• Internal Revenue Service Issues Guidance on Medicare Entitlement as Second Qualifying Event Under COBRA
  • March 22, 2004
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • Among the more difficult of the COBRA rules to understand, based upon questions that we receive from clients, are those resulting from the interplay of COBRA and Medicare. In general, an employee's own entitlement to Medicare is not itself a qualifying event with respect to the employee. However, if an employee's Medicare entitlement occurs prior to the date of his or her COBRA election, the individual is not precluded from being a qualified beneficiary with respect to the loss of coverage resulting from his or her subsequent termination or reduction in hours of employment.

    With respect to an employee's eligible spouse and dependent children, an employee's Medicare entitlement entitles the qualified beneficiary to 36 months of coverage only when it causes a qualified beneficiary to lose coverage under a group health plan. As a practical matter, because of the Medicare Secondary Payer ("MSP") provision of the Social Security Act, it would be unusual for an active employee's Medicare entitlement to trigger COBRA rights for his or her family members, because it is highly unlikely that the employee's family members will suffer a loss of group coverage at that time. Further, there is a special rule in the COBRA regulations that addresses the employee's becoming entitled to Medicare before termination of employment, followed by a termination of employment. In this situation, COBRA coverage is provided for up to 36 months for the employee's covered dependents who are qualifying beneficiaries, measured from the date of the employee's Medicare entitlement, regardless of whether it resulted in a loss of coverage for those dependents.

    In Revenue Ruling 2004-22, the IRS considered the reverse case -- the employee terminated employment entitling the employee and his or her qualified beneficiaries to 18 months of continuation coverage, and within that 18 month period, the employee became entitled to Medicare. In a surprising result, the IRS concluded that the Medicare entitlement of a covered employee is not a second qualifying event for a qualified beneficiary unless the Medicare entitlement would have resulted (if COBRA continuation coverage, including COBRA continuation coverage due to the first qualifying event, is disregarded) in a loss of coverage for the qualified beneficiary under the group heath plan.

    Huh? Well, according to the IRS, for a spouse or dependent child of a covered employee to be entitled to the expanded maximum coverage period, i.e., 36 months of continuation coverage when a second qualifying event occurs, three conditions must be satisfied:

    • the spouse or dependent child must be a qualified beneficiary in connection with a termination (or reduction of hours) of employment

    • the spouse or dependent child must still be a qualified beneficiary at the time that the 36 month event occurs; and

    • the 36 month event must be a qualifying event.

    It was this third factor that provided the twist in this ruling. According to the IRS, the inquiry in determining whether a 36 month event is a qualifying event is whether, in the absence of the first qualifying event, the 36 month event would have resulted in a loss of coverage. In other words, the terms of the plan are applied to the individual as if he or she had not terminated employment to determine if the event would result in a loss of coverage. In the facts of the Revenue Ruling, if the terms of the plan were applied to the employee's spouse as if the spouse were receiving coverage under the plan in the absence of a termination of employment, then, consistent with the employee becoming entitled to Medicare without having terminated employment there would not have been a loss of coverage to the employee's spouse.

    This result is counterintuitive, and in our view does not reflect the understanding of many practitioners. Nonetheless, it is a favorable result which employers are free to embrace, although since COBRA represents a statutory minimum, an employer could, if it so wished, treat the former employee's Medicare entitlement as a second qualifying event for qualified beneficiaries.