Providers of Dental Coverage | GROUP DENTAL INSURANCE

Since the early 1970s, group dental insurance has been one of the fastest-growing employee benefits. It has been estimated that in the past 25 years, the percentage of employees who have dental coverage has grown from about 5 percent to more than 60 percent. More than 90 percent of firms with 500 or more employees make coverage available. Many employee benefit consultants feel that by the early part of the next century most employees, except for those who work for very small employers, will have dental coverage.

To a great extent, group dental insurance contracts have been patterned after group medical expense contracts, and they contain many similar, if not identical, provisions. Like group medical expense insurance, however, group dental insurance has many variations. Dental plans may be limited to specific types of expenses or they may be broad enough to cover virtually all dental expenses. In addition, coverage can be obtained from various types of providers, and benefits can be in the form of either services or cash payments.

The concept of managed care has had a significant role in the evolution of group dental insurance plans. However, this role has been somewhat different from that in medical expense plans. Group dental plans are more likely than medical expense plans to provide benefits on a traditional fee-for-service basis, but they are also more likely to take a managed care approach to providing those benefits. The most common example of the latter is the emphasis on providing a higher level of benefits for preventive care. As group dental plans have become more prevalent, the percentage of persons receiving preventive care has continued to increase; as a result, the percentage of persons needing care for more serious dental problems has continued to decrease.

One other difference between group medical expense plans and group dental plans is that providers of managed dental care arrangements have been more likely to offer coverage to very small groups.

Providers of Dental Coverage

Group dental benefits may be offered by insurance companies, dental service plans, the Blues, and managed care plans. Like medical expense coverage, a significant portion of dental coverage is also self-funded. An employer may either self-administer the plan or use the services of a third-party administrator. In either case, the plan may use a preferred-provider network to provide dental services.

Insurance Companies

Insurance companies are a major provider of dental coverage, often on an indemnity basis. Coverage is usually offered independently of other group insurance coverages, but it may be incorporated into a major medical contract. If it is part of a major medical contract, the coverage is often referred to as an integrated dental plan, and the benefits are frequently subject to the same provisions and limitations as benefits that are available under a separate dental plan.

Dental Service Plans

Most states have dental service plans, often called Delta Plans or Delta Dental Plans that along with the Blues write approximately one-quarter of dental coverage. However, the extent of their use varies widely by state, and western states generally have larger and more successful plans than states in other parts of the country. The majority of these plans are nonprofit organizations that are sponsored by state dental associations. In addition, they are patterned after Blue Shield plans, and dentists provide service benefits on a contractual basis. Also like Blue Shield, state Delta Plans are coordinated by a national board, Delta Dental Plans, Inc.

Blue Cross and Blue Shield

Many Blue Cross and Blue Shield plans also provide dental coverage. In some cases, the Blues have contractual arrangements that are similar to those that dental service plans have with dentists; in other cases, benefits are paid on an indemnity basis just as if an insurance company were involved. Finally, a few of the Blues market dental coverage through Delta Plans in conjunction with their own medical expense plans.

Managed Care Plans

A significant and growing amount of dental coverage is provided through managed care plans, often sponsored by insurance companies or the Blues. However, the majority of dental benefits are provided through traditional fee-for-service plans. Because dental expenses are more predictable than medical expenses, the emphasis on preventive care by managed care plans provides a real potential to hold down future costs.

Coverage can be obtained from dental health maintenance organizations (DHMOs), which operate like health maintenance organizations but provide dental care only. Like HMOs, DHMOs can take the form of closed-panel plans or individual practice associations. Estimates are that about one-quarter of employers offer a DHMO option to employees but usually as an alternative to a fee-for-service plan.

Coverage can also be obtained from PPOs, which have enjoyed rapid growth in recent years. Point-of-service plans have also become increasingly common for providing dental coverage.

Self-Funded Plans

For several years, it has been common for large employers to self-fund dental benefits, and recently the concept has spread to smaller employers. Under the technique, often called direct reimbursement, the employee visits the dentist, pays the bill, and then submits the bill to the employer or a third-party administrator for reimbursement. This process often generates significant savings for the employer, largely because of a significant savings in administrative costs. The claims process is relatively simple because most reimbursements are small in size, and large claims do not exist because of caps on benefit amounts. The number of claims is also fairly stable from year to year. One problem that often occurs in self-funding of benefits is the lack of control over utilization. However, this has been a minimal problem in dental treatment because employees seem to be reluctant to visit the dentist unless it is absolutely necessary.

