or

an asset sale), so long as the selling

group maintains a group health plan

after the sale, a group health plan

maintained by the selling group has the

obligation to make COBRA continuation

coverage available to M&A qualified

beneficiaries with respect to that sale.

This Q&A–8 prescribes rules for cases in

which the selling group ceases to

provide any group health plan to any

employee in connection with the sale.

Paragraph (b) of this Q&A–8 contains

these rules for stock sales, and

paragraph (c) of this Q&A–8 contains

these rules for asset sales. Neither a

stock sale nor an asset sale has any

effect on the COBRA continuation

coverage requirements applicable to any

group health plan for any period before

the sale.

(b)(1) In the case of a stock sale, if the

selling group ceases to provide any

group health plan to any employee in

connection with the sale, a group health

plan maintained by the buying group

has the obligation to make COBRA

continuation coverage available to M&A

qualified beneficiaries with respect to

that stock sale. A group health plan of

the buying group has this obligation

beginning on the later of the following

two dates and continuing as long as the

buying group continues to maintain a

group health plan (but subject to the

rules in § 54.4980B–7, relating to the

duration of COBRA continuation

coverage)—

(i) The date the selling group ceases

to provide any group health plan to any

employee; or

(ii) The date of the stock sale.

(2) The determination of whether the

selling group’s cessation of providing

any group health plan to any employee

is in connection with the stock sale is

based on all of the relevant facts and

circumstances. A group health plan of

the buying group does not, as a result

of the stock sale, have an obligation to

make COBRA continuation coverage

available to those qualified beneficiaries

of the selling group who are not M&A

qualified beneficiaries with respect to

that sale.

(c)(1) In the case of an asset sale, if the

selling group ceases to provide any

group health plan to any employee in

connection with the sale and if the

buying group continues the business

operations associated with the assets

purchased from the selling group

without interruption or substantial

change, then the buying group is a

successor employer to the selling group

in connection with that asset sale. A

buying group does not fail to be a

successor employer in connection with

an asset sale merely because the asset

sale takes place in connection with a

proceeding in bankruptcy under Title 11

of the United States Code. If the buying

group is a successor employer, a group

health plan maintained by the buying

group has the obligation to make

COBRA continuation coverage available

to M&A qualified beneficiaries with

respect to that asset sale. A group health

plan of the buying group has this

obligation beginning on the later of the

following two dates and continuing as

long as the buying group continues to

maintain a group health plan (but

subject to the rules in § 54.4980B–7,

relating to the duration of COBRA

continuation coverage)—

(i) The date the selling group ceases

to provide any group health plan to any

employee; or

(ii) The date of the asset sale.

(2) The determination of whether the

selling group’s cessation of providing

any group health plan to any employee

is in connection with the asset sale is

based on all of the relevant facts and

circumstances. A group health plan of

the buying group does not, as a result

of the asset sale, have an obligation to

make COBRA continuation coverage

available to those qualified beneficiaries

of the selling group who are not M&A

qualified beneficiaries with respect to

that sale.

(d) The rules of Q&A–1 through Q&A–

7 of this section and this Q&A–8 are

illustrated by the following examples; in

each example, each group health plan is

subject to COBRA:

Stock Sale Examples

Example 1. (i) Selling Group S consists of

three corporations, A, B, and C. Buying

Group P consists of two corporations, D and

E. P enters into a contract to purchase all the

stock of C from S effective July 1, 2002.

Before the sale of C, S maintains a single

group health plan for the employees of A, B,

and C (and their families). P maintains a

single group health plan for the employees of

D and E (and their families). Effective July 1,

2002, the employees of C (and their families)

become covered under P’s plan. On June 30,

2002, there are 48 qualified beneficiaries

receiving COBRA continuation coverage

under S’s plan, 15 of whom are M&A

qualified beneficiaries with respect to the

sale of C. (The other 33 qualified

beneficiaries had qualifying events in

connection with a covered employee whose

last employment before the qualifying event

was with either A or B.)

