Continuation Coverage Requirements Applicable to
Group Health Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 54 [REG-121865-98] RIN 1545-
AW94

TITLE: Continuation Coverage Requirements Applicable to Group Health
Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations that provide
guidance under section 4980B of the Internal Revenue Code relating
to the COBRA continuation coverage requirements applicable to group
health plans. The proposed regulations in this document supplement
final regulations being published elsewhere in this issue of the
Federal Register. The regulations will generally affect sponsors of
and participants in group health plans, and they provide plan
sponsors and plan administrators with guidance necessary to comply
with the law.

DATES: Written or electronic comments and outlines of topics to be
discussed at the public hearing scheduled for June 8, 1999 at 10
a.m. must be received by May 14, 1999.

ADDRESSES: Send Submissions to: CC:DOM:CORP:R (REG-121865-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG- The COBRA
continuation coverage requirements were initially set forth in
section 1 162(k), but were moved to section 4980B by the Technical
and Miscellaneous Revenue Act of 1988 (TAMRA). TAMRA changed the
sanction for failure to comply with the continuation coverage
requirements of the Internal Revenue Code from disallowance of
certain employer deductions under section 162 (and denial of the
income exclusion under section 106(a) to certain highly compensated
employees of the employer) to an excise tax under section 4980B.

121865-98), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers
may submit comments electronically via the Internet by selecting the
"Tax Regs" option on the IRS Home Page, or by submitting comments
directly to the IRS Internet site at .

The public hearing scheduled for June 8, 1999 will be held in room
2615 of the Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Yurlinda Mathis at 202-622-4695; concerning submissions of comments,
the hearing, or to be placed on the building access list to attend
the hearing, LaNita Van Dyke at 202-622-7190 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

Background

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
amended the Internal Revenue Code (Code) to add health care
continuation coverage requirements. These provisions, now set forth
in section 4980B, generally apply to a group health plan maintained
by 1 an employer or employee organization, with certain exceptions,
and require such a plan to offer each qualified beneficiary who
would otherwise lose coverage as a result of a qualifying event an
opportunity to elect, within the applicable election period, COBRA
continuation coverage. The Changes affecting the COBRA continuation
coverage provisions were made under the Omnibus Budget
Reconciliation Act of 1986, the Tax Reform Act of 1986, the
Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget
Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of
1990, the Small Business Job Protection Act of 1996, and the Health
Insurance Portability and Accountability Act of 1996. The statutory
continuation coverage requirements have also been affected by an
amendment made to the definition of group health plan in section
5000(b)(1) by the Omnibus Budget Reconciliation Act of 1993; that
definition is incorporated by reference in section 4980B(g)(2).

COBRA continuation coverage requirements were amended on various
occasions, most recently 2 under the Health Insurance Portability
and Accountability Act of 1996 (HIPAA).

Proposed regulations providing guidance under the continuation
coverage requirements as originally enacted by COBRA, and as amended
by the Tax Reform Act of 1986, were published as proposed Treasury
Regulation �1.162-26 in the Federal Register of June 15, 1987 (52 FR
22716). Supplemental proposed regulations were published as proposed
Treasury Regulation �54.4980B-1 in the Federal Register of January
7, 1998 (63 FR 708). Final regulations are being published elsewhere
in this issue of the Federal Register.

The new set of proposed regulations being published in this notice
of proposed rulemaking addresses how the COBRA continuation coverage
requirements apply in business reorganizations. Also proposed are
rules relating to the interaction of the COBRA continuation coverage
requirements and the Family and Medical Leave Act of 1993, which
were previously published as Notice 94-103 (1994-2 C.B. 569), and
certain other issues. These provisions in the new set of proposed
regulations are summarized in the explanation below. For a summary
of the new proposed regulations integrated with a summary of the
final regulations, see the "Explanation of Provisions" section of
the preamble to the final regulations published elsewhere in this
issue of the Federal Register.

Explanation of Provisions Plans That Must Comply

The new proposed regulations would make a number of changes to the
section in the final regulations that addresses which plans must
comply with the COBRA continuation coverage requirements. The
principal changes being proposed are to add rules simplifying the
determination of whether the small-employer plan exception applies,
giving employers and employee organizations broad discretion to
determine the number of group health plans that they maintain, and
providing an exception for certain health flexible spending
accounts.

In determining whether a plan is eligible for the small-employer
plan exception, part-time employees, as well as full-time employees,
must be taken into account. Several commenters on the 1987 proposed
regulations requested clarification of how to count part-time
employees for the small-employer plan exception, and the new
proposed regulations provide guidance on this issue.

Under the new proposed regulations, instead of each part-time
employee counting as a full employee, each part-time employee counts
as a fraction of an employee, with the fraction equal to the number
of hours that the part-time employee works for the employer divided
by the number of hours that an employee must work in order to be
considered a full-time employee. The number of hours that must be
worked to be considered a full-time employee is determined in a
manner consistent with the employer's general employment practices,
although for this purpose not more than eight hours a day or 40
hours a week may be used. An employer may count employees for each
typical business day or may count employees for a pay period and
attribute the total number of employees for that pay period to each
typical business day that falls within the pay period. The employer
must use the same method for all employees and for the entire year
for which the small-employer plan determination is made.

The new proposed regulations provide guidance, for purposes of the
COBRA continuation coverage requirements, on how to determine the
number of group health plans that an employer or employee
organization maintains. Under these rules, the employer or employee
organization is generally permitted to establish the separate
identity and number of group health plans under which it provides
health care benefits to employees. Thus, if an employer or employee
organization provides a variety of health care benefits to
employees, it generally may aggregate the benefits into a single
group health plan or disaggregate benefits into separate group
health plans. The status of health care benefits as part of a single
group health plan or as separate plans is determined by reference to
the instruments governing those arrangements. If it is not clear
from the instruments governing an arrangement or arrangements to
provide health care benefits whether the benefits are provided under
one plan or more than one plan, or if there are no instruments
governing the arrangement or arrangements, all such health care
benefits (other than those for qualified long-term care services)
provided by a single entity (determined without regard to the
controlled group rules) constitute a single group health plan.

Under the new proposed regulations, a multiemployer plan and a plan
other than a multiemployer plan are always separate plans. In
addition, any treatment of health care benefits as constituting
separate group health plans will be disregarded if a principal
purpose of the treatment is to evade any requirement of law. Of
course, an employer's flexibility to treat benefits as part of
separate plans may be limited by the operation of other laws, such
as the prohibition in section Under HIPAA, a qualified beneficiary
who maintains coverage after termination of employment under a group
health plan that is subject to HIPAA can avoid a break in coverage
and thereby avoid becoming subject to a preexisting condition
exclusion upon later becoming covered by another group health plan.

9802 on conditioning eligibility to enroll in a group health plan on
the basis of any health factor of an individual.

Many commenters on the 1987 proposed regulations requested
clarification of the application of COBRA to health care benefits
provided under flexible spending arrangements (health FSAs). Some
commentators argued that health FSAs should not be subject to COBRA.

Health FSAs satisfy the definition of group health plan in section
5000(b)(1) and, accordingly, are generally subject to the COBRA
continuation coverage requirements. However, COBRA is intended to
ensure that a qualified beneficiary has guaranteed access to
coverage under a group health plan and that the cost of that
coverage is no greater than 102 percent of the applicable premium.

The IRS and Treasury believe that the purposes of COBRA are not
furthered by requiring an employer to offer COBRA for a plan year if
the amount that the employer could require to be paid for the COBRA
coverage for the plan year would exceed the maximum benefit that the
qualified beneficiary could receive under the FSA for that plan year
and if the qualified beneficiary could not avoid a break in
coverage, for purposes of the HIPAA portability provisions , by 3
electing COBRA coverage under the FSA. Accordingly, the new proposed
regulations contain a rule limiting the application of the COBRA
continuation coverage requirements in the case of health FSAs.

The IRS and Treasury, together with the U.S. Department of Labor and
the U.S. Department of Health and Human Services, have issued a
notice (62 FR 67688) holding that a health FSA is exempt from HIPAA
because the benefits provided under it are excepted benefits under
sections 9831 and 9832 if the employer also provides another group
health plan, the benefits under the other plan are not limited to
excepted benefits, and the maximum reimbursement under the health
FSA is not greater than two times the employee's salary reduction
election (or if greater, the employee's salary reduction election
plus five hundred dollars).

Under this proposed rule, if the health FSA satisfies two
conditions, the health FSA need not make COBRA continuation coverage
available to a qualified beneficiary for any plan year after the
plan year in which the qualifying event occurs. The first condition
that the health FSA must satisfy for this exception to apply is that
the health FSA is not subject to the HIPAA portability provisions in
sections 9801 though 9833 because the benefits provided under the
health FSA are excepted benefits. (See sections 9831 and 9832.) The
second condition is that, in the 4 plan year in which the qualifying
event of a qualified beneficiary occurs, the maximum amount that the
health FSA could require to be paid for a full plan year of COBRA
continuation coverage equals or exceeds the maximum benefit
available under the health FSA for the year. It is contemplated that
this second condition will be satisfied in most cases.

Moreover, if a third condition is satisfied, the health FSA need not
make COBRA continuation coverage available with respect to a
qualified beneficiary at all. This third condition is satisfied if,
as of the date of the qualifying event, the maximum benefit
available to the qualified beneficiary under the health FSA for the
remainder of the plan year is not more than the maximum amount that
the plan could require as payment for the remainder of that year to
maintain coverage under the health FSA.

Duration of COBRA Continuation Coverage

The new proposed regulations would make two principal changes to the
section in the final regulations addressing the duration of COBRA
continuation coverage.

The 1987 proposed regulations reflect the statutory rules that were
then in effect for the maximum period that a plan is required to
make COBRA continuation coverage available. Since then the statute
has been amended to add the disability extension, to permit plans to
extend the notice period if the maximum coverage period is also
extended (referred to as the optional extension of the required
periods), and to add a special rule in the case of Medicare
entitlement preceding a qualifying event that is the termination or
reduction of hours of employment. The new proposed regulations
reflect these statutory changes. The maximum coverage period for a
qualifying event that is the bankruptcy of the employer has also
been added to the new proposed regulations.