FEDERAL TAXATION | Plan Provisions and Taxation

In many respects, the federal tax treatment of group medical (including group dental) expense premiums and benefits parallels that of other group coverage if they are provided through an insurance company, a Blue Cross—Blue Shield plan, an HMO, or a PPO. Contributions by the employer for an employee's coverage or the coverage of the employee's dependents are tax deductible to the employer, as long as the employee's overall compensation is reasonable. Employer contributions do not create any income tax liability for an employee. Moreover, benefits are not taxable to an employee except when they exceed any medical expenses incurred. The value of any employer-provided coverage for an employee's domestic partner, minus any employee contributions, represents taxable income to the employee unless the partner qualifies under IRS rules as the employee's dependent.

One major difference between group medical expense coverage and other forms of group insurance is that a portion of an employee's contribution for coverage may be tax deductible as a medical expense if that individual itemizes his or her income tax deductions. Under the Internal Revenue Code, individuals are allowed to deduct certain medical care expenses (including dental expenses) for which no reimbursement was received. This deduction is limited to expenses (including amounts paid for insurance) that exceed 7.5 percent of the person's adjusted gross income.

If a sole proprietorship or partnership pays the cost of medical expense coverage for a proprietor or partner (including dependent coverage), this amount constitutes taxable income to the proprietor or partner. However, the proprietor or partner may be entitled to an income tax deduction for a percentage of this amount. As a result of recent legislation, this deduction is 60 percent through 2001, 70 percent in 2002, and 100 percent thereafter. The deduction cannot exceed the individual's earned income from the proprietorship or partnership that provides the medical expense plan, and the deduction is available only if the proprietor or partner is not eligible to participate in any subsidized medical expense plan of another employer of the proprietor, the partner, or the proprietor's or partner's spouse. It is important to recognize that this is not an itemized deduction; rather, it is a deduction in arriving at adjusted gross income. The remainder of the cost of the medical expense coverage can be deducted as an itemized expense to the extent that it and other medical expenses exceed the 7.5 percent threshold previously described.

As of 1999, there is one circumstance under which a self-employed person, other than a more-than-2 percent owner-employee of an S corporation, can receive a 100 percent deduction for his or her medical expense coverage. This occurs only if the spouse is a bona fide employee of the self-employed person. The medical coverage is then provided to the spouse, who elects dependent coverage for the self-employed person. The self-employed person then pays the entire premium and takes a business deduction for the medical expense coverage provided to an employee. However, the IRS has indicated that such an arrangement will be challenged if the spouse's involvement in the business consists of nominal or insignificant services that have no economic substance or independent significance. Note that if there is a significant investment of the spouse's separate assets in the business, the spouse is employed in the business as a joint owner and treated as self-employed person rather than an employee for purposes of the medical expense insurance.

The tax situation may be different if an employer provides medical expense benefits through a self-funded plan (referred to in the Internal Revenue Code as a self-insured medical reimbursement plan), under which employers either (1) pay the providers of medical care directly or (2) reimburse employees for their medical expenses. If a self-funded plan meets certain nondiscrimination requirements for highly compensated employees, the employer can deduct benefit payments as they are made, and the employee has no taxable income. If a plan is discriminatory, the employer still receives an income tax deduction. However, all or a portion of the benefits received by "highly compensated individuals," but not by other employees, are treated as taxable income. A highly compensated individual is defined as (1) one of the five highest-paid officers of the firm, (2) a shareholder who owns more than 10 percent of the firm's stock, or (3) one of the highest-paid 25 percent of all the firm's employees. There are no nondiscrimination rules if a plan is not self-funded and provides benefits through an insurance contract, a Blue Cross—Blue Shield plan, an HMO, or a PPO.

To be considered nondiscriminatory, a self-funded plan must meet certain requirements regarding eligibility and benefits. The plan must provide benefits (1) for 70 percent or more of "all employees" or (2) for 80 percent or more of all eligible employees if 70 percent or more of all employees are eligible. The following can be excluded from the all-employees category without affecting the plan's nondiscriminatory status:

• Employees who have not completed three years of service.