(ii) Under these facts, S’s plan continues to

have the obligation to make COBRA

continuation coverage available to the 15

M&A qualified beneficiaries under S’s plan

after the sale of C to P. The employees who

continue in employment with C do not

experience a qualifying event by virtue of P’s

acquisition of C. If they experience a

qualifying event after the sale, then the group

health plan of P has the obligation to make

COBRA continuation coverage available to

them.

Example 2. (i) Selling Group S consists of

three corporations, A, B, and C. Each of A,

B, and C maintains a group health plan for

its employees (and their families). Buying

Group P consists of two corporations, D and

E. P enters into a contract to purchase all of

the stock of C from S effective July 1, 2002.

As of June 30, 2002, there are 14 qualified

beneficiaries receiving COBRA continuation

coverage under C’s plan. C continues to

employ all of its employees and continues to

maintain its group health plan after being

acquired by P on July 1, 2002.

(ii) Under these facts, C is an acquired

organization and the 14 qualified

beneficiaries under C’s plan are M&A

qualified beneficiaries. A group health plan

of S (that is, either the plan maintained by

A or the plan maintained by B) has the

obligation to make COBRA continuation

coverage available to the 14 M&A qualified

beneficiaries. S and P could negotiate to have

C’s plan continue to make COBRA

continuation coverage available to the 14

M&A qualified beneficiaries. In such a case,

neither A’s plan nor B’s plan would make

COBRA continuation coverage available to

the 14 M&A qualified beneficiaries unless C’s

plan failed to fulfill its contractual

responsibility to make COBRA continuation

coverage available to the M&A qualified

beneficiaries. C’s employees (and their

spouses and dependent children) do not

experience a qualifying event in connection

with P’s acquisition of C, and consequently

no plan maintained by either P or S has any

obligation to make COBRA continuation

coverage available to C’s employees (or their

spouses or dependent children) in

connection with the transfer of stock in C

from S to P.

Example 3. (i) The facts are the same as in

Example 2, except that C ceases to employ

two employees on June 30, 2002, and those

two employees never become covered under

P’s plan.

(ii) Under these facts, the two employees

experience a qualifying event on June 30,

2002 because their termination of

employment causes a loss of group health

coverage. A group health plan of S (that is,

either the plan maintained by A or the plan

maintained by B) has the obligation to make

COBRA continuation coverage available to

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1857

the two employees (and to any spouse or

dependent child of the two employees who

loses coverage under C’s plan in connection

with the termination of employment of the

two employees) because they are M&A

qualified beneficiaries with respect to the

sale of C.

Example 4. (i) Selling Group S consists of

three corporations, A, B, and C. Buying

Group P consists of two corporations, D and

E. P enters into a contract to purchase all of

the stock of C from S effective July 1, 2002.

Before the sale of C, S maintains a single

group health plan for the employees of A, B,

and C (and their families). P maintains a

single group health plan for the employees of

D and E (and their families). Effective July 1,

2002, the employees of C (and their families)

become covered under P’s plan. On June 30,

2002, there are 25 qualified beneficiaries

receiving COBRA continuation coverage

under S’s plan, 20 of whom are M&A

qualified beneficiaries with respect to the

sale of C. (The other five qualified

beneficiaries had qualifying events in

connection with a covered employee whose

last employment before the qualifying event

was with either A or B.) S terminates its

group health plan effective June 30, 2002 and

begins to liquidate the assets of A and B and

to lay off the employees of A and B.

(ii) Under these facts, S ceases to provide

a group health plan to any employee in

connection with the sale of C to P. Thus,

beginning July 1, 2002 P’s plan has the

obligation to make COBRA continuation

coverage available to the 20 M&A qualified

beneficiaries, but P is not obligated to make

COBRA continuation coverage available to

the other 5 qualified beneficiaries with

respect to S’s plan as of June 30, 2002 or to

any of the employees of A or B whose

employment is terminated by S (or to any of

those employees’ spouses or dependent

children).

