Coverage Termination
Summary
When an employee is terminated from employment, generally, eligibility for employer-sponsored health coverage is lost and health insurance coverage is terminated at that time. However, coverage can terminate for other reasons, such as a reduction in hours and subsequent loss in eligibility for benefits, or because the individual was enrolled in coverage mistakenly to begin with. Further, in cases where an employee is on FMLA, there are situations when, due to nonpayment of premiums, coverage may be terminated.
This discussion outlines four notices an employer (and its insurer) must be familiar with in the event an employee or former employee loses coverage - or is at risk for losing coverage - under the employer-sponsored group health plans.
COBRA Election Notice
An employee and certain covered dependents who experience a qualifying event and a subsequent termination of coverage under the plan should receive a COBRA Election Notice, which explains their right to continue that coverage through COBRA.
A qualifying event can include:
- Termination of employment
- Reduction of hours that results in a loss of eligibility (such as leave of absence or reduction from full-time
to part-time)
- Divorce or legal separation (where permitted under state law)
- A dependent child aging out of the plan
- Employee's death
- Entitlement to Medicare
- Employer's bankruptcy
The notice should include the coverage termination date, information on how to continue coverage and payment information.
More information, including the deadlines associated with the requirement and penalties for noncompliance, is available on the page dedicated to the COBRA Election Notice.
HIPAA Certificate of Creditable Coverage
Under HIPAA, all individuals who lose coverage under an employer-provided health plan or who would have lost coverage but for COBRA election-to-continue coverage, must be provided with a HIPAA Certificate of Creditable Coverage (CCC). The requirement applies when normal coverage terminates under the plan (regardless of whether the individual is COBRA-eligible), and again when any COBRA coverage terminates. In addition, a CCC must be issued as soon as reasonably possible if an individual requests it within 24 months after the date coverage ceases.
Recognizing that the rules for providing HIPAA-required CCCs have been superseded by the prohibition on pre-existing condition exclusions under the Patient Protection and Affordable Care Act (PPACA) for plan years beginning on or after Jan. 1, 2014, there is a proposal to eliminate the requirement to provide CCCs, effective Dec. 31, 2014. The proposed effective date recognizes that participants may still need these certificates during 2014 to avoid PCEs under non-calendar-year plans.
More information, including the deadlines associated with the requirement and penalties for noncompliance, is available on the page dedicated to the HIPAA CCC.
Rescission of Coverage
A rescission is a retroactive termination of coverage. Under PPACA, a group health plan is prohibited from rescinding coverage except in three circumstances. Effective for plan years that began on or after Sept. 23, 2010, coverage can only be terminated:
- Where the individual fails to pay premiums
- Where the individual engaged in fraud
- Where the individual made an intentional misrepresentation of material fact
If coverage is to be rescinded, the affected individual must be given at least 30 days advanced written notice that his or her coverage is being terminated retroactively.
More information, including best practices for the notice, employer action required and penalties for noncompliance, is available on the page dedicated to the rescission of coverage.
Notice of Nonpayment of Premiums (Applies in the case of FMLA only)
If an employee fails to pay premiums while on FMLA leave, in the absence of an established employer policy providing a longer grace period, an employer's obligation to maintain the health insurance coverage of an employee on FMLA leave ends if the employee's payment of his or her share of the premium is more than 30 days late. To drop coverage on this basis, the employer must have provided written notice to the employee that payment was not received. The notice must be mailed to the employee at least 15 days before coverage is to cease. It also must advise the employee that coverage will be dropped on a specified date at least 15 days after the date of the letter unless the payment has been received by that specified date.
More information, including best practices for the notice, employer action required and penalties for noncompliance, is available on the page dedicated to the Notice of Nonpayment of Premiums. Information about FMLA can also be reviewed on this page.
Recent Developments
The Rescission of Coverage Notice requirement, a requirement under health care reform, has only been in place since March 23, 2010. The COBRA Election Notice, HIPAA CCC, and Notice of Nonpayment of Premiums under FMLA are existing requirements that all employers offering medical plans should already be familiar with.
Employer Action Required
An employer should review its procedures to follow in the event coverage is terminated for an employee or former employee to ensure these notices are provided when it is relevant to do so. All notices are not required in every situation, so employers must be knowledgeable with respect to when the notices might apply.
If the plan is fully insured, the carrier is responsible for creating and sending the HIPAA CCC. In some cases, an insurer may also provide a Rescission of Coverage Notice. The employer may still have some responsibility and should discuss the procedures to follow with the insurer for these two notices. If the plan is self-insured, the employer sponsoring the plan is responsible for creating and distributing both the HIPAA CCC and Rescission of Coverage Notice.
Employers are generally responsible for distributing the COBRA Election Notice and the FMLA Notice of Nonpayment of Premiums, although it is common to outsource this practice to a third party. Employers still have ultimate responsibility for ensuring the notice is properly distributed.
Penalties for Noncompliance
Penalties for noncompliance vary depending on the required notice. For more information on specific penalties, visit the page dedicated to that notice.
Frequently Asked Questions
Q1. If the employer inadvertently enrolled an employee in coverage and withheld premiums for coverage, must the employer provide the Rescission of Coverage Notice to the employee when terminating coverage retroactively?
A: The Rescission of Coverage Notice would not be relevant in this situation, because employers are not permitted to retroactively terminate coverage due to employer error. Retroactive termination is only permitted in the event of fraud or intentional misrepresentation of material fact. Employer error is neither, and so the employer must instead prospectively cancel coverage, and the Rescission of Coverage Notice would not be applicable.
Q2. Which notices have model notices available from the government?
A: The Department of Labor (DOL) made a model notice available for the COBRA Election Notice and the HIPAA CCC. However, model notices are not available for the Rescission of Coverage Notice or the FMLA Nonpayment of Premiums Notice. Employers who need such notices should contact their insurers, benefits counsel or third-party administrators for assistance.
Additional Resources
Citations
- Pub. L. No. 99-272 (April 7, 1986)
- Code §414(d)
- Code §4980B(d)
- Prop. Treas. Reg. § 54.9801-5
- ERISA 701(e)
- IRC 9801(e)
- 42 USC 300gg-2(b)
- 26 CFR 54.9815-2712T(a)(1)
- 26 CFR 54.9815-2712T(a)(3), Example 2
- 26 USC 4980D
- ERISA 502(A)
- The FMLA Statute: 29 U.S.C. 2601, et seq.
- The FMLA Regulations: 29 CFR Part 825
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