• Employees who have not attained age 25.

• Part-time employees. Anyone who works fewer than 25 hours per week is automatically considered a part-time employee. Persons who work 25 or more but fewer than 35 hours per week, may also be counted as part-time, as long as other employees in similar work for the employer have substantially more hours.

• Seasonal employees. Anyone who works fewer than seven months of the year is automatically considered a seasonal employee. Persons who work between seven and nine months of the year may also be considered seasonal, as long as other employees have substantially more months of employment.

• Employees who are covered by a collective-bargaining agreement if accident-and-health benefits were a subject of collective bargaining.

Even if a plan fails to meet the percentage requirements regarding eligibility, it can still qualify as nondiscriminatory, as long as the IRS is satisfied that the plan benefits a classification of employees in a manner that does not discriminate in favor of highly compensated employees. This determination is made on a case-by-case basis.

To satisfy the nondiscrimination requirements for benefits, the same type and amount of benefits must be provided for all employees covered under the plan, regardless of their compensation. In addition, the dependents of other employees cannot be treated less favorably than the dependents of highly compensated employees. However, because diagnostic procedures are not considered part of a self-funded plan for purposes of the nondiscrimination rule, a higher level of this type of benefit is permissible for highly compensated employees.

If a plan is discriminatory in either benefits or eligibility, highly compensated employees must include the amount of any "excess reimbursement" in their gross income for income tax purposes. If highly compensated employees receive any benefits that are not available to all employees covered under the plan, these benefits are considered an excess reimbursement. For example, if a plan pays 80 percent of covered expenses for employees in general but 100 percent for highly compensated employees, the extra 20 percent of benefits constitutes taxable income.

If a self-funded plan discriminates in the way it determines eligibility, highly compensated employees have excess reimbursements for any amounts they receive. The amount of this excess reimbursement is determined by a percentage that is calculated by dividing the total amount of benefits highly compensated employees receive (exclusive of any other excess reimbursements) by the total amount of benefits paid to all employees (exclusive of any other excess reimbursements). Using the previous example, assume a highly compensated employee receives $2,000 in benefits during a certain year. If other employees receive only 80 percent of this amount (or $1,600), the highly compensated employee has received an excess reimbursement of $400. If the plan also discriminates in the area of eligibility, the highly compensated employee incurs additional excess reimbursement. For example, if 60 percent of the benefits (ignoring any benefits already considered excess reimbursement) are given to highly compensated employees, 60 percent of the remaining $1,600 ($2,000 - $400), or $960, is added to the $400, for a total excess reimbursement of $1,360.

If a plan provides benefits only for highly compensated employees, all benefits received are considered an excess reimbursement, because the percentage is 100 percent.

CLAIMS | Plan Provisions and Taxation

Medical expense contracts that provide benefits on a service basis (such as HMOs and the Blues) generally do not require that covered persons file claim forms. Rather, the providers of services perform any necessary paperwork and are then reimbursed directly.

Medical expense contracts that provide benefits on an indemnity basis typically require that the insurance company (or other provider) be given a written proof of loss (that is, a claim form) concerning the occurrence, character, and extent of the loss for which a claim is made. This form usually contains portions that must be completed and signed by the employee, a representative of the employer, and the provider of medical services.

The period during which an employee must file a claim depends on the provider of coverage and any applicable state requirements. An employee generally has at least 90 days (or as soon as is reasonably possible) after medical expenses are incurred to file. Some insurance companies require that they be notified within a shorter time (such as 20 days) about any illness or injury on which a claim may be based, even though they give a longer time period for the actual filing of the form itself.

Individuals have the right under medical expense plans to assign their benefits to the providers of medical services. Such an assignment, which authorizes the insurance company to make the benefit payment directly to the provider, may generally be made by completing the appropriate portion of the claim form. In addition, the insurance company has the right (as it does in disability income insurance) to examine any person for whom a claim is filed at its own expense and with the physician of its own choice.