The 1987 proposed regulations incorporate the statutory bases for
terminating COBRA continuation coverage except the rule (added in
1989 and amended in 1996) that COBRA coverage can be terminated in
the month that is more than 30 days after a final determination that
a qualified beneficiary is no longer disabled. The new proposed
regulations add this statutory basis for terminating COBRA coverage,
with two clarifications. First, the new proposed regulations clarify
that a determination that a qualified beneficiary is no longer
disabled allows termination of COBRA continuation coverage for all
qualified beneficiaries who were entitled to the disability
extension by reason of the disability of the qualified beneficiary
who has been determined to no longer be disabled. Second, the new
proposed regulations clarify that such a determination does not
allow termination of the COBRA continuation coverage of a qualified
beneficiary before the end of the maximum coverage period that would
apply without regard to the disability extension.

Business Reorganizations

The 1987 proposed regulations provide little direct guidance on the
allocation of responsibility for COBRA continuation coverage in the
event of corporate transactions, such as a sale of stock of a
subsidiary or a sale of substantial assets. Commenters on the 1987
proposed regulations requested further guidance on corporate
transactions, pointing out that the existing degree of uncertainty
tends to drive up the costs and risks of a transaction to both
buyers and sellers. The IRS and Treasury share this view and believe
also that greater certainty helps to protect the rights of qualified
beneficiaries in these transactions. The IRS has been contacted by
many qualified beneficiaries whose COBRA continuation coverage has
been dropped or denied in the context of a corporate transaction. In
many cases, these qualified beneficiaries have been told by each of
the buyer and the seller that the other party is the one responsible
for providing them with COBRA continuation coverage.

The preamble to the 1998 proposed regulations requested comments on
a possible approach to allocating responsibility for COBRA
continuation coverage in corporate transactions.

Commenters suggested that, in a stock sale, as in an asset sale, it
would be consistent with standard commercial practice to provide
that the seller retains liability for all existing qualified
beneficiaries, including those formerly associated with the
subsidiary being sold. The IRS and Treasury have studied the
comments and given consideration to several alternatives with a view
to establishing rules that will minimize the administrative burden
and transaction costs for the parties to transactions while
protecting the rights of qualified beneficiaries and maintaining
consistency with the statute.

Accordingly, the new proposed regulations make clear that the
parties to a transaction are free to allocate the responsibility for
providing COBRA continuation coverage by contract, even if the
contract imposes responsibility on a different party than would the
new proposed regulations.

So long as the party to whom the contract allocates responsibility
performs its obligations, the other party will have no
responsibility for providing COBRA continuation coverage. If,
however, the party allocated responsibility under the contract
defaults on its obligation, and if, under the new proposed
regulations, the other party would have the obligation to provide
COBRA continuation coverage in the absence of a contractual
provision, then the other party would retain that obligation. This
approach would avoid prejudicing the rights of qualified
beneficiaries to COBRA continuation coverage based upon the
provisions of a contract to which they were not a party and under
which the employer with the underlying obligation under the
regulations to provide COBRA continuation coverage could otherwise
contract away that obligation to a party that fails to perform.
Moreover, the party with the underlying responsibility under the
regulations can insist on appropriate security and, of course, could
pursue contractual remedies against the defaulting party.

The new proposed regulations provide, for both sales of stock and
sales of substantial assets, such as a division or plant or
substantially all the assets of a trade or business, that the seller
retains the obligation to make COBRA continuation coverage available
to existing qualified beneficiaries. In addition, in situations in
which the seller ceases to provide any group health plan to any
employee in connection with the sale - whether such a cessation is
in connection with the sale is determined on the basis of the facts
and circumstances of each case - and thus is not responsible for
providing COBRA continuation coverage, the new proposed regulations
provide that the buyer is responsible for providing COBRA
continuation coverage to existing qualified beneficiaries. This
secondary liability for the buyer applies in all stock sales and in
all sales of substantial assets in which the buyer continues the
business operations associated with the assets without interruption
or substantial change.

A particular type of asset sale raises issues for which the new
proposed regulations do not provide any special rules. (Thus, the
general rules in the new proposed regulations for business
reorganizations would apply to this type of transaction.) This type
of asset sale is one in which, after purchasing a business as a
going concern, the buyer continues to employ the employees of that
business and continues to provide those employees exactly the same
health coverage that they had before the sale (either by providing
coverage through the same insurance contract or by establishing a
plan that mirrors the one that provided benefits before the sale).
The application of the rules in the new proposed regulations to this
type of asset sale would require the seller to make COBRA
continuation coverage available to the employees continuing in
employment with the buyer (and to other family members who are
qualified beneficiaries). Ordinarily, the continuing employees (or
their family members) would be very unlikely to elect COBRA
continuation coverage from the seller when they can receive the same
coverage (usually at much lower cost) as active employees of the
buyer.

Consideration is being given to whether, under appropriate
circumstances, such an asset sale would be considered not to result
in a loss of coverage for those employees who continue in employment
with the buyer after the sale. A countervailing concern, however,
relates to those qualified beneficiaries who might have a reason to
elect COBRA continuation coverage from the seller. An example of
such a qualified beneficiary would be an employee who continues in
employment with the buyer, whose family is likely to have medical
expenses that exceed the cost of COBRA coverage, and who has
significant questions about the solvency of the buyer or other
concerns about how long the buyer might continue to provide the same
health coverage.

Under one possible approach, a loss of coverage would be considered
not to have occurred so long as the purchasing employer in an asset
sale continued to maintain the same group health plan coverage that
the seller maintained before the sale without charging the employees
any greater percentage of the total cost of coverage than the seller
had charged before the sale. For this purpose, the coverage would be
considered unchanged if there was no obligation to provide a summary
of material modifications within 60 days after the change due to a
material reduction in covered services or benefits under the rules
that apply under Title I of ERISA. If these conditions were
satisfied for the maximum coverage period that would otherwise apply
to the seller's termination of employment of the continuing
employees (generally 18 months from the date of the sale), then
those terminations of employment would never be considered
qualifying events. If the conditions were not satisfied for the full
maximum coverage period, then on the date when they ceased to be
satisfied the seller would be obligated to make COBRA continuation
coverage available for the balance of the maximum coverage period.

Comments are invited on the utility of such a rule, either in
situations in which the seller retains an ownership interest in the
buyer after the sale (for example, a sale of assets from a 100-
percent owned subsidiary to a 75-percent owned subsidiary) or, more
generally, in situations in which the seller and the buyer are
unrelated. Suggestions are also solicited for other rules that would
protect qualified beneficiaries while providing relief to employers
in these situations.

Although the new proposed regulations address how COBRA obligations
are affected by a sale of stock (and a sale of substantial assets),
the new proposed regulations do not address how the obligation to
make COBRA continuation coverage available is affected by the
transfer of an ownership interest in a noncorporate entity that
causes the noncorporate entity to cease to be a member of a group of
trades or businesses under common control (whether or not it becomes
a member of a different group of trades or business under common
control). Comments are invited on this issue.

Employer Withdrawals From Multiemployer Plans

The new proposed regulations also address COBRA obligations in
connection with an employer's cessation of contributions to a
multiemployer group health plan. The new proposed regulations
provide that the multiemployer plan generally continues to have the
obligation to make COBRA continuation coverage available to
qualified beneficiaries associated with that employer. (There
generally would not be any obligation to make COBRA continuation
coverage available to continuing employees in this situation because
a cessation of contributions is not a qualifying event.) However,
once the employer provides group health coverage to a significant
number of employees who were formerly covered under the
multiemployer plan, or starts contributing to another multiemployer
plan on their behalf, the employer's plan (or the new multiemployer
plan) would have the obligation to make COBRA continuation coverage
available to the existing qualified beneficiaries. This rule is
contrary to the holding in In re Appletree Markets, Inc., 19 F.3d
969 (5 Cir. 1994), which held that the multiemployer plan continued
to th have the COBRA obligations with respect to existing qualified
beneficiaries after the withdrawing employer established a plan for
the same class of employees previously covered under the
multiemployer plan.

Interaction of FMLA and COBRA

The new proposed regulations set forth rules regarding the
interaction of the COBRA continuation coverage requirements with the
provisions of the Family and Medical Leave Act of 1993 (FMLA). The
rules under the new proposed regulations are substantially the same
as those set forth in Notice 94-103. The last two questions-and-
answers in that notice have not been included in the new proposed
regulations because they relate to general subject matter that is
addressed elsewhere in the regulations.

Under the new proposed regulations, the taking of FMLA leave by a
covered employee is not itself a qualifying event. Instead, a
qualifying event occurs when an employee who is covered under a
group health plan immediately prior to FMLA leave (or who becomes
covered under a group health plan during FMLA leave) does not return
to work with the employer at the end of FMLA leave and would, but
for COBRA continuation coverage, lose coverage under the group
health plan. (As under the general rules of COBRA, this would also
constitute a qualifying event with respect to the spouse or any
dependent child of the employee.) The qualifying event is deemed to
occur on the last day of the employee's FMLA leave, and the maximum
coverage period generally begins on that day. (The new proposed
regulations provide a special rule for cases where coverage is not
lost until a later date and the plan provides for the optional
extension of the required periods.) In the case of such a qualifying
event, the employer cannot condition the employee's rights to COBRA
continuation coverage on the employee's reimbursement of any
premiums paid by the employer to maintain the employee's group
health plan coverage during the period of FMLA leave.

Any lapse of coverage under the group health plan during the period
of FMLA leave and any state or local law requiring that group health
plan coverage be provided for a period longer than that required by
the FMLA are disregarded in determining whether the employee has a
qualifying event on the last day of that leave. However, the
employee's loss of coverage at the end of FMLA leave will not
constitute a qualifying event if, prior to the employee's return
from FMLA leave, the employer has eliminated group health plan
coverage for the class of employees to which the employee would have
belonged if she or he had not taken FMLA leave.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also
has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and because the regulations do not impose a collection
of information requirement on small entities, the Regulatory
Flexibility Act (5 U.S.C.

chapter 6) does not apply. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are
submitted timely (a signed original and eight (8) copies) to the
IRS. Comments are specifically requested on the clarity of the
proposed regulations and how they may be made easier to understand.
All comments will be available for public inspection and copying.

A public hearing has been scheduled for June 8, 1999, beginning at
10 a.m.

in room 2615 of the Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the 10 Street entrance, located th between
Constitution and Pennsylvania Avenues, NW. In addition, all visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the
immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER
INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time
to be devoted to each topic (signed original and eight (8) copies)
by May 14, 1999. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines
has passed. Copies of the agenda will be available free of charge at
the hearing.

