COBRA and MSP Obligations of Small Employers

Employers with fewer than 20 employees are  not subject to COBRA or to Medicare Secondary Payer (MSP) requirements.  This article explains these rules, the differences in how the 20-employee threshold applies for COBRA versus MSP, and how the COBRA and MSP rules apply when an employer grows from under 20 to more than 20 employees.

Assume that employer Small-but-Growing Co. had fewer than 20 employees last year but currently has more than 20 employees.  What are its COBRA and MSP obligations?

COBRA

General Rule

COBRA requires that employers with at least 20 employees offer continued group health plan coverage to enrollees who are “qualified beneficiaries” and have a “qualifying event” that causes a loss of coverage.

The COBRA small employer exception is that a group health plan is not subject to COBRA for any calendar year “if all employers maintaining such plan normally employed fewer than 20 employees on a typical business day during the preceding calendar year.”  This means the employer employed fewer than 20 employees on at least 50% of its business days in the prior calendar year.

What Employees must be Counted?

To determine whether the COBRA 20-employee threshold is met:

• Count all common-law employees under all related employers under common control.
• Count all employees, not just all employees covered under the group health plan.
• Count both full-time and part-time employees.  (See details below in “Fractional Rule for Counting Part-time Employees.”)
• Do NOT count workers who are not common-law employees For example, do not count self-employed individuals, independent contractors, and members of a corporate employer’s board of directors, unless these individuals are also common-law employees of the employer or of any member of the employer’s controlled group.

When does a Growing Employer become Subject to COBRA?

If a single employer had fewer than 20 employees in the prior calendar year, but in the current calendar year employs at least 20 employees on at least 50% of its business days, then the plan becomes subject to COBRA as of the following January 1.

If a single employer is subject to COBRA in the current calendar year (because it had 20 or more employees on at least 50% of its business days in the prior calendar year), but in the current calendar year it employs fewer than 20 employees on at least 50% of its business days, then the plan is not required to offer COBRA to individuals who have a “qualifying event” after the end of the current year.

This sounds fairly straightforward, but sometimes the application can be tricky.

• If a plan enrollee has a “triggering event” (such as termination of employment, reduction in hours, divorce, death of the employee, etc.) while the plan is subject to COBRA, that counts as a “qualifying event” and the individual is a “qualified beneficiary” and is entitled to COBRA.
• If a qualified beneficiary becomes entitled to COBRA, the individual’s COBRA continuation right continues even if the plan is not subject to COBRA in the following year.
• If a plan enrollee has a “triggering event” when the plan is not subject to COBRA, that does not count as a “qualifying event” and the individual is not entitled to COBRA. This applies even if the coverage is not actually lost until the plan becomes subject to COBRA.

Examples

• E.g.#1: if an enrollee is terminated December 15^th when the plan is not subject to COBRA but does not lose coverage until January 1, the day the plan becomes subject to COBRA:  the enrollee is NOT entitled to COBRA.
• E.g.#2: if an enrollee is terminated December 15^th when the plan is subject to COBRA but does not lose coverage until January 1, the day the plan is no longer subject to COBRA:  the enrollee IS entitled to COBRA.

Employees and dependents who are enrolled in the employer group health plan and who have a triggering event in 2015 and 2016 will not have a COBRA continuation right.  However, enrollees who have a triggering event in 2017 will have a COBRA continuation right, even though in 2017 the employer had fewer than 20 employees on at least half of its business days.

Fractional Rule for Counting Part-time Employees

To determine whether the small employer exception applies, the COBRA regulations create a special rule that requires employers to count a part-time employee as a fraction of an employee.  For example, if full-time employees work 40 hours/week, an employee who works 30 hours/week will be counted as ¾ of an employee, and an employee who works 20 hours/week will be counted as ½ an employee.

The special rule applies as follows:

• To calculate the part-time employee fraction, divide the number of hours a part-time employee works by the number of hours an employee must work in order to be considered “full-time.”
• The number of hours required for “full-time” must be determined in a manner consistent with the employer’s general employment practices, but it cannot be more than eight hours a day or 40 hours a week.
• An employer may count employees for each typical business day or may count employees for a pay period and then attribute that total number to each typical business day that falls within the pay period.
• Alternatively, an employer may count part-time employees on an aggregate basis (rather than individually) by dividing the total hours worked by part-time employees by the number of hours required for one worker to be considered “full-time.”
• An employer must use the same method for all employees and for the entire year for which the small employer plan determination is made.

Medicare Secondary Payer (MSP) Rules

Medicare Secondary Payer (MSP) Obligations of Small Employers

The MSP rules prohibit group health plans from offering different benefits or costs to eligible individuals based on their Medicare entitlement due to age.  Additionally, employers cannot offer incentives to get Medicare-eligible individuals to decline employer group health coverage and elect Medicare instead.  These MSP rules apply only to group health plans of employers with 20 or more employees for each working day in at least 20 weeks in either the current or the preceding calendar year. Thus, small employer group health plans (fewer than 20 employees) are not required to pay primary to Medicare.  If an employee of a small employer enrolls in Medicare — even just free Medicare Part A — the small group plan will not pay primary for expenses that Medicare will pay.

The MSP 20-employee test is different from the COBRA 20-employee test.  The COBRA test looks at the number of employees only in the prior calendar year, while the MSP test looks at the number of employees in either the current or prior calendar year.  Additionally, the MSP 20-employee test must be run at the time the individual receives the services for which Medicare benefits are claimed, which requires constant monitoring by employers whose workforce is slightly over or under the 20-employee threshold.  If an employer has more than 20 employees at the time one of its employees receives services for which Medicare benefits are claimed, the employer plan must pay primary to Medicare, even if fewer than 20 employees participate in the plan.

Some other benefits articles have warned that employees who turn 65 must enroll in Medicare because insurers who offer small group plans will pay secondary to the amount Medicare would have paid.  We have found this is not always the case, although a carrier probably could write a policy that would do this.  We advise that you read your policy and also check with your insurer . If the policy language does not specify, send your carrier representative an email and get the answer in writing.  We did this recently, and the carrier confirmed:

• If a member is Medicare eligible and does not enroll in Medicare we would be primary.
• If a member only has Medicare Part A and does not have part B, we would pay the Part B as primary.

Small employers who become part of a larger controlled group but keep their own separate health insurance policy should be aware of another potential issue:   The MSP rules apply on a controlled group basis, which means the 20-employee tests counts all employees of all employers under common control.  If an employee is enrolled in Medicare and the employer group health plan, the employer plan overall might be required to pay primary to Medicare, but the “under-20” group health insurance policy will not.  The employer could end up unintentionally “self-insuring” primary payment for Medicare-eligible or Medicare-enrolled employees.  This would be particularly problematic if the small group policy offset for amounts Medicare would have paid if the Medicare-eligible employee had enrolled (unlike the policy in the above example).    Why would a small employer continue its own separate policy after it becomes part of a larger controlled group?  One reason might be that the small employer is at a separate location or even in a different state.  Another reason might be that the newly-acquired small employer is keeping its separate policy for the remainder of the plan year and will then join the larger plan.

If you are acquiring an under-20 employer, or if you are an under-20 employer who is growing, do not overlook the MSP rule!