Most self-funded plans contain subrogation provisions. If state law allows, they are also commonly contained in the group medical expense contracts of HMOs, PPOs, the Blues, and insurance companies. A subrogation provision gives the plan (or the organization that provides plan benefits) the right to recover from a third party who is responsible through negligence or other wrongdoing for a covered person's injuries that result in claims being paid. If a covered person receives a settlement from the third party (or their liability insurance company) for medical expenses that the plan has already paid, the covered person must reimburse the plan. The plan also has the right to seek a recovery for benefits paid if legal action is not taken by the person who receives benefits.

Group-to-Individual Portability | Plan Provisions and Taxation

HIPAA makes it easier for individuals who lose group medical expense coverage to find alternative coverage in the individual marketplace. The purpose of the federal legislation seems to be to encourage states to adopt their own mechanisms to achieve this goal. The federal rules apply in a state only if the state fails to have its own plan in effect.

Most states have adopted their own plans so that the federal rules have not become effective. The state alternative must do all the following:

• Provide a choice of health insurance coverage to all eligible individuals

• Not impose any preexisting-conditions restrictions

• Include at least one policy form of coverage that is either comparable to comprehensive health coverage offered in the individual marketplace or comparable to or a standard option of coverage available under the group or individual laws of the state

In addition, the state must implement one of the following:

• One of the NAIC model laws on individual market reform

• A qualified high-risk pool

• Certain other mechanisms specified in the act

If a state fails to adopt an alternative to federal regulation, then insurance companies, HMOs, and other health plan providers in the individual marketplace are required to make coverage available on a guaranteed-issue basis to individuals with 18 or more months of creditable coverage and whose most recent coverage was under a group health plan. Coverage does not have to be provided to an individual who has other health insurance or who is eligible for COBRA coverage, Medicare, or Medicaid. No preexisting-conditions exclusions can be imposed. Health insurers have three options for providing coverage to eligible individuals:

1. They may offer every health insurance policy they offer in the state.

2. They may offer their two most popular policies in the state, based on premium volume.

3. They may offer a low-level and a high-level coverage as long as they contain benefits that are similar to other coverage offered by the insurer in the state.

Conversion | Plan Provisions and Taxation

Except when termination results from the failure to pay any required premiums, medical expense contracts usually contain (and are often required to contain) a conversion provision, whereby most covered persons whose group coverage terminates are allowed to purchase individual medical expense coverage without evidence of insurability and without any limitation of benefits for preexisting conditions. Covered persons commonly have 31 days from the date of termination of the group coverage to exercise this conversion privilege, and coverage is then effective retroactively to the date of termination.

This conversion privilege is typically given to any employee who has been insured under the group contract (or under any group contract it replaced) for at least three months, and it permits the employee to convert his or her own coverage as well as any dependent coverage. In addition, a spouse or child whose dependent coverage ceases for any other reason may also be eligible for conversion (for example, a spouse who divorces or separates, and children who reach age 19).

A person who is eligible for both the conversion privilege and the right to continue the group insurance coverage under COBRA has two choices when eligibility for coverage terminates. He or she can either elect to convert under the provisions of the policy or elect to continue the group coverage. If the latter choice is made, the COBRA rules specify that the person must again be eligible to convert to an individual policy within the usual conversion period (31 days) after the maximum continuation-of-coverage period ceases. Policy provisions may also make the conversion privilege available to persons whose coverage terminates prior to the end of the maximum continuation period.

The provider of the medical expense coverage has the right to refuse the issue of a "conversion" policy to anyone (1) who is covered by Medicare or (2) whose benefits under the converted policy, together with similar benefits from other sources, would result in overinsurance according to the insurance company's standards. These similar benefits may be found in other coverages that the individual has (either group or individual coverage) or for which the individual is eligible under any group arrangement.

The use of the word conversion is often a misnomer. In actuality, a person whose coverage terminates is given only the right to purchase a contract on an individual basis at individual rates. Most Blue Cross—Blue Shield plans and some HMO plans offer a conversion policy that is similar or identical to the terminated group coverage. However, most insurance companies offer a conversion policy (or a choice of policies) that contains a lower level of benefits than existed under the group coverage. Traditionally, the conversion policy contained only basic hospital and surgical coverages, even if major medical coverage was provided under the group contract. Now many insurance companies provide (and are required to provide in many states) a conversion policy that includes major medical benefits, which do not necessarily have to be as broad as those under the former group coverage.