Drafting Information

The principal author of these proposed regulations is Russ
Weinheimer, Office of the Associate Chief Counsel (Employee Benefits
and Exempt Organizations). However, other personnel from the IRS and
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 54 Excise taxes, Health care, Health
insurance, Pensions, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 54
is proposed to be amended as follows:

PART 54 - PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 is amended in part
by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 54.4980B-9 also issued under 26 U.S.C. 4980B.

Section 54.4980B-10 also issued under 26 U.S.C. 4980B. * * *

Par. 2. Section 54.4980B-0 is amended by:

1. Revising the introductory text.

2. Adding entries for ��54.4980B-9 and 54.4980B-10 at the end of the
list of sections.

3. Revising the entries for Q-3 and Q-6 of �54.4980B-2 in the list
of questions.

4. Revising the entry for Q-4 of �54.4980B-7 in the list of
questions.

5. Adding an entry for the section heading for �54.4980B-9 in the
list of questions.

6. Adding an entry for the section heading for �54.4980B-10 in the
list of questions.

The additions and revisions read as follows:

�54.4980B-0 Table of contents.

This section contains first a list of the section headings and then
a list of the questions in each section in ��54.4980B-1 through
54.4980B-10.

LIST OF SECTIONS *

* * * *

�54.4980B-9 Business reorganizations and employer withdrawals from
multiemployer plans.

�54.4980B-10 Interaction of FMLA and COBRA.

LIST OF QUESTIONS

* * * * *

�54.4980B-2 Plans that must comply.

* * * * *

Q-3: What is a multiemployer plan?

* * * * *

Q-6: For purposes of COBRA, how is the number of group health plans
that an employer or employee organization maintains determined?

* * * * *

�54.4980B-7 Duration of COBRA continuation coverage.

* * * * *

Q-4: When does the maximum coverage period end?

* * * * *

�54.4980B-9 Business reorganizations and employer withdrawals from
multiemployer plans.

Q-1: For purposes of this section, what are a business
reorganization, a stock sale, and an asset sale?

Q-2: In the case of a stock sale, what are the selling group, the
acquired organization, and the buying group?

Q-3: In the case of an asset sale, what are the selling group and
the buying group?

Q-4: Who is an M&A qualified beneficiary? Q-

5: In the case of a stock sale, is the sale a qualifying event with
respect to a covered employee who is employed by the acquired
organization before the sale and who continues to be employed by the
acquired organization after the sale, or with respect to the spouse
or dependent children of such a covered employee?

Q-6: In the case of an asset sale, is the sale a qualifying event
with respect to a covered employee whose employment immediately
before the sale was associated with the purchased assets, or with
respect to the spouse or dependent children of such a covered
employee who are covered under a group health plan of the selling
group immediately before the sale?

Q-7: In a business reorganization, are the buying group and the
selling group permitted to allocate by contract the responsibility
to make COBRA continuation coverage available to M&A qualified
beneficiaries?

Q-8: Which group health plan has the obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries in a
business reorganization?

Q-9: Can the cessation of contributions by an employer to a
multiemployer group health plan be a qualifying event?

Q-10: If an employer stops contributing to a multiemployer group
health plan, does the multiemployer plan have the obligation to make
COBRA continuation coverage available to a qualified beneficiary who
was receiving coverage under the multiemployer plan on the day
before the cessation of contributions and who is, or whose
qualifying event occurred in connection with, a covered employee
whose last employment prior to the qualifying event was with the
employer that has stopped contributing to the multiemployer plan?
�54.4980B-10 Interaction of FMLA and COBRA.

Q-1: In what circumstances does a qualifying event occur if an
employee does not return from leave taken under FMLA?

Q-2: If a qualifying event described in Q&A-1 of this section
occurs, when does it occur, and how is the maximum coverage period
measured?

Q-3: If an employee fails to pay the employee portion of premiums
for coverage under a group health plan during FMLA leave or declines
coverage under a group health plan during FMLA leave, does this
affect the determination of whether or when the employee has
experienced a qualifying event?

Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this
section affected by a requirement of state or local law to provide a
period of coverage longer than that required under FMLA? Q-

5: May COBRA continuation coverage be conditioned upon reimbursement
of the premiums paid by the employer for coverage under a group
health plan during FMLA leave? Par. 3. Section 54.4980B-1, A-1 is
amended by:

1. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the last sentence of paragraph (a).

2. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the third sentence and last sentence of paragraph (b).

3. Removing the last sentence of paragraph (c) and adding two
sentences in its place to read as follows:

�54.4980B-1 COBRA in general.

* * * * *

A-1: * * *

(c) * * * Section 54.4980B-9 contains special rules for how COBRA
applies in connection with business reorganizations and employer
withdrawals from a multiemployer plan, and �54.4980B-10 addresses
how COBRA applies for individuals who take leave under the Family
and Medical Leave Act of 1993. Unless the context indicates
otherwise, any reference in ��54.4980B-1 through �54.4980B-10 to
COBRA refers to section 4980B (as amended) and to the parallel
provisions of ERISA.

* * * * *

Par. 4. Section 54.4980B-2 is amended by:

1. Revising paragraph (a) in A-1. 2.

Removing the language "54.4980B-8" and adding "54.4980B-10" in its
place in the first sentence of paragraph (b) in A-1.

3. Revising A-2.

4. Adding Q&A-3.

5. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the last sentence of paragraph (a) in A-4.

6. Adding a sentence immediately before the last sentence of the
introductory text of paragraph (a) in A-5.

7. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the last sentence of paragraph (c) in A-5.

8. Adding paragraphs (d), (e), and (f) in A-5.

9. Adding Q&A-6.

10. Revising A-8.

11. Revising paragraph (a) in A-10.

The additions and revisions read as follows:

�54.4980B-2 Plans that must comply.

* * * * *

A-1: (a) For purposes of section 4980B, a group health plan is a
plan maintained by an employer or employee organization to provide
health care to individuals who have an employment-related connection
to the employer or employee organization or to their families.

Individuals who have an employment-related connection to the
employer or employee organization consist of employees, former
employees, the employer, and others associated or formerly
associated with the employer or employee organization in a business
relationship (including members of a union who are not currently
employees). Health care is provided under a plan whether provided
directly or through insurance, reimbursement, or otherwise, and
whether or not provided through an on-site facility (except as set
forth in paragraph (d) of this Q&A-1), or through a cafeteria plan
(as defined in section 125) or other flexible benefit arrangement.
(See paragraphs (b) through (e) in Q&A-8 of this section for rules
regarding the application of the COBRA continuation coverage
requirements to certain health flexible spending arrangements.) For
purposes of this Q&A-1, insurance includes not only group insurance
policies but also one or more individual insurance policies in any
arrangement that involves the provision of health care to two or
more employees. A plan maintained by an employer or employee
organization is any plan of, or contributed to (directly or
indirectly) by, an employer or employee organization. Thus, a group
health plan is maintained by an employer or employee organization
even if the employer or employee organization does not contribute to
it if coverage under the plan would not be available at the same
cost to an individual but for the individual's employment-related
connection to the employer or employee organization. These rules are
further explained in paragraphs (b) through (d) of this Q&A-1. An
exception for qualified long-term care services is set forth in
paragraph (e) of this Q&A-1, and for medical savings accounts in
paragraph (f) of this Q&A-1. See Q&A-6 of this section for rules to
determine the number of group health plans that an employer or
employee organization maintains.

* * * * *

A-2: (a) For purposes of section 4980B, employer refers to -

(1) A person for whom services are performed;

(2) Any other person that is a member of a group described in
section 414(b), (c), (m), or

(o) that includes a person described in paragraph (a)(1) of this
Q&A-2; and

(3) Any successor of a person described in paragraph (a)(1) or (2)
of this Q&A-2.

(b) An employer is a successor employer if it results from a
consolidation, merger, or similar restructuring of the employer or
if it is a mere continuation of the employer. See paragraph (c) in
Q&A-8 of �54.4980B-9 for rules describing the circumstances in which
a purchaser of substantial assets is a successor employer to the
employer selling the assets.

Q-3: What is a multiemployer plan?

A-3: For purposes of ��54.4980B-1 through 54.4980B-10, a
multiemployer plan is a plan to which more than one employer is
required to contribute, that is maintained pursuant to one or more
collective bargaining agreements between one or more employee
organizations and more than one employer, and that satisfies such
other requirements as the Secretary of Labor may prescribe by
regulation. Whenever reference is made in ��54.4980B-1 through
54.4980B-10 to a plan of or maintained by an employer or employee
organization, the reference includes a multiemployer plan.

* * * * *

A-5: (a) * * * See Q&A-6 of this section for rules to determine the
number of plans that an employer or employee organization maintains.
* * *

* * * * *

(d) In determining the number of the employees of an employer, each
full-time employee is counted as one employee and each part-time
employee is counted as a fraction of an employee, determined in
accordance with paragraph (e) of this Q&A-5.

(e) An employer may determine the number of its employees on a daily
basis or a pay period basis. The basis used by the employer must be
used with respect to all employees of the employer and must be used
for the entire year for which the number of employees is being
determined. If an employer determines the number of its employees on
a daily basis, it must determine the actual number of full-time
employees on each typical business day and the actual number of
part-time employees and the hours worked by each of those part-time
employees on each typical business day. Each full-time employee
counts as one employee on each typical business day and each part-
time employee counts as a fraction, with the numerator of the
fraction equal to the number of hours worked by that employee and
the denominator equal to the number of hours that must be worked on
a typical business day in order to be considered a full-time
employee. If an employer determines the number of its employees on a
pay period basis, it must determine the actual number of full-time
employees employed during that pay period and the actual number of
part-time employees employed and the hours worked by each of those
part-time employees during the pay period. For each day of that pay
period, each full-time employee counts as one employee and each
part-time employee counts as a fraction, with the numerator of the
fraction equal to the number of hours worked by that employee during
that pay period and the denominator equal to the number of hours
that must be worked during that pay period in order to be considered
a full-time employee. The determination of the number of hours
required to be considered a full-time employee is based upon the
employer's employment practices, except that in no event may the
hours required to be considered a full-time employee exceed eight
hours for any day or 40 hours for any week.