Asset Sale Examples

Example 5. (i) Selling Group S provides

group health plan coverage to employees at

each of its operating divisions. S sells the

assets of one of its divisions to Buying Group

P. Under the terms of the group health plan

covering the employees at the division being

sold, their coverage will end on the date of

the sale. P hires all but one of those

employees, gives them the same positions

that they had with S before the sale, and

provides them with coverage under a group

health plan. Immediately before the sale,

there are two qualified beneficiaries receiving

COBRA continuation coverage under a group

health plan of S whose qualifying events

occurred in connection with a covered

employee whose last employment prior to

the qualifying event was associated with the

assets sold to P.

(ii) These two qualified beneficiaries are

M&A qualified beneficiaries with respect to

the asset sale to P. Under these facts, a group

health plan of S retains the obligation to

make COBRA continuation coverage

available to these two M&A qualified

beneficiaries. In addition, the one employee

P does not hire as well as all of the

employees P hires (and the spouses and

dependent children of these employees) who

were covered under a group health plan of

S on the day before the sale are M&A

qualified beneficiaries with respect to the

sale. A group health plan of S also has the

obligation to make COBRA continuation

coverage available to these M&A qualified

beneficiaries.

Example 6. (i) Selling Group S provides

group health plan coverage to employees at

each of its operating divisions. S sells

substantially all of the assets of all of its

divisions to Buying Group P, and S ceases to

provide any group health plan to any

employee on the date of the sale. P hires all

but one of S’s employees on the date of the

asset sale by S, gives those employees the

same positions that they had with S before

the sale, and continues the business

operations of those divisions without

substantial change or interruption. P

provides these employees with coverage

under a group health plan. Immediately

before the sale, there are 10 qualified

beneficiaries receiving COBRA continuation

coverage under a group health plan of S

whose qualifying events occurred in

connection with a covered employee whose

last employment prior to the qualifying event

was associated with the assets sold to P.

(ii) These 10 qualified beneficiaries are

M&A qualified beneficiaries with respect to

the asset sale to P. Under these facts, P is a

successor employer described in paragraph

(c) of this Q&A–8. Thus, a group health plan

of P has the obligation to make COBRA

continuation coverage available to these 10

M&A qualified beneficiaries.

(iii) The one employee that P does not hire

and the family members of that employee are

also M&A qualified beneficiaries with respect

to the sale. A group health plan of P also has

the obligation to make COBRA continuation

coverage available to these M&A qualified

beneficiaries.

(iv) The employees who continue in

employment in connection with the asset

sale (and their family members) and who

were covered under a group health plan of

S on the day before the sale are not M&A

qualified beneficiaries because P is a

successor employer to S in connection with

the asset sale. Thus, no group health plan of

P has any obligation to make COBRA

continuation coverage available to these

continuing employees with respect to the

qualifying event that resulted from their

losing coverage under S’s plan in connection

with the asset sale.

Example 7. (i) Selling Group S provides

group health plan coverage to employees at

each of its two operating divisions. S sells the

assets of one of its divisions to Buying Group

P1. Under the terms of the group health plan

covering the employees at the division being

sold, their coverage will end on the date of

the sale. P1 hires all but one of those

employees, gives them the same positions

that they had with S before the sale, and

provides them with coverage under a group

health plan.

(ii) Under these facts, a group health plan

of S has the obligation to make COBRA

continuation coverage available to M&A

qualified beneficiaries with respect to the

sale to P1. (If an M&A qualified beneficiary

first became covered under P1’s plan after

electing COBRA continuation coverage under

S’s plan, then S’s plan could terminate the

COBRA continuation coverage once the M&A

qualified beneficiary became covered under

P1’s plan, provided that the remaining

conditions of Q&A–2 of § 54.4980B–7 were

satisfied.)

