In the first significant changes to the federal Consolidated Omnibus Business Reconciliation Act ("COBRA") since its enactment in 1986, the Internal Revenue Service ("IRS") recently issued proposed and final regulations intended to address legislative changes and important court decisions affecting the Act. (COBRA requires employers and plan administrators to give qualified individuals the opportunity to purchase employer-provided health coverage at their own expense.).

A summary of the principal changes are as follows:

• Ability to Choose Same Coverage

  The final rules no longer allow a qualified individual to choose only "core coverage" (e.g., medical only) where that individual participated in a single plan offering medical and dental coverage when the individual was employed.

• Certain Flexible Spending Arrangements Exempt

  The IRS has proposed a rule exempting the following Flexible Spending Arrangements ("FSA") from COBRA: (1) the health FSA is exempt from HIPAA; and (2) the maximum amount the employee must contribute for the full year is equal to or more than the maximum benefit he/she can receive (e.g., no employer contributions to the FSA).

• Number of Plans Offered The number of group health plans an employer must offer under COBRA will be restricted by a proposed rule that will determine the number of plans offered based on the documents governing the coverage. In other words, if the employer offers two group plans, one for medical and one for dental, the qualified beneficiary must be offered the choice of electing COBRA for either medical plan, the dental plan, or both. Conversely, the employer or plan administrator would only be required to offer medical or dental if the programs currently are offered only in a single plan.

• Effect of Move Out of HMO Service Area

  The current rule allows the employer or plan administrator to offer other coverage only if the employer had employees at the location where the qualified beneficiary moved. The final new rule requires that where the qualified individual moves out of the area, coverage must be offered in one of the employer's other plans or options that covers the area in which the beneficiary relocates.

• Duration of Coverage

  To reflect a recent U.S. Supreme Court ruling, the new final rule requires that even individuals who have other coverage at the time of the COBRA election must be offered COBRA coverage. It appears that "other coverage" includes coverage through another employer's plan (including a governmental employer) and Medicare, but probably not Medicaid or CHAMPUS/Tricare.

• Increase in Premiums

  The final rule allows an employer to change the amount in premium contributions only in narrow circumstances, such as when a qualified beneficiary changes coverage options. It appears that mid-year premium changes are not allowed, even if the group health plan is changed for similarly situated active employees.

These rules identified by the IRS as "final" generally are effective for plan years beginning after 1999. Employers and plan administrators will be considered in good faith compliance if they follow the final and proposed rules until that time. In anticipation of these changes, employers and plan administrators are advised to review their plan documents, summary plan descriptions and COBRA notices and forms and accordingly revise these documents prior to the end of this year. Further information about the changes is available from Stuart Harris in the Portland office of Davis Wright Tremaine at (503) 241-2300.

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