(f) In the case of a multiemployer plan, the determination of
whether the plan is a small-employer plan on any particular date
depends on which employers are contributing to the plan on that date
and on the workforce of those employers during the preceding
calendar year. If a plan that is otherwise subject to COBRA ceases
to be a small-employer plan because of the addition during a
calendar year of an employer that did not normally employ fewer than
20 employees on a typical business day during the preceding calendar
year, the plan ceases to be excepted from COBRA immediately upon the
addition of the new employer. In contrast, if the plan ceases to be
a small-employer plan by reason of an increase during a calendar
year in the workforce of an employer contributing to the plan, the
plan ceases to be excepted from COBRA on the January 1 immediately
following the calendar year in which the employer's workforce
increased.

* * * * *

Q-6: For purposes of COBRA, how is the number of group health plans
that an employer or employee organization maintains determined?

A-6: (a) The rules of this Q&A-6 apply, for purposes of COBRA, in
determining the number of group health plans that an employer or
employee organization maintains. Except as provided in paragraph (c)
of this Q&A-6, in the case of health care benefits provided under an
arrangement or arrangements of an employer or employee organization,
the number of group health plans pursuant to which those benefits
are provided is determined by the instruments governing the
arrangement or arrangements. However, a multiemployer plan and a
nonmultiemployer plan are always separate plans. All references
elsewhere in ��54.4980B-1 through 54.4980B-10 to a group health plan
are references to a group health plan as determined under Q&A-1 of
this section and this Q&A-6.

(b) If it is not clear from the instruments governing an arrangement
or arrangements to provide health care benefits whether the benefits
are provided under one plan or more than one plan, or if there are
no instruments governing the arrangement or arrangements, all such
health care benefits, except benefits for qualified long-term care
services (as defined in section 7702B(c)), provided by a
corporation, partnership, or other entity or trade or business, or
by an employee organization, constitute one group health plan.

(c) Notwithstanding paragraph (a) of this Q&A-6, if a principal
purpose of establishing separate plans is to evade any requirement
of law, then the separate plans will be considered a single plan to
the extent necessary to prevent the evasion.

(d) The significance of treating an arrangement as two or more
separate group health plans is illustrated by the following
examples:

Example 1. (i) Employer X maintains a single group health plan,
which provides major medical and prescription drug benefits.
Employer Y maintains two group health plans; one provides major
medical benefits and the other provides prescription drug benefits.

(ii) X's plan could comply with the COBRA continuation coverage
requirements by giving a qualified beneficiary experiencing a
qualifying event with respect to X's plan the choice of either
electing both major medical and prescription drug benefits or not
receiving any COBRA continuation coverage under X's plan. By
contrast, for Y's plans to comply with the COBRA continuation
coverage requirements, a qualified beneficiary experiencing a
qualifying event with respect to each of Y's plans must be given the
choice of electing COBRA continuation coverage under either the
major medical plan or the prescription drug plan or both.

Example 2. If a joint board of trustees administers one
multiemployer plan, that plan will fail to qualify for the small-
employer plan exception if any one of the employers whose employees
are covered under the plan normally employed 20 or more employees
during the preceding calendar year. However, if the joint board of
trustees maintains two or more multiemployer plans, then the
exception would be available with respect to each of those plans in
which each of the employers whose employees are covered under the
plan normally employed fewer than 20 employees during the preceding
calendar year.

* * * * *

A-8: (a) The provision of health care benefits does not fail to be a
group health plan merely because those benefits are offered under a
cafeteria plan (as defined in section 125) or under any other
arrangement under which an employee is offered a choice between
health care benefits and other taxable or nontaxable benefits.
However, the COBRA continuation coverage requirements apply only to
the type and level of coverage under the cafeteria plan or other
flexible benefit arrangement that a qualified beneficiary is
actually receiving on the day before the qualifying event. See
paragraphs (b) through (e) of this Q&A-8 for rules limiting the
obligations of certain health flexible spending arrangements. The
rules of this paragraph (a) are illustrated by the following
example:

Example: (i) Under the terms of a cafeteria plan, employees can
choose among life insurance coverage, membership in a health
maintenance organization (HMO), coverage for medical expenses under
an indemnity arrangement, and cash compensation. Of these available
choices, the HMO and the indemnity arrangement are the arrangements
providing health care.

The instruments governing the HMO and indemnity arrangements
indicate that they are separate group health plans. These group
health plans are subject to COBRA. The employer does not provide any
group health plan outside of the cafeteria plan. B and C are
unmarried employees. B has chosen the life insurance coverage, and C
has chosen the indemnity arrangement.

(ii) B does not have to be offered COBRA continuation coverage upon
terminating employment, nor is a subsequent open enrollment period
for active employees required to be made available to B. However, if
C terminates employment and the termination constitutes a qualifying
event, C must be offered an opportunity to elect COBRA continuation
coverage under the indemnity arrangement. If C makes such an
election and an open enrollment period for active employees occurs
while C is still receiving the COBRA continuation coverage, C must
be offered the opportunity to switch from the indemnity arrangement
to the HMO (but not to the life insurance coverage because that does
not constitute coverage provided under a group health plan).

(b) If a health flexible spending arrangement (health FSA), within
the meaning of regulations project EE-130-86 (1989-1 C.B. 944, 986)
(see �601.601(d)(2) of this chapter), satisfies the two conditions
in paragraph (c) of this Q&A-8 for a plan year, the obligation of
the health FSA to make COBRA continuation coverage available to a
qualified beneficiary who experiences a qualifying event in that
plan year is limited in accordance with paragraphs (d) and (e) of
this Q&A-8, as illustrated by an example in paragraph (f) of this
Q&A-8.

(c) The conditions of this paragraph (c) are satisfied if -

(1) Benefits provided under the health FSA are excepted benefits
within the meaning of sections 9831 and 9832; and

(2) The maximum amount that the health FSA can require to be paid
for a year of COBRA continuation coverage under Q&A-1 of �54.4980B-8
equals or exceeds the maximum benefit available under the health FSA
for the year.

(d) If the conditions in paragraph (c) of this Q&A-8 are satisfied
for a plan year, then the health FSA is not obligated to make COBRA
continuation coverage available for any subsequent plan year to any
qualified beneficiary who experiences a qualifying event during that
plan year.

(e) If the conditions in paragraph (c) of this Q&A-8 are satisfied
for a plan year, the health FSA is not obligated to make COBRA
continuation coverage available for that plan year to any qualified
beneficiary who experiences a qualifying event during that plan year
unless, as of the date of the qualifying event, the qualified
beneficiary can become entitled to receive during the remainder of
the plan year a benefit that exceeds the maximum amount that the
health FSA is permitted to require to be paid for COBRA continuation
coverage for the remainder of the plan year. In determining the
amount of the benefit that a qualified beneficiary can become
entitled to receive during the remainder of the plan year, the
health FSA may deduct from the maximum benefit available to that
qualified beneficiary for the year (based on the election made under
the health FSA for that qualified beneficiary before the date of the
qualifying event) any reimbursable claims submitted to the health
FSA for that plan year before the date of the qualifying event. ( f)
The rules of paragraphs (b), (c), (d), and (e) of this Q&A-8 are
illustrated by the following example:

Example: (i) An employer maintains a group health plan providing
major medical benefits and a group health plan that is a health FSA,
and the plan year for each plan is the calendar year.

Both the plan providing major medical benefits and the health FSA
are subject to COBRA. Under the health FSA, during an open season
before the beginning of each calendar year, employees can elect to
reduce their compensation during the upcoming year by up to $1200
per year and have that same amount contributed to a health flexible
spending account. The employer contributes an additional amount to
the account equal to the employee's salary reduction election for
the year.

Thus, the maximum amount available to an employee under the health
FSA for a year is two times the amount of the employee's salary
reduction election for the year. This amount may be paid to the
employee during the year as reimbursement for health expenses not
covered by the employer's major medical plan (such as deductibles,
copayments, prescription drugs, or eyeglasses). The employer
determined, in accordance with section 4980B(f)(4), that a
reasonable estimate of the cost of providing coverage for similarly
situated nonCOBRA beneficiaries for 2002 under this health FSA is
equal to two times their salary reduction election for 2002 and,
thus, that two times the salary reduction election is the applicable
premium for 2002.

(ii) Because the employer provides major medical benefits under
another group health plan, and because the maximum benefit that any
employee can receive under the health FSA is not greater than two
times the employee's salary reduction election for the plan year,
benefits under this health FSA are excepted benefits within the
meaning of sections 9831 and 9832. Thus, the first condition of
paragraph (c) of this Q&A-8 is satisfied for the year. The maximum
amount that a plan can require to be paid for coverage (outside of
coverage required to be made available due to a disability
extension) under Q&A-1 of �54.4980B-8 is 102 percent of the
applicable premium. Thus, the maximum amount that the health FSA can
require to be paid for coverage for the 2002 plan year is 2.04 times
the employee's salary reduction election for the plan year.

Because the maximum benefit available under the health FSA is 2.0
times the employee's salary reduction election for the year, the
maximum benefit available under the health FSA for the year is less
than the maximum amount that the health FSA can require to be paid
for coverage for the year. Thus, the second condition in paragraph
(c) of this Q&A-8 is also satisfied for the 2002 plan year. Because
both conditions in paragraph (c) of this Q&A-8 are satisfied for
2002, with respect to any qualifying event occurring in 2002, the
health FSA is not obligated to make COBRA continuation coverage
available for any year after 2002.

(iii) Whether the health FSA is obligated to make COBRA continuation
coverage available in 2002 to a qualified beneficiary with respect
to a qualifying event that occurs in 2002 depends upon the maximum
benefit that would be available to the qualified beneficiary under
COBRA continuation coverage for that plan year. Case 1: Employee B
has elected to reduce B's salary by $1200 for 2002. Thus, the
maximum benefit that B can become entitled to receive under the
health FSA during the entire year is $2400. B experiences a
qualifying event that is the termination of B's employment on May
31, 2002. As of that date, B had submitted $300 of reimbursable
expenses under the health FSA. Thus, the maximum benefit that B
could become entitled to receive for the remainder of 2002 is $2100.
The maximum amount that the health FSA can require to be paid for
COBRA continuation coverage for the remainder of 2002 is 102 percent
times 1/12 of the applicable premium for 2002 times the number of
months remaining in 2002 after the date of the qualifying event. In
B's case, the maximum amount that the health FSA can require to be
paid for COBRA continuation coverage for 2002 is 2.04 times $1200,
or $2448.

One-twelfth of $2448 is $204. Because seven months remain in the
plan year, the maximum amount that the health FSA can require to be
paid for B's coverage for the remainder of the year is seven times
$204, or $1428. Because $1428 is less than the maximum benefit that
B could become entitled to receive for the remainder of the year
($2100), the health FSA is required to make COBRA continuation
coverage available to B for the remainder of 2002 (but not for any
subsequent year).