(iii) Several months after the sale to P1, S

sells the assets of its remaining division to

Buying Group P2, and S ceases to provide

any group health plan to any employee on

the date of that sale. Thus, under Q&A–1 of

§ 54.4980B–7, S ceases to have an obligation

to make COBRA continuation coverage

available to any qualified beneficiary on the

date of the sale to P2. P1 and P2 are unrelated

organizations.

(iv) Even if it was foreseeable that S would

sell its remaining division to an unrelated

third party after the sale to P1, under these

facts the cessation of S to provide any group

health plan to any employee on the date of

the sale to P2 is not in connection with the

asset sale to P1. Thus, even after the date S

ceases to provide any group health plan to

any employee, no group health plan of P1 has

any obligation to make COBRA continuation

coverage available to M&A qualified

beneficiaries with respect to the asset sale to

P1 by S. If P2 is a successor employer under

the rules of paragraph (c) of this Q&A–8 and

maintains one or more group health plans

after the sale, then a group health plan of P2

would have an obligation to make COBRA

continuation coverage available to M&A

qualified beneficiaries with respect to the

asset sale to P2 by S (but in such a case

employees of S before the sale who

continued working for P2 after the sale

would not be M&A qualified beneficiaries).

However, even in such a case, no group

health plan of P2 would have an obligation

to make COBRA continuation coverage

available to M&A qualified beneficiaries with

respect to the asset sale to P1 by S. Thus,

under these facts, after S has ceased to

provide any group health plan to any

employee, no plan has an obligation to make

COBRA continuation coverage available to

M&A qualified beneficiaries with respect to

the asset sale to P1.

Example 8. (i) Selling Group S provides

group health plan coverage to employees at

each of its operating divisions. S sells

substantially all of the assets of all of its

divisions to Buying Group P. P hires most of

S’s employees on the date of the purchase of

S’s assets, retains those employees in the

same positions that they had with S before

the purchase, and continues the business

operations of those divisions without

substantial change or interruption. P

provides these employees with coverage

under a group health plan. S continues to

employ a few employees for the principal

purpose of winding up the affairs of S in

preparation for liquidation. S continues to

provide coverage under a group health plan

to these few remaining employees for several

weeks after the date of the sale and then

ceases to provide any group health plan to

any employee.

(ii) Under these facts, the cessation by S to

provide any group health plan to any

employee is in connection with the asset sale

to P. Because of this, and because P

1858 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

continued the business operations associated

with those assets without substantial change

or interruption, P is a successor employer to

S with respect to the asset sale. Thus, a group

health plan of P has the obligation to make

COBRA continuation coverage available to

M&A qualified beneficiaries with respect to

the sale beginning on the date that S ceases

to provide any group health plan to any

employee. (A group health plan of S retains

this obligation for the several weeks after the

date of the sale until S ceases to provide any

group health plan to any employee.)

Q–9: Can the cessation of

contributions by an employer to a

multiemployer group health plan be a

qualifying event?

A–9: The cessation of contributions

by an employer to a multiemployer

group health plan is not itself a

qualifying event, even though the

cessation of contributions may cause

current employees (and their spouses

and dependent children) to lose

coverage under the multiemployer plan.

An event coinciding with the

employer’s cessation of contributions

(such as a reduction of hours of

employment in the case of striking

employees) will constitute a qualifying

event if it otherwise satisfies the

requirements of Q&A–1 of § 54.4980B–

4.

Q–10: If an employer stops

contributing to a multiemployer group

health plan, does the multiemployer

plan have the obligation to make

COBRA continuation coverage available

to a qualified beneficiary who was

receiving coverage under the

multiemployer plan on the day before

the cessation of contributions and who

is, or whose qualifying event occurred

in connection with, a covered employee

whose last employment prior to the

qualifying event was with the employer

that has stopped contributing to the

multiemployer plan?