Some plans offer a conversion policy that is written by another entity. For example, an HMO might enter into a contractual arrangement with an insurance company. In some cases, the HMO and insurance company are commonly owned or have a parent-subsidiary relationship.

Self-funded plans, which are exempt from state laws that mandate a conversion policy, may still provide such a benefit. Rather than providing coverage directly to the terminated employee, an agreement is usually made with an insurance company to make a policy available. This agreement is typically part of a broader contract with the insurer to also provide administrative services and/or stop-loss protection. Because the availability of a conversion policy results in a charge (such as $.65 per employee per month), most self-funded plans do not provide any continuation of coverage beyond what is required by COBRA.

Continuation of Coverage in Addition to COBRA | Plan Provisions and Taxation

Even before the passage of COBRA, it was becoming increasingly common for employers (particularly large employers) to continue group insurance coverage for certain employees—and sometimes their dependents—beyond the usual termination dates. Obviously, when coverage is continued now, an employer must at least comply with COBRA. However, an employer can be more liberal than COBRA by paying all or a portion of the cost, providing continued coverage for additional categories of persons, or continuing coverage for a longer period of time. Some states have continuation laws for insured medical expense plans that might require coverage to be made available in situations not covered by COBRA. One example is coverage for employees of firms with fewer than 20 employees; another is coverage for periods longer than those required by COBRA.

Retired Employees

Even though not required to do so by the Age Discrimination in Employment Act, many employers continue coverage on retired employees. Although coverage can also be continued for retirees' dependents, it is often limited only to spouses. Retired employees under age 65 usually have the same coverage as the active employees have. However, coverage for employees aged 65 or older (if included under the same plan) may be provided under a Medicare carve-out or a Medicare supplement. The lifetime maximum for persons eligible for Medicare is often much lower (such as $5,000 or $10,000) than for active employees.

The subject of retiree benefits has become a major concern to employers since the Financial Accounting Standards Board (FASB) phased in new rules between 1993 and 1997 for the accounting of postretirement benefits other than pensions. These rules require that employers do the following:

• Recognize the present value of future retiree medical expense benefits on the firm's balance sheet with other liabilities.

• Record the cost for postretirement medical benefits in the period when an employee performs services. This is comparable to the accounting for pension costs.

• Amortize the present value of the future cost of benefits accrued prior to the new rules.

These rules are in contrast to the long-used previous practice of paying retiree medical benefits or premiums out of current revenue and recognizing these costs as expenses when paid. Although the rules are logical from a financial accounting standpoint, the effect on employers has been significant. Employers who have elected to immediately recognize the liability have had to show reduced earnings and net worth. Firms that have elected to amortize the liability (often because immediate recognition would wipe out net worth) will be affected for years to come.

The FASB rules have resulted in two major changes by employers. First, many employers have lowered or eliminated retiree benefits or are considering such a change. However, there are legal uncertainties as to whether benefits that have been promised to retirees can be eliminated or reduced. Many employers also feel that there is a moral obligation to continue these benefits. As a result, most employers are not altering plans for current retirees or active employees who are eligible to retire. Instead, the changes apply to future retirees only. These changes, which seem to be running the gamut, include the following:

• The elimination of benefits for future retirees.

• The shifting of more of the cost burden to future retirees by reducing benefits. Such a reduction may be accomplished by providing lower benefit maximums, covering fewer types of expenses, or increasing copayments.

• Adding or increasing retiree sharing of premium costs after retirement.

• Shifting to a defined-contribution approach to funding retiree benefits. For example, an employer might agree to pay $5 per month toward the cost of coverage after retirement for each year of service by an employee. Thus, an employer would make a monthly contribution of $150 for an employee who retired with 30 years of service, but the employer would make a contribution of only $75 for an employee with 15 years of service. Many plans of this nature have been designed so that the employer's contribution increases with changes in the consumer price index, subject to maximum increases (such as 5 percent per year).

• Encouraging retirees to elect benefits from managed care plans. With this approach, retirees are required to pay a significant portion of the cost if coverage is continued through a traditional indemnity plan.

A second change is that employers have increasingly explored methods to prefund the benefits. However, there are no alternatives for prefunding that are as favorable as the alternatives for funding pension benefits. One alternative is the use of a 501(c)(9) trust (or VEBA). There are limitations on the deductible of contributions to a 501(c)(9) trust. Furthermore, a 501(c)(9) trust can be used to fund retiree benefits only if it is currently being used to fund benefits for active employees.