(iv) Case 2: The facts are the same as in Case 1 except that B had
submitted $1000 of reimbursable expenses as of the date of the
qualifying event. In that case, the maximum benefit available to B
for the remainder of the year would be $1400 instead of $2100.
Because the maximum amount that the health FSA can require to be
paid for B's coverage is $1428, and because the $1400 maximum
benefit for the remainder of the year does not exceed $1428, the
health FSA is not obligated to make COBRA continuation coverage
available to B in 2002 (or any later year). (Of course, the
administrator of the health FSA is permitted to make COBRA
continuation coverage available to every qualified beneficiary in
the year that the qualified beneficiary's qualifying event occurs in
order to avoid having to determine the maximum benefit available for
each qualified beneficiary for the remainder of the plan year.)

* * * * *

A-10: (a) In general, the excise tax is imposed on the employer
maintaining the plan, except that in the case of a multiemployer
plan (see Q&A-3 of this section for a definition of multiemployer
plan) the excise tax is imposed on the plan.

* * * * *

Par. 5. In �54.4980B-3, the language "54.4980B-8" is removed and
"54.4980B-10" is added in its place in the last sentence of
paragraph (a)(3) and the first sentence of paragraph (g) in

A-1; in the first and second sentences of paragraph (a)(1), the
first sentence of paragraph (a)(2), and the first and last sentences
in paragraph (b) in A-2; and in A-3.

Par. 6. Section 54.4980B-4 is amended by: 1.

Adding a sentence at the end of paragraph (a) in A-1.

2. Removing the language "Q&A-1" and adding "Q&A-4" in its place in
the fifth sentence of paragraph (c) of A-1.

3. Revising the third sentence in paragraph (e) of A-1.

The addition and revision read as follows:

�54.4980B-4 Qualifying events.

* * * * *

A-1: (a) * * * See Q&A-1 through Q&A-3 of �54.4980B-10 for special
rules in the case of leave taken under the Family and Medical Leave
Act of 1993 (29 U.S.C. 2601-2619).

* * * * *

(e) * * * For example, an absence from work due to disability, a
temporary layoff, or any other reason (other than due to leave that
is FMLA leave; see �54.4980B-10) is a reduction of hours of a
covered employee's employment if there is not an immediate
termination of employment. * * *

* * * * *

Par. 7. In �54.4980B-5, the penultimate sentence in paragraph (a) of
A-1 is amended by removing the language "54.4980B-8" and adding
"54.4980B-10" in its place.

Par. 8. In �54.4980B-6, the Example in paragraph (c) of A-1 is
revised to read as follows:

�54.4980B-6 Electing COBRA continuation coverage.

* * * * *

A-1: * * *

Example. (i) An unmarried employee without children who is receiving
employer-paid coverage under a group health plan voluntarily
terminates employment on June 1, 2001. The employee is not disabled
at the time of the termination of employment nor at any time
thereafter, and the plan does not provide for the extension of the
required periods (as is permitted under paragraph (b) of Q&A-4 of
�54.4980B-7).

(ii) Case 1: If the plan provides that the employer-paid coverage
ends immediately upon the termination of employment, the election
period must begin not later than June 1, 2001, and must not end
earlier than July 31, 2001. If notice of the right to elect COBRA
continuation coverage is not provided to the employee until June 15,
2001, the election period must not end earlier than August 14, 2001.

(iii) Case 2: If the plan provides that the employer-paid coverage
does not end until 6 months after the termination of employment, the
employee does not lose coverage until December 1, 2001. The election
period can therefore begin as late as December 1, 2001, and must not
end before January 30, 2002.

(iv) Case 3: If employer-paid coverage for 6 months after the
termination of employment is offered only to those qualified
beneficiaries who waive COBRA continuation coverage, the employee
loses coverage on June 1, 2001, so the election period is the same
as in Case 1. The difference between Case 2 and Case 3 is that in
Case 2 the employee can receive 6 months of employer-paid coverage
and then elect to pay for up to an additional 12 months of COBRA
continuation coverage, while in Case 3 the employee must choose
between 6 months of employer-paid coverage and paying for up to 18
months of COBRA continuation coverage. In all three cases, COBRA
continuation coverage need not be provided for more than 18 months
after the termination of employment (see Q&A-4 of �54.4980B-7), and
in certain circumstances might be provided for a shorter period (see
Q&A-1 of �54.4980B-7).

* * * * *

Par. 9. Section 54.4980B-7 is amended by:

1. Revising paragraph (a) of A-1.

2. Adding Q&A-4.

3. Revising the second sentence in paragraph (c) of A-5.

4. Revising paragraph (b) of Q&A-6.

5. Removing the language "Q&A-1" and adding "Q&A-4" in its place in
paragraph (a) of A-7.

The addition and revisions read as follows: � 54.4980B-7 Duration of
COBRA continuation coverage.

* * * * *

A-1: (a) Except for an interruption of coverage in connection with a
waiver, as described in Q&A-4 of �54.4980B-6, COBRA continuation
coverage that has been elected for a qualified beneficiary must
extend for at least the period beginning on the date of the
qualifying event and ending not before the earliest of the following
dates -

(1) The last day of the maximum coverage period (see Q&A-4 of this
section);

(2) The first day for which timely payment is not made to the plan
with respect to the qualified beneficiary (see Q&A-5 in
�54.4980B-8);

(3) The date upon which the employer or employee organization ceases
to provide any group health plan (including successor plans) to any
employee;

(4) The date, after the date of the election, upon which the
qualified beneficiary first becomes covered under any other group
health plan, as described in Q&A-2 of this section;

(5) The date, after the date of the election, upon which the
qualified beneficiary first becomes entitled to Medicare benefits,
as described in Q&A-3 of this section; and

(6) In the case of a qualified beneficiary entitled to a disability
extension (see Q&A-5 of this section), the later of -

(i) Either 29 months after the date of the qualifying event, or the
first day of the month that is more than 30 days after the date of a
final determination under Title II or XVI of the Social Security Act
(42 U.S.C. 401-433 or 1381-1385) that the disabled qualified
beneficiary whose disability resulted in the qualified beneficiary's
being entitled to the disability extension is no longer disabled,
whichever is earlier; or ( ii) The end of the maximum coverage
period that applies to the qualified beneficiary without regard to
the disability extension.

* * * * *

Q-4: When does the maximum coverage period end?

A-4: (a) Except as otherwise provided in this Q&A-4, the maximum
coverage period ends 36 months after the qualifying event. The
maximum coverage period for a qualified beneficiary who is a child
born to or placed for adoption with a covered employee during a
period of COBRA continuation coverage is the maximum coverage period
for the qualifying event giving rise to the period of COBRA
continuation coverage during which the child was born or placed for
adoption. Paragraph (b) of this Q&A-4 describes the starting point
from which the end of the maximum coverage period is measured. The
date that the maximum coverage period ends is described in paragraph
(c) of this Q&A-4 in a case where the qualifying event is a
termination of employment or reduction of hours of employment, in
paragraph (d) of this Q&A-4 in a case where a covered employee
becomes entitled to Medicare benefits under Title XVIII of the
Social Security Act (42 U.S.C. 1395-1395ggg) before experiencing a
qualifying event that is a termination of employment or reduction of
hours of employment, and in paragraph (e) of this Q&A-4 in the case
of a qualifying event that is the bankruptcy of the employer. See
Q&A-8 of �54.4980B-2 for limitations that apply to certain health
flexible spending arrangements. See also Q&A-6 of this section in
the case of multiple qualifying events. Nothing in ��54.4980B-1
through 54.4980B-10 prohibits a group health plan from providing
coverage that continues beyond the end of the maximum coverage
period. ( b)(1) The end of the maximum coverage period is measured
from the date of the qualifying event even if the qualifying event
does not result in a loss of coverage under the plan until a later
date. If, however, coverage under the plan is lost at a later date
and the plan provides for the extension of the required periods,
then the maximum coverage period is measured from the date when
coverage is lost. A plan provides for the extension of the required
periods if it provides both -

(i) That the 30-day notice period (during which the employer is
required to notify the plan administrator of the occurrence of
certain qualifying events such as the death of the covered employee
or the termination of employment or reduction of hours of employment
of the covered employee) begins on the date of the loss of coverage
rather than on the date of the qualifying event; and

(ii) That the end of the maximum coverage period is measured from
the date of the loss of coverage rather than from the date of the
qualifying event.

(2) In the case of a plan that provides for the extension of the
required periods, whenever the rules of ��54.4980B-1 through
54.4980B-10 refer to the measurement of a period from the date of
the qualifying event, those rules apply in such a case by measuring
the period instead from the date of the loss of coverage.

(c) In the case of a qualifying event that is a termination of
employment or reduction of hours of employment, the maximum coverage
period ends 18 months after the qualifying event if there is no
disability extension, and 29 months after the qualifying event if
there is a disability extension. See Q&A-5 of this section for rules
to determine if there is a disability extension. If there is a
disability extension and the disabled qualified beneficiary is later
determined to no longer be disabled, then a plan may terminate the
COBRA continuation coverage of an affected qualified beneficiary
before the end of the disability extension; see paragraph (a)(6) in
Q&A-1 of this section.

(d)(1) If a covered employee becomes entitled to Medicare benefits
under Title XVIII of the Social Security Act (42 U.S.C.
1395-1395ggg) before experiencing a qualifying event that is a
termination of employment or reduction of hours of employment, the
maximum coverage period for qualified beneficiaries other than the
covered employee ends on the later of -

(i) 36 months after the date the covered employee became entitled to
Medicare benefits; or

(ii) 18 months (or 29 months, if there is a disability extension)
after the date of the covered employee's termination of employment
or reduction of hours of employment.

(2) See paragraph (b) of Q&A-3 of this section regarding when a
covered employee becomes entitled to Medicare benefits.

(e) In the case of a qualifying event that is the bankruptcy of the
employer, the maximum coverage period for a qualified beneficiary
who is the retired covered employee ends on the date of the retired
covered employee's death. The maximum coverage period for a
qualified beneficiary who is the spouse, surviving spouse, or
dependent child of the retired covered employee ends on the earlier
of -

(1) The date of the qualified beneficiary's death; or

(2) The date that is 36 months after the death of the retired
covered employee.