A–10: (a) In general, yes. (See Q&A–

3 of § 54.4980B–2 for a definition of

multiemployer plan.) If, however, the

employer that stops contributing to the

multiemployer plan makes group health

plan coverage available to (or starts

contributing to another multiemployer

plan that is a group health plan with

respect to) a class of the employer’s

employees formerly covered under the

multiemployer plan, the plan

maintained by the employer (or the

other multiemployer plan), from that

date forward, has the obligation to make

COBRA continuation coverage available

to any qualified beneficiary who was

receiving coverage under the

multiemployer plan on the day before

the cessation of contributions and who

is, or whose qualifying event occurred

in connection with, a covered employee

whose last employment prior to the

qualifying event was with the employer.

(b) The rules of Q&A–9 of this section

and this Q&A–10 are illustrated by the

following examples; in each example,

each group health plan is subject to

COBRA:

Example 1. (i) Employer Z employs a class

of employees covered by a collective

bargaining agreement and participating in

multiemployer group health plan M. As

required by the collective bargaining

agreement, Z has been making contributions

to M. Z experiences financial difficulties and

stops making contributions to M but

continues to employ all of the employees

covered by the collective bargaining

agreement. Z’s cessation of contributions to

M causes those employees (and their spouses

and dependent children) to lose coverage

under M. Z does not make group health plan

coverage available to any of the employees

covered by the collective bargaining

agreement.

(ii) After Z stops contributing to M, M

continues to have the obligation to make

COBRA continuation coverage available to

any qualified beneficiary who experienced a

qualifying event that preceded or coincided

with the cessation of contributions to M and

whose coverage under M on the day before

the qualifying event was due to an

employment affiliation with Z. The loss of

coverage under M for those employees of Z

who continue in employment (and the loss

of coverage for their spouses and dependent

children) does not constitute a qualifying

event.

Example 2. (i) The facts are the same as in

Example 1 except that B, one of the

employees covered under M before Z stops

contributing to M, is transferred into

management. Z maintains a group health

plan for managers and B becomes eligible for

coverage under the plan on the day of B’s

transfer.

(ii) Under these facts, Z does not make

group health plan coverage available to a

class of employees formerly covered under M

after B becomes eligible under Z’s group

health plan for managers. Accordingly, M

continues to have the obligation to make

COBRA continuation coverage available to

any qualified beneficiary who experienced a

qualifying event that preceded or coincided

with the cessation of contributions to M and

whose coverage under M on the day before

the qualifying event was due to an

employment affiliation with Z.

Example 3. (i) Employer Y employs two

classes of employees skilled and unskilled

laborers covered by a collective bargaining

agreement and participating in

multiemployer group health plan M. As

required by the collective bargaining

agreement, Y has been making contributions

to M. Y stops making contributions to M but

continues to employ all the employees

covered by the collective bargaining

agreement. Y’s cessation of contributions to

M causes those employees (and their spouses

and dependent children) to lose coverage

under M. Y makes group health plan

coverage available to the skilled laborers

immediately after their coverage ceases under

M, but Y does not make group health plan

coverage available to any of the unskilled

laborers.

(ii) Under these facts, because Y makes

group health plan coverage available to a

class of employees previously covered under

M immediately after both classes of

employees lose coverage under M, Y alone

has the obligation to make COBRA

continuation coverage available to any

qualified beneficiary who experienced a

qualifying event that preceded or coincided

with the cessation of contributions to M and

whose coverage under M on the day before

the qualifying event was due to an

employment affiliation with Y, regardless of

whether the employment affiliation was as a

skilled or unskilled laborer. However, the

loss of coverage under M for those employees

of Y who continue in employment (and the

loss of coverage for their spouses and

dependent children) does not constitute a

qualifying event.

Example 4. (i) Employer X employs a class

of employees covered by a collective

bargaining agreement and participating in

multiemployer group health plan M. As

required by the collective bargaining

agreement, X has been making contributions

to M. X experiences financial difficulties and

is forced into bankruptcy by its creditors. X

continues to employ all of the employees

covered by the collective bargaining

agreement. X also continues to make

contributions to M until the current

collective bargaining agreement expires, on

June 30, 2001, and then X stops making

contributions to M. X’s employees (and their

spouses and dependent children) lose

coverage under M effective July 1, 2001. X

does not enter into another collective

bargaining agreement covering the class of

employees covered by the expired collective

bargaining agreement. Effective September 1,

2001, X establishes a group health plan

covering the class of employees formerly

covered by the collective bargaining

agreement. The group health plan also covers

their spouses and dependent children.