Another alternative is to prefund medical benefits within a pension plan. Contributions are tax deductible, and earnings accumulate tax free. The IRS rules for qualified retirement plans permit the payment of benefits for medical expenses from a pension plan if certain requirements are satisfied:

• The medical benefits must be subordinate to the retirement benefits. This rule is met if the cost of the medical benefits provided does not exceed 25 percent of the employer's aggregate contribution to the pension plan. For many employers, this figure is too low to allow the entire future liability to be prefunded.

• A separate account must be established and maintained for the monies allocated to medical benefits. This account can be an aggregate account for nonkey employees, but individual separate accounts must be maintained for key employees, and medical benefits attributable to a key employee (and his or her family members) can be made only from the key employee's account.

• The employer's contributions for medical benefits must be ascertainable and reasonable.

Although the rules for funding retiree medical benefits in a pension plan are restricted and administratively complex, they offer an employer the opportunity to deduct at least a portion of the cost of prefunded benefits.

Surviving Dependents

Coverage can be continued for the survivors of deceased active employees and/or deceased retired employees. However, coverage for the survivors of active employees is not commonly continued beyond the period required by COBRA, and coverage for the survivors of retired employees may be limited to surviving spouses. In both instances, the continued coverage is usually identical to what was provided prior to the employee's death. It is also common for the employer to continue the same premium contribution level.

Laid-off Employees

Medical expense coverage can be continued for laid-off workers, and large employers frequently provide such coverage for a limited period. Few employers provide coverage beyond the period required by COBRA, but some employers continue to make the same premium contribution, at least for a limited period of time.

Disabled Employees

Medical expense coverage can be continued for an employee (and dependents) when he or she has a temporary interruption of employment, including one arising from illness or injury. Many employers also cover employees who have long-term disabilities or who have retired because of a disability. In most cases, this continuation of coverage is contingent on satisfaction of some definition of total (and possibly permanent) disability. When continuing coverage for disabled employees, an employer must determine the extent of employer contributions. For example, the employer may continue the same premium contribution as for active employees, although there is nothing to prevent a different contribution rate—either lower or higher.

Continuation of Coverage under COBRA | Plan Provisions and Taxation

The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, requires that group health plans allow employees and certain beneficiaries to elect to have their current health insurance coverage extended at group rates for up to 36 months following a "qualifying event" that results in the loss of coverage for a "qualified beneficiary." The term group health plan as used in the act is broad enough to include medical expense plans, dental plans, vision care plans, and prescription drug plans, regardless of whether benefits are self-insured or provided through other entities, such as insurance companies, HMOs, or PPOs. COBRA applies even if the cost of a plan is paid solely by employees, as long as the plan would not be available at the same cost to an employee if he or she were not employed. There is one exception to this rule: Voluntary benefit plans under which the employer's only involvement is to process payroll deductions are not subject to COBRA.

Church and government plans are exempt from COBRA, but the act applies to all other employers who had the equivalent of 20 or more full-time employees on a typical business day during the preceding calendar year. For example, an employer who had 10 full-time and 16 half-time employees had the equivalent of 18 full-time employees and is not subject to COBRA. Failure to comply with the act results in an excise tax of up to $100 per day for each person denied coverage. The tax can be levied on the employer as well as on the entity (such as an insurer or HMO) that provides or administers the benefits.

Since the passage of COBRA, a qualified beneficiary has been defined as any employee, or the spouse or dependent child of the employee, who on the day before a qualifying event was covered under the employee's group health plan. HIPAA expanded the definition to include any child who is born to or placed for adoption with the employee during the period of COBRA coverage. This change gives automatic eligibility for COBRA coverage to the child as well as the right to have his or her own election rights if a second qualifying event occurs.

Under the act, each of the following is a qualifying event if it results in the loss of coverage by a qualified beneficiary or an increase in the amount the qualified beneficiary must pay for the coverage:

The death of the covered employee

The termination of the employee for any reason except gross misconduct (This includes quitting, retiring, or being fired for anything other than gross misconduct)

A reduction of the employee's hours so that the employee or dependent is ineligible for coverage

The divorce or legal separation of the covered employee and his or her spouse

For spouses and children, the employee's eligibility for Medicare

A child's ceasing to be an eligible dependent under the plan

The act specifies that a qualified beneficiary is entitled to elect continued coverage without providing evidence of insurability. The beneficiary must be allowed to continue coverage identical to that available to employees and dependents to whom a qualifying event has not occurred.