* * * * *

A-5: * * *

(c) * * * For this purpose, the period of the first 60 days of COBRA
continuation coverage is measured from the date of the qualifying
event described in paragraph (b) of this Q&A-5 (except that if a
loss of coverage would occur at a later date in the absence of an
election for COBRA continuation coverage and if the plan provides
for the extension of the required periods (as described in paragraph
(b) of Q&A-4 of this section) then the period of the first 60 days
of COBRA continuation coverage is measured from the date on which
the coverage would be lost). * * *

* * * * *

A-6: * * *

(b) The requirements of this paragraph (b) are satisfied if a
qualifying event that gives rise to an 18-month maximum coverage
period (or a 29-month maximum coverage period in the case of a
disability extension) is followed, within that 18-month period (or
within that 29-month period, in the case of a disability extension),
by a second qualifying event (for example, a death or a divorce)
that gives rise to a 36-month maximum coverage period. (Thus, a
termination of employment following a qualifying event that is a
reduction of hours of employment cannot be a second qualifying event
that expands the maximum coverage period; the bankruptcy of an
employer also cannot be a second qualifying event that expands the
maximum coverage period.) In such a case, the original 18-month
period (or 29-month period, in the case of a disability extension)
is expanded to 36 months, but only for those individuals who were
qualified beneficiaries under the group health plan in connection
with the first qualifying event and who are still qualified
beneficiaries at the time of the second qualifying event. No
qualifying event (other than a qualifying event that is the
bankruptcy of the employer) can give rise to a maximum coverage
period that ends more than 36 months after the date of the first
qualifying event (or more than 36 months after the date of the loss
of coverage, in the case of a plan that provides for the extension
of the required periods; see paragraph (b) in Q&A-4 of this
section). For example, if an employee covered by a group health plan
that is subject to COBRA terminates employment (for reasons other
than gross misconduct) on December 31, 2000, the termination is a
qualifying event giving rise to a maximum coverage period that
extends for 18 months to June 30, 2002. If the employee dies after
the employee and the employee's spouse and dependent children have
elected COBRA continuation coverage and on or before June 30, 2002,
the spouse and dependent children (except anyone among them whose
COBRA continuation coverage had already ended for some other reason)
will be able to receive COBRA continuation coverage through December
31, 2003. See Q&A-8(b) of �54.4980B-2 for a special rule that
applies to certain health flexible spending arrangements.

* * * * *

Par. 10. Sections 54.4980B-9 and 54.4980B-10 are added to read as
follows:

�54.4980B-9 Business reorganizations and employer withdrawals from
multiemployer plans.

The following questions-and-answers address who has the obligation
to make COBRA continuation coverage available to affected qualified
beneficiaries in the context of business reorganizations and
employer withdrawals from multiemployer plans:

Q-1: For purposes of this section, what are a business
reorganization, a stock sale, and an asset sale?

A-1: For purposes of this section:

(a) A business reorganization is a stock sale or an asset sale.

(b) A stock sale is a transfer of stock in a corporation that causes
the corporation to become a different employer or a member of a
different employer. (See Q&A-2 of �54.4980B-2, which defines
employer to include all members of a controlled group of
corporations.) Thus, for example, a sale or distribution of stock in
a corporation that causes the corporation to cease to be a member of
one controlled group of corporations, whether or not it becomes a
member of another controlled group of corporations, is a stock sale.

(c) An asset sale is a sale of substantial assets, such as a plant
or division or substantially all the assets of a trade or business.

(d) The rules of �1.414(b)-1 of this chapter apply in determining
what constitutes a controlled group of corporations, and the rules
of ��1.414(c)-1 through 1.414(c)-5 of this chapter apply in
determining what constitutes a group of trades or businesses under
common control.

Q-2: In the case of a stock sale, what are the selling group, the
acquired organization, and the buying group?

A-2: In the case of a stock sale -

(a) The selling group is the controlled group of corporations, or
the group of trades or businesses under common control, of which a
corporation ceases to be a member as a result of the stock sale;

(b) The acquired organization is the corporation that ceases to be a
member of the selling group as a result of the stock sale; and

(c) The buying group is the controlled group of corporations, or the
group of trades or businesses under common control, of which the
acquired organization becomes a member as a result of the stock
sale. If the acquired organization does not become a member of such
a group, the buying group is the acquired organization.

Q-3: In the case of an asset sale, what are the selling group and
the buying group?

A-3: In the case of an asset sale - (a) The selling group is the
controlled group of corporations or the group of trades or
businesses under common control that includes the corporation or
other trade or business that is selling the assets; and

(b) The buying group is the controlled group of corporations or the
group of trades or businesses under common control that includes the
corporation or other trade or business that is buying the assets.

Q-4: Who is an M&A qualified beneficiary?

A-4: (a) Asset sales: In the case of an asset sale, an individual is
an M&A qualified beneficiary if the individual is a qualified
beneficiary whose qualifying event occurred prior to or in
connection with the sale and who is, or whose qualifying event
occurred in connection with, a covered employee whose last
employment prior to the qualifying event was associated with the
assets being sold.

(b) Stock sales: In the case of a stock sale, an individual is an
M&A qualified beneficiary if the individual is a qualified
beneficiary whose qualifying event occurred prior to or in
connection with the sale and who is, or whose qualifying event
occurred in connection with, a covered employee whose last
employment prior to the qualifying event was with the acquired
organization.

(c) In the case of a qualified beneficiary who has experienced more
than one qualifying event with respect to her or his current right
to COBRA continuation coverage, the qualifying event referred to in
paragraphs (a) and (b) of this Q&A-4 is the first qualifying event.

Q-5: In the case of a stock sale, is the sale a qualifying event
with respect to a covered employee who is employed by the acquired
organization before the sale and who continues to be employed by the
acquired organization after the sale, or with respect to the spouse
or dependent children of such a covered employee?

A-5: No. A covered employee who continues to be employed by the
acquired organization after the sale does not experience a
termination of employment as a result of the sale.

Accordingly, the sale is not a qualifying event with respect to the
covered employee, or with respect to the covered employee's spouse
or dependent children, regardless of whether they are provided with
group health coverage after the sale, and neither the covered
employee, nor the covered employee's spouse or dependent children,
become qualified beneficiaries as a result of the sale.

Q-6: In the case of an asset sale, is the sale a qualifying event
with respect to a covered employee whose employment immediately
before the sale was associated with the purchased assets, or with
respect to the spouse or dependent children of such a covered
employee who are covered under a group health plan of the selling
group immediately before the sale?

A-6: (a) Yes, unless -

(1) The buying group is a successor employer under paragraph (c) of
Q&A-8 of this section or Q&A-2 of �54.4980B-2, and the covered
employee is employed by the buying group immediately after the sale;
or

(2) The covered employee (or the spouse or any dependent child of
the covered employee) does not lose coverage (within the meaning of
paragraph (c) in Q&A-1 of �54.4980B-4) under a group health plan of
the selling group after the sale.

(b) Unless the conditions in paragraph (a)(1) or (2) of this Q&A-6
are satisfied, such a covered employee experiences a termination of
employment with the selling group as a result of the asset sale,
regardless of whether the covered employee is employed by the buying
group or whether the covered employee's employment is associated
with the purchased assets after the sale. Accordingly, the covered
employee, and the spouse and dependent children of the covered
employee who lose coverage under a plan of the selling group in
connection with the sale, are M&A qualified beneficiaries in
connection with the sale.

Q-7: In a business reorganization, are the buying group and the
selling group permitted to allocate by contract the responsibility
to make COBRA continuation coverage available to M&A qualified
beneficiaries?

A-7: Yes. Nothing in this section prohibits a selling group and a
buying group from allocating to one or the other of the parties in a
purchase agreement the responsibility to provide the coverage
required under ��54.4980B-1 through 54.4980B-10. However, if and to
the extent that the party assigned this responsibility under the
terms of the contract fails to perform, the party who has the
obligation under Q&A-8 of this section to make COBRA continuation
coverage available to M&A qualified beneficiaries continues to have
that obligation.

Q-8: Which group health plan has the obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries in a
business reorganization?

A-8: (a) In the case of a business reorganization (whether a stock
sale or an asset sale), so long as the selling group maintains a
group health plan after the sale, a group health plan maintained by
the selling group has the obligation to make COBRA continuation
coverage available to M&A qualified beneficiaries with respect to
that sale. This Q&A-8 prescribes rules for cases in which the
selling group ceases to provide any group health plan to any
employee in connection with the sale. Paragraph (b) of this Q&A-8
contains these rules for stock sales, and paragraph (c) of this
Q&A-8 contains these rules for asset sales. Neither a stock sale nor
an asset sale has any effect on the COBRA continuation coverage
requirements applicable to any group health plan for any period
before the sale.

(b)(1) In the case of a stock sale, if the selling group ceases to
provide any group health plan to any employee in connection with the
sale, a group health plan maintained by the buying group has the
obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to that stock sale. A group
health plan of the buying group has this obligation beginning on the
later of the following two dates and continuing as long as the
buying group continues to maintain a group health plan (but subject
to the rules in �54.4980B-7, relating to the duration of COBRA
continuation coverage) -

(i) The date the selling group ceases to provide any group health
plan to any employee; or

(ii) The date of the stock sale.

(2) The determination of whether the selling group's cessation of
providing any group health plan to any employee is in connection
with the stock sale is based on all of the relevant facts and
circumstances. A group health plan of the buying group does not, as
a result of the stock sale, have an obligation to make COBRA
continuation coverage available to those qualified beneficiaries of
the selling group who are not M&A qualified beneficiaries with
respect to that sale.

(c)(1) In the case of an asset sale, if the selling group ceases to
provide any group health plan to any employee in connection with the
sale and if the buying group continues the business operations
associated with the assets purchased from the selling group without
interruption or substantial change, then the buying group is a
successor employer to the selling group in connection with that
asset sale. If the buying group is a successor employer, a group
health plan maintained by the buying group has the obligation to
make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to that asset sale. A group health plan
of the buying group has this obligation beginning on the later of
the following two dates and continuing as long as the buying group
continues to maintain a group health plan (but subject to the rules
in �54.4980B-7, relating to the duration of COBRA continuation
coverage) -

(i) The date the selling group ceases to provide any group health
plan to any employee; or

(ii) The date of the asset sale.