(ii) Under these facts, M has the obligation

to make COBRA continuation coverage

available from July 1, 2001 until August 31,

2001, and the group health plan established

by X has the obligation to make COBRA

continuation coverage available from

September 1, 2001 until the obligation ends

(see Q&A–1 of § 54.4980B–7) to any qualified

beneficiary who experienced a qualifying

event that preceded or coincided with the

cessation of contributions to M and whose

coverage under M on the day before the

qualifying event was due to an employment

affiliation with X. The loss of coverage under

M for those employees of X who continue in

employment (and the loss of coverage for

their spouses and dependent children) does

not constitute a qualifying event.

Example 5. (i) Employer W employs a class

of employees covered by a collective

bargaining agreement and participating in

multiemployer group health plan M. As

required by the collective bargaining

agreement, W has been making contributions

to M. The employees covered by the

collective bargaining agreement vote to

decertify their current employee

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1859

representative effective January 1, 2002 and

vote to certify a new employee representative

effective the same date. As a consequence, on

January 1, 2002 they cease to be covered

under M and commence to be covered under

multiemployer group health plan N.

(ii) Effective January 1, 2002, N has the

obligation to make COBRA continuation

coverage available to any qualified

beneficiary who experienced a qualifying

event that preceded or coincided with the

cessation of contributions to M and whose

coverage under M on the day before the

qualifying event was due to an employment

affiliation with W. The loss of coverage under

M for those employees of W who continue in

employment (and the loss of coverage for

their spouses and dependent children) does

not constitute a qualifying event.

§ 54.4980B–10 Interaction of FMLA and

COBRA.

The following questions-and-answers

address how the taking of leave under

the Family and Medical Leave Act of

1993 (FMLA) (29 U.S.C. 2601–2619)

affects the COBRA continuation

coverage requirements:

Q–1: In what circumstances does a

qualifying event occur if an employee

does not return from leave taken under

FMLA?

A–1: (a) The taking of leave under

FMLA does not constitute a qualifying

event. A qualifying event under Q&A–

1 of § 54.4980B–4 occurs, however, if—

(1) An employee (or the spouse or a

dependent child of the employee) is

covered on the day before the first day

of FMLA leave (or becomes covered

during the FMLA leave) under a group

health plan of the employee’s employer;

(2) The employee does not return to

employment with the employer at the

end of the FMLA leave; and

(3) The employee (or the spouse or a

dependent child of the employee)

would, in the absence of COBRA

continuation coverage, lose coverage

under the group health plan before the

end of the maximum coverage period.

(b) However, the satisfaction of the

three conditions in paragraph (a) of this

Q&A–1 does not constitute a qualifying

event if the employer eliminates, on or

before the last day of the employee’s

FMLA leave, coverage under a group

health plan for the class of employees

(while continuing to employ that class

of employees) to which the employee

would have belonged if the employee

had not taken FMLA leave.

Q–2: If a qualifying event described in

Q&A–1 of this section occurs, when

does it occur, and how is the maximum

coverage period measured?