Coverage for persons electing continuation can be changed when changes are made to the plan covering active employees and their dependents. The continued coverage must extend from the date of the qualifying event to the earliest of the following:

18 months for employees and dependents when the employee's employment has terminated or coverage has been terminated because of a reduction in hours. This period is extended to 29 months for a qualified beneficiary if the Social Security Administration determines that the beneficiary was or became totally disabled at any time during the first 60 days of COBRA coverage.

36 months for other qualifying events.

The date the plan terminates for all employees.

The date the coverage ceases because of a qualified beneficiary's failure to make a timely payment of premium.

The date a qualified beneficiary subsequently becomes entitled to Medicare or becomes covered (as either an employee or dependent) under another group health plan, provided the group health plan does not contain an exclusion or limitation with respect to any preexisting condition. If the new plan does not cover a preexisting condition, the COBRA coverage can be continued until the earlier of (1) the remainder of the 18- or 36-month period or (2) the time when the preexisting-conditions provision no longer applies. Note that COBRA coverage is not affected by entitlement to benefits under Medicare or coverage under another group plan if this entitlement or coverage existed at the time of the qualifying event.

If a second qualifying event (such as the death or divorce of a terminated employee) occurs during the period of continued coverage, the maximum period of continuation is 36 months. For example, if an employee terminates employment, the employee and family are eligible for 18 months of COBRA coverage. If the employee dies after 15 months, a second qualifying event has occurred for the employee's spouse and dependent children. The normal period of COBRA continuation resulting from the death of an employee is 36 months. However, because the spouse and children have already had COBRA coverage for 15 months, the second qualifying event extends coverage for an additional 21 months.

At the termination of continued coverage, a qualified beneficiary must be offered the right to convert to an individual insurance policy if a conversion privilege is generally available to employees under the employer's plan.

Notification of the right to continue coverage must be made at two times by a plan's administrator. First, when a plan becomes subject to COBRA or when a person becomes covered under a plan subject to COBRA, notification must be given to an employee as well as to his or her spouse. Second, when a qualifying event occurs, the employer must notify the plan administrator, who then must notify all qualified beneficiaries within 14 days. In general, the employer has 30 days to notify the plan administrator. However, an employer may not know of a qualifying event if it involves divorce, legal separation, or a child's ceasing to be eligible for coverage. In these circumstances, the employee or family member must notify the employer within 60 days of the event, or the right to elect COBRA coverage is lost. The time period for the employer to notify the plan administrator begins when the employer is informed of the qualifying event, as long as this occurs within the 60-day period.

The continuation of coverage is not automatic; it must be elected by a qualified beneficiary. The election period starts on the date of the qualifying event and may end not earlier than 60 days after actual notice of the event to the qualified beneficiary by the plan administrator. Once coverage is elected, the beneficiary has 45 days to pay the premium for the period of coverage prior to the election.

Under COBRA, the cost of the continued coverage may be passed on to the qualified beneficiary, but the cost cannot exceed 102 percent of the cost to the plan for the period of coverage for a similarly situated active employee to whom a qualifying event has not occurred. The extra 2 percent is supposed to cover the employer's extra administrative costs. The one exception to this rule occurs for months 19 through 29 if an employee is disabled, in which case the premium can then be as high as 150 percent. Qualified beneficiaries must have the option of paying the premium in monthly installments. In addition, there must be a grace period of at least 30 days for each installment.

COBRA has resulted in significant extra costs for employers. Surveys indicate that coverage is elected by approximately 20 percent of those persons who are entitled to a COBRA continuation. The length of coverage averages almost one year for persons eligible for an 18-month extension and almost two years for persons eligible for a 36-month extension. While significant variations exist among employers, claim costs of persons with COBRA coverage generally run between 150 percent and 200 percent of claim costs for active employees and dependents. Moreover, administrative costs are estimated to be about $20 per month for each person with COBRA coverage.