(2) The determination of whether the selling group's cessation of
providing any group health plan to any employee is in connection
with the asset sale is based on all of the relevant facts and
circumstances. A group health plan of the buying group does not, as
a result of the asset sale, have an obligation to make COBRA
continuation coverage available to those qualified beneficiaries of
the selling group who are not M&A qualified beneficiaries with
respect to that sale.

(d) The rules of Q&A-1 through Q&A-7 of this section and this Q&A-8
are illustrated by the following examples; in each example, each
group health plan is subject to COBRA:

Stock Sale Examples

Example 1. (i) Selling Group S consists of three corporations, A, B,
and C. Buying Group P consists of two corporations, D and E. P
enters into a contract to purchase all the stock of C from S
effective July 1, 2002. Before the sale of C, S maintains a single
group health plan for the employees of A, B, and C (and their
families). P maintains a single group health plan for the employees
of D and E (and their families). Effective July 1, 2002, the
employees of C (and their families) become covered under P's plan.
On June 30, 2002, there are 48 qualified beneficiaries receiving
COBRA continuation coverage under S's plan, 15 of whom are M&A
qualified beneficiaries with respect to the sale of C. (The other 33
qualified beneficiaries had qualifying events in connection with a
covered employee whose last employment before the qualifying event
was with either A or B.)

(ii) Under these facts, S's plan continues to have the obligation to
make COBRA continuation coverage available to the 15 M&A qualified
beneficiaries under S's plan after the sale of C to P. The employees
who continue in employment with C do not experience a qualifying
event by virtue of P's acquisition of C. If they experience a
qualifying event after the sale, then the group health plan of P has
the obligation to make COBRA continuation coverage available to
them.

Example 2. (i) Selling Group S consists of three corporations, A, B,
and C. Each of A, B, and C maintains a group health plan for its
employees (and their families). Buying Group P consists of two
corporations, D and E. P enters into a contract to purchase all of
the stock of C from S effective July 1, 2002. As of June 30, 2002,
there are 14 qualified beneficiaries receiving COBRA continuation
coverage under C's plan. C continues to employ all of its employees
and continues to maintain its group health plan after being acquired
by P on July 1, 2002.

(ii) Under these facts, C is an acquired organization and the 14
qualified beneficiaries under C's plan are M&A qualified
beneficiaries. A group health plan of S (that is, either the plan
maintained by A or the plan maintained by B) has the obligation to
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries. S and P could negotiate to have C's plan continue to
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries. In such a case, neither A's plan nor B's plan would
make COBRA continuation coverage available to the 14 M&A qualified
beneficiaries unless C's plan failed to fulfill its contractual
responsibility to make COBRA continuation coverage available to the
M&A qualified beneficiaries. C's employees (and their spouses and
dependent children) do not experience a qualifying event in
connection with P's acquisition of C, and consequently no plan
maintained by either P or S has any obligation to make COBRA
continuation coverage available to C's employees (or their spouses
or dependent children) in connection with the transfer of stock in C
from S to P.

Example 3. (i) The facts are the same as in Example 2, except that C
ceases to employ two employees on June 30, 2002, and those two
employees never become covered under P's plan.

(ii) Under these facts, the two employees experience a qualifying
event on June 30, 2002 because their termination of employment
causes a loss of group health coverage. A group health plan of S
(that is, either the plan maintained by A or the plan maintained by
B) has the obligation to make COBRA continuation coverage available
to the two employees (and to any spouse or dependent child of the
two employees who loses coverage under C's plan in connection with
the termination of employment of the two employees) because they are
M&A qualified beneficiaries with respect to the sale of C.

Example 4. (i) Selling Group S consists of three corporations, A, B,
and C. Buying Group P consists of two corporations, D and E. P
enters into a contract to purchase all of the stock of C from S
effective July 1, 2002. Before the sale of C, S maintains a single
group health plan for the employees of A, B, and C (and their
families). P maintains a single group health plan for the employees
of D and E (and their families). Effective July 1, 2002, the
employees of C (and their families) become covered under P's plan.
On June 30, 2002, there are 25 qualified beneficiaries receiving
COBRA continuation coverage under S's plan, 20 of whom are M&A
qualified beneficiaries with respect to the sale of C. (The other
five qualified beneficiaries had qualifying events in connection
with a covered employee whose last employment before the qualifying
event was with either A or B.) S terminates its group health plan
effective June 30, 2002 and begins to liquidate the assets of A and
B and to lay off the employees of A and B.

(ii) Under these facts, S ceases to provide a group health plan to
any employee in connection with the sale of C to P. Thus, beginning
July 1, 2002 P's plan has the obligation to make COBRA continuation
coverage available to the 20 M&A qualified beneficiaries, but P is
not obligated to make COBRA continuation coverage available to the
other 5 qualified beneficiaries with respect to S's plan as of June
30, 2002 or to any of the employees of A or B whose employment is
terminated by S (or to any of those employees' spouses or dependent
children).

Asset Sale Examples

Example 5. (i) Selling Group S provides group health plan coverage
to employees at each of its operating divisions. S sells the assets
of one of its divisions to Buying Group P. Under the terms of the
group health plan covering the employees at the division being sold,
their coverage will end on the date of the sale. P hires all but one
of those employees, gives them the same positions that they had with
S before the sale, and provides them with coverage under a group
health plan. Immediately before the sale, there are two qualified
beneficiaries receiving COBRA continuation coverage under a group
health plan of S whose qualifying events occurred in connection with
a covered employee whose last employment prior to the qualifying
event was associated with the assets sold to P.

(ii) These two qualified beneficiaries are M&A qualified
beneficiaries with respect to the asset sale to P. Under these
facts, a group health plan of S retains the obligation to make COBRA
continuation coverage available to these two M&A qualified
beneficiaries. In addition, the one employee P does not hire as well
as all of the employees P hires (and the spouses and dependent
children of these employees) who were covered under a group health
plan of S on the day before the sale are M&A qualified beneficiaries
with respect to the sale. A group health plan of S also has the
obligation to make COBRA continuation coverage available to these
M&A qualified beneficiaries.

Example 6. (i) Selling Group S provides group health plan coverage
to employees at each of its operating divisions. S sells
substantially all of the assets of all of its divisions to Buying
Group P, and S ceases to provide any group health plan to any
employee on the date of the sale.

P hires all but one of S's employees on the date of the asset sale
by S, gives those employees the same positions that they had with S
before the sale, and continues the business operations of those
divisions without substantial change or interruption. P provides
these employees with coverage under a group health plan. Immediately
before the sale, there are 10 qualified beneficiaries receiving
COBRA continuation coverage under a group health plan of S whose
qualifying events occurred in connection with a covered employee
whose last employment prior to the qualifying event was associated
with the assets sold to P.

(ii) These 10 qualified beneficiaries are M&A qualified
beneficiaries with respect to the asset sale to P. Under these
facts, P is a successor employer described in paragraph (c) of this
Q&A-8. Thus, a group health plan of P has the obligation to make
COBRA continuation coverage available to these 10 M&A qualified
beneficiaries.

(iii) The one employee that P does not hire and the family members
of that employee are also M&A qualified beneficiaries with respect
to the sale. A group health plan of P also has the obligation to
make COBRA continuation coverage available to these M&A qualified
beneficiaries.

(iv) The employees who continue in employment in connection with the
asset sale (and their family members) and who were covered under a
group health plan of S on the day before the sale are not M&A
qualified beneficiaries because P is a successor employer to S in
connection with the asset sale. Thus, no group health plan of P has
any obligation to make COBRA continuation coverage available to
these continuing employees with respect to the qualifying event that
resulted from their losing coverage under S's plan in connection
with the asset sale.

Example 7. (i) Selling Group S provides group health plan coverage
to employees at each of its two operating divisions. S sells the
assets of one of its divisions to Buying Group P1.

Under the terms of the group health plan covering the employees at
the division being sold, their coverage will end on the date of the
sale. P1 hires all but one of those employees, gives them the same
positions that they had with S before the sale, and provides them
with coverage under a group health plan.

(ii) Under these facts, a group health plan of S has the obligation
to make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to the sale to P1. (If an M&A qualified
beneficiary first became covered under P1's plan after electing
COBRA continuation coverage under S's plan, then S's plan could
terminate the COBRA continuation coverage once the M&A qualified
beneficiary became covered under P1's plan, provided that the
remaining conditions of Q&A-2 of �54.4980B-7 were satisfied.) (iii)
Several months after the sale to P1, S sells the assets of its
remaining division to Buying Group P2, and S ceases to provide any
group health plan to any employee on the date of that sale. Thus,
under Q&A-1 of �54.4980B-7, S ceases to have an obligation to make
COBRA continuation coverage available to any qualified beneficiary
on the date of the sale to P2. P1 and P2 are unrelated
organizations.

(iv) Even if it was foreseeable that S would sell its remaining
division to an unrelated third party after the sale to P1, under
these facts the cessation of S to provide any group health plan to
any employee on the date of the sale to P2 is not in connection with
the asset sale to P1. Thus, even after the date S ceases to provide
any group health plan to any employee, no group health plan of P1
has any obligation to make COBRA continuation coverage available to
M&A qualified beneficiaries with respect to the asset sale to P1 by
S. If P2 is a successor employer under the rules of paragraph (c) of
this Q&A-8 and maintains one or more group health plans after the
sale, then a group health plan of P2 would have an obligation to
make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to the asset sale to P2 by S (but in such
a case employees of S before the sale who continued working for P2
after the sale would not be M&A qualified beneficiaries). However,
even in such a case, no group health plan of P2 would have an
obligation to make COBRA continuation coverage available to M&A
qualified beneficiaries with respect to the asset sale to P1 by S.
Thus, under these facts, after S has ceased to provide any group
health plan to any employee, no plan has an obligation to make COBRA
continuation coverage available to M&A qualified beneficiaries with
respect to the asset sale to P1.

Example 8. (i) Selling Group S provides group health plan coverage
to employees at each of its operating divisions. S sells
substantially all of the assets of all of its divisions to Buying
Group P. P hires most of S's employees on the date of the purchase
of S's assets, retains those employees in the same positions that
they had with S before the purchase, and continues the business
operations of those divisions without substantial change or
interruption. P provides these employees with coverage under a group
health plan. S continues to employ a few employees for the principal
purpose of winding up the affairs of S in preparation for
liquidation.

S continues to provide coverage under a group health plan to these
few remaining employees for several weeks after the date of the sale
and then ceases to provide any group health plan to any employee.