A–2: A qualifying event described in

Q&A–1 of this section occurs on the last

day of FMLA leave. (The determination

of when FMLA leave ends is not made

under the rules of this section. See the

FMLA regulations, 29 CFR Part 825

(§§ 825.100–825.800).) The maximum

coverage period (see Q&A–4 of

§ 54.4980B–7) is measured from the date

of the qualifying event (that is, the last

day of FMLA leave). If, however,

coverage under the group health plan is

lost at a later date and the plan provides

for the extension of the required periods

(see paragraph (b) of Q&A–4 of

§ 54.4980B–7), then the maximum

coverage period is measured from the

date when coverage is lost. The rules of

this Q&A–2 are illustrated by the

following examples:

Example 1. (i) Employee B is covered

under the group health plan of Employer X

on January 31, 2001. B takes FMLA leave

beginning February 1, 2001. B’s last day of

FMLA leave is 12 weeks later, on April 25,

2001, and B does not return to work with X

at the end of the FMLA leave. If B does not

elect COBRA continuation coverage, B will

not be covered under the group health plan

of X as of April 26, 2001.

(ii) B experiences a qualifying event on

April 25, 2001, and the maximum coverage

period is measured from that date. (This is

the case even if, for part or all of the FMLA

leave, B fails to pay the employee portion of

premiums for coverage under the group

health plan of X and is not covered under X’s

plan. See Q&A–3 of this section.)

Example 2. (i) Employee C and C’s spouse

are covered under the group health plan of

Employer Y on August 15, 2001. C takes

FMLA leave beginning August 16, 2001. C

informs Y less than 12 weeks later, on

September 28, 2001, that C will not be

returning to work. Under the FMLA

regulations, 29 CFR Part 825 (§§ 825.100–

825.800), C’s last day of FMLA leave is

September 28, 2001. C does not return to

work with Y at the end of the FMLA leave.

If C and C’s spouse do not elect COBRA

continuation coverage, they will not be

covered under the group health plan of Y as

of September 29, 2001.

(ii) C and C’s spouse experience a

qualifying event on September 28, 2001, and

the maximum coverage period (generally 18

months) is measured from that date. (This is

the case even if, for part or all of the FMLA

leave, C fails to pay the employee portion of

premiums for coverage under the group

health plan of Y and C or C’s spouse is not

covered under Y’s plan. See Q&A–3 of this

section.)

Q–3: If an employee fails to pay the

employee portion of premiums for

coverage under a group health plan

during FMLA leave or declines coverage

under a group health plan during FMLA

leave, does this affect the determination

of whether or when the employee has

experienced a qualifying event?

A–3: No. Any lapse of coverage under

a group health plan during FMLA leave

is irrelevant in determining whether a

set of circumstances constitutes a

qualifying event under Q&A–1 of this

section or when such a qualifying event

occurs under Q&A–2 of this section.

Q–4: Is the application of the rules in

Q&A–1 through Q&A–3 of this section

affected by a requirement of state or

local law to provide a period of coverage

longer than that required under FMLA?

A–4: No. Any state or local law that

requires coverage under a group health

plan to be maintained during a leave of

absence for a period longer than that

required under FMLA (for example, for

16 weeks of leave rather than for the 12

weeks required under FMLA) is

disregarded for purposes of determining

when a qualifying event occurs under

Q&A–1 through Q&A–3 of this section.

Q–5: May COBRA continuation

coverage be conditioned upon

reimbursement of the premiums paid by

the employer for coverage under a group

health plan during FMLA leave?

A–5: No. The U.S. Department of

Labor has published rules describing the

circumstances in which an employer

may recover premiums it pays to

maintain coverage, including family

coverage, under a group health plan

during FMLA leave from an employee

who fails to return from leave. See 29

CFR 825.213. Even if recovery of

premiums is permitted under 29 CFR

825.213, the right to COBRA

continuation coverage cannot be

conditioned upon the employee’s

reimbursement of the employer for

premiums the employer paid to

maintain coverage under a group health

plan during FMLA leave.

Approved: December 18, 2000.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 01–5 Filed 1–9–01; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Parts 95 and 177

[USCG–1998–4593]

RIN 2115–AF72

Revision to Federal Blood Alcohol

Concentration (BAC) Standard for

Recreational Vessel Operators

AGENCY: Coast Guard, DOT.

ACTION: Final rule.

SUMMARY: The Coast Guard is revising

the Federal Blood Alcohol

Concentration (BAC) standard under

which a recreational vessel operator