(ii) Under these facts, the cessation by S to provide any group
health plan to any employee is in connection with the asset sale to
P. Because of this, and because P continued the business operations
associated with those assets without substantial change or
interruption, P is a successor employer to S with respect to the
asset sale. Thus, a group health plan of P has the obligation to
make COBRA continuation coverage available to M&A qualified
beneficiaries with respect to the sale beginning on the date that S
ceases to provide any group health plan to any employee.

(A group health plan of S retains this obligation for the several
weeks after the date of the sale until S ceases to provide any group
health plan to any employee.)

Q-9: Can the cessation of contributions by an employer to a
multiemployer group health plan be a qualifying event?

A-9: The cessation of contributions by an employer to a
multiemployer group health plan is not itself a qualifying event,
even though the cessation of contributions may cause current
employees (and their spouses and dependent children) to lose
coverage under the multiemployer plan. An event coinciding with the
employer's cessation of contributions (such as a reduction of hours
of employment in the case of striking employees) will constitute a
qualifying event if it otherwise satisfies the requirements of Q&A-1
of �54.4980B-4.

Q-10: If an employer stops contributing to a multiemployer group
health plan, does the multiemployer plan have the obligation to make
COBRA continuation coverage available to a qualified beneficiary who
was receiving coverage under the multiemployer plan on the day
before the cessation of contributions and who is, or whose
qualifying event occurred in connection with, a covered employee
whose last employment prior to the qualifying event was with the
employer that has stopped contributing to the multiemployer plan?

A-10: (a) In general, yes. (See Q&A-3 of �54.4980B-2 for a
definition of multiemployer plan.) If, however, the employer that
stops contributing to the multiemployer plan establishes one or more
group health plans (or starts contributing to another multiemployer
plan that is a group health plan) covering a significant number of
the employer's employees formerly covered under the multiemployer
plan, the plan established by the employer (or the other
multiemployer plan) has the obligation to make COBRA continuation
coverage available to any qualified beneficiary who was receiving
coverage under the multiemployer plan on the day before the
cessation of contributions and who is, or whose qualifying event
occurred in connection with, a covered employee whose last
employment prior to the qualifying event was with the employer.

(b) The rules of Q&A-9 of this section and this Q&A-10 are
illustrated by the following examples; in each example, each group
health plan is subject to COBRA:

Example 1. (i) Employer Z employs a class of employees covered by a
collective bargaining agreement and participating in multiemployer
group health plan M. As required by the collective bargaining
agreement, Z has been making contributions to M. Z experiences
financial difficulties and stops making contributions to M but
continues to employ all of the employees covered by the collective
bargaining agreement. Z's cessation of contributions to M causes
those employees (and their spouses and dependent children) to lose
coverage under M. Z does not establish any group health plan
covering any of the employees covered by the collective bargaining
agreement.

(ii) After Z stops contributing to M, M continues to have the
obligation to make COBRA continuation coverage available to any
qualified beneficiary who experienced a qualifying event that
preceded or coincided with the cessation of contributions to M and
whose coverage under M on the day before the qualifying event was
due to an employment affiliation with Z. The loss of coverage under
M for those employees of Z who continue in employment (and the loss
of coverage for their spouses and dependent children) does not
constitute a qualifying event.

Example 2. (i) Employer Y employs a class of employees covered by a
collective bargaining agreement and participating in multiemployer
group health plan M. As required by the collective bargaining
agreement, Y has been making contributions to M. Y experiences
financial difficulties and is forced into bankruptcy by its
creditors. Y continues to employ all of the employees covered by the
collective bargaining agreement. Y also continues to make
contributions to M until the current collective bargaining agreement
expires, on June 30, 2001, and then Y stops making contributions to
M. Y's employees (and their spouses and dependent children) lose
coverage under M effective July 1, 2001. Y does not enter into
another collective bargaining agreement covering the class of
employees covered by the expired collective bargaining agreement.
Effective September 1, 2001, Y establishes a group health plan
covering the class of employees formerly covered by the collective
bargaining agreement. The group health plan also covers their
spouses and dependent children.

(ii) Under these facts, M has the obligation to make COBRA
continuation coverage available from July 1, 2001 until August 31,
2001, and the group health plan established by Y has the obligation
to make COBRA continuation coverage available from September 1, 2001
until the obligation ends (see Q&A-1 of �54.4980B-7) to any
qualified beneficiary who experienced a qualifying event that
preceded or coincided with the cessation of contributions to M and
whose coverage under M on the day before the qualifying event was
due to an employment affiliation with Y. The loss of coverage under
M for those employees of Y who continue in employment ( and the loss
of coverage for their spouses and dependent children) does not
constitute a qualifying event.

Example 3. (i) Employer X employs a class of employees covered by a
collective bargaining agreement and participating in multiemployer
group health plan M. As required by the collective bargaining
agreement, X has been making contributions to M. The employees
covered by the collective bargaining agreement vote to decertify
their current employee representative effective January 1, 2002 and
vote to certify a new employee representative effective the same
date. As a consequence, on January 1, 2002 they cease to be covered
under M and commence to be covered under multiemployer group health
plan N.

(ii) Effective January 1, 2002, N has the obligation to make COBRA
continuation coverage available to any qualified beneficiary who
experienced a qualifying event that preceded or coincided with the
cessation of contributions to M and whose coverage under M on the
day before the qualifying event was due to an employment affiliation
with X. The loss of coverage under M for those employees of X who
continue in employment (and the loss of coverage for their spouses
and dependent children) does not constitute a qualifying event.

�54.4980B-10 Interaction of FMLA and COBRA.

The following questions-and-answers address how the taking of leave
under the Family and Medical Leave Act of 1993 (FMLA) (29 U.S.C.
2601-2619) affects the COBRA continuation coverage requirements:

Q-1: In what circumstances does a qualifying event occur if an
employee does not return from leave taken under FMLA?

A-1: (a) The taking of leave under FMLA does not constitute a
qualifying event. A qualifying event under Q&A-1 of �54.4980B-4
occurs, however, if -

(1) An employee (or the spouse or a dependent child of the employee)
is covered on the day before the first day of FMLA leave (or becomes
covered during the FMLA leave) under a group health plan of the
employee's employer;

(2) The employee does not return to employment with the employer at
the end of the FMLA leave; and

(3) The employee (or the spouse or a dependent child of the
employee) would, in the absence of COBRA continuation coverage, lose
coverage under the group health plan before the end of the maximum
coverage period.

(b) However, the satisfaction of the three conditions in paragraph
(a) of this Q&A-1 does not constitute a qualifying event if the
employer eliminates, on or before the last day of the employee's
FMLA leave, coverage under a group health plan for the class of
employees (while continuing to employ that class of employees) to
which the employee would have belonged if the employee had not taken
FMLA leave.

Q-2: If a qualifying event described in Q&A-1 of this section
occurs, when does it occur, and how is the maximum coverage period
measured?

A-2: A qualifying event described in Q&A-1 of this section occurs on
the last day of FMLA leave. The maximum coverage period (see Q&A-4
of �54.4980B-7) is measured from the date of the qualifying event
(that is, the last day of FMLA leave). If, however, coverage under
the group health plan is lost at a later date and the plan provides
for the extension of the required periods (see paragraph (b) of
Q&A-4 of �54.4980B-7), then the maximum coverage period is measured
from the date when coverage is lost. The rules of this Q&A-2 are
illustrated by the following examples:

Example 1. (i) Employee B is covered under the group health plan of
Employer X on January 31, 2001. B takes FMLA leave beginning
February 1, 2001. B's last day of FMLA leave is 12 weeks later, on
April 25, 2001, and B does not return to work with X at the end of
the FMLA leave. If B does not elect COBRA continuation coverage, B
will not be covered under the group health plan of X as of April 26,
2001.

(ii) B experiences a qualifying event on April 25, 2001, and the
maximum coverage period is measured from that date. (This is the
case even if, for part or all of the FMLA leave, B fails to pay the
employee portion of premiums for coverage under the group health
plan of X and is not covered under X's plan. See Q&A-3 of this
section.)

Example 2. (i) Employee C and C's spouse are covered under the group
health plan of Employer Y on August 15, 2001. C takes FMLA leave
beginning August 16, 2001. C informs Y less than 12 weeks later, on
September 28, 2001, that C will not be returning to work. Under the
FMLA regulations, 29 CFR Part 825 (��825.100-825.800), C's last day
of FMLA leave is September 28, 2001. C does not return to work with
Y at the end of the FMLA leave. If C and C's spouse do not elect
COBRA continuation coverage, they will not be covered under the
group health plan of Y as of September 29, 2001.

(ii) C and C's spouse experience a qualifying event on September 28,
2001, and the maximum coverage period (generally 18 months) is
measured from that date. (This is the case even if, for part or all
of the FMLA leave, C fails to pay the employee portion of premiums
for coverage under the group health plan of Y and C or C's spouse is
not covered under Y's plan.

See Q&A-3 of this section.)

Q-3: If an employee fails to pay the employee portion of premiums
for coverage under a group health plan during FMLA leave or declines
coverage under a group health plan during FMLA leave, does this
affect the determination of whether or when the employee has
experienced a qualifying event?

A-3: No. Any lapse of coverage under a group health plan during FMLA
leave is irrelevant in determining whether a set of circumstances
constitutes a qualifying event under Q&A-1 of this section or when
such a qualifying event occurs under Q&A-2 of this section.

Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this
section affected by a requirement of state or local law to provide a
period of coverage longer than that required under FMLA?

A-4: No. Any state or local law that requires coverage under a group
health plan to be maintained during a leave of absence for a period
longer than that required under FMLA (for example, for 16 weeks of
leave rather than for the 12 weeks required under FMLA) is
disregarded for purposes of determining when a qualifying event
occurs under Q&A-1 through Q&A-3 of this section.

Q-5: May COBRA continuation coverage be conditioned upon
reimbursement of the premiums paid by the employer for coverage
under a group health plan during FMLA leave?

A-5: No. The U.S. Department of Labor has published rules describing
the circumstances in which an employer may recover premiums it pays
to maintain coverage, including family coverage, under a group
health plan during FMLA leave from an employee who fails to return
from leave. See 29 CFR 825.213. Even if recovery of premiums is
permitted under 29 CFR 825.213, the right to COBRA continuation
coverage cannot be conditioned upon the employee's reimbursement of
the employer for premiums the employer paid to maintain coverage
under a group health plan during FMLA leave.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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