The COBRA legislation is specific in its definition of premiums being offered to Qualified Beneficiaries. Premiums are based upon the amount the insurance carrier is charging the employer (or actuarial equivalent for self funded plans). The employer then has the right to add an administration fee of up to two percent (fifty percent for qualified beneficiaries deemed “disabled” by the Social Security Administration). These rates are to remain in effect for a twelve month period, commonly known as the “Determination Period.”

The question arises as to what COBRA Participants should be charged in the event there is a midyear change in plan(s) and/or rates. This may not occur often but it is important the Administrator understands it is an issue, and the best methods to handle it.

The IRS offers the following three instances which would allow the employer to change rates for COBRA Participants outside the “Determination Period.” The premiums may be changed,

1. if the employer was subsidizing all or a portion of the qualified beneficiary’s premiums for a term less than the maximum timeframe under COBRA (18, 29 or 36 months);
   
2. if the COBRA Participant has entered their 19th (through 29th ) month under the COBRA disability extension;
   
3. if the COBRA Participant changes his/her coverage. For example, the Participant removes a dependent and goes from Family to Single coverage; or
   
4. if the rates for the group are decreased. The law states COBRA Participants are to receive the rates of a similarly-situated active employee so if employees have received a decrease, COBRA Participants should also receive the decreased rate.
   

Since you cannot change rates, can you change the “Determination Period?” COBRA does not address changes to the Determination Period so it is assumed to be appropriate as long as the Administrator is “acting in good faith.” There are three approaches that an Administrator may consider. (The author provides these alternatives as options and does not recommend one over the other.)

• Example information to help explain the different methods:
  Current Determination Period: January 1 to December 31
  Current Premium: $300.00
  
  
• Implement a new insurance plan replacing current plan effective July 1st.
  New Determination Period: July 1 to June 30
  New Premium: $350.00
  

Alternative #1 – The employer creates a second “Determination Period” running concurrently with the initial Determination Period. Qualified Beneficiaries currently enrolled on the plan as of the date of the change (July 1st) would continue to receive the same premiums ($300.00) as originally offered for a year, changing (to $350.00) at the beginning of the original Determination Period (January 1st). The problem is the employer would end up subsidizing COBRA premiums [$50.00 ($350.00 - $300)] for these COBRA Participants for a portion of their COBRA timeframe.

New COBRA Participants would receive the new plan’s COBRA rates ($350.00 as designated under the “new Determination Period). Eventually, after all COBRA Participants under the initial Determination Period fall off the plan, the new Determination Period would be the sole determining period.

Alternative #2 – The second option would be to have the new determination period start and all new qualified beneficiaries would receive the new rates (or $350.00 based upon our example information). COBRA Participants who were enrolled on COBRA prior to the new Determination Period would continue with the same rate ($300.00) until the beginning of the new Determination Period (July 1st). Their rates would not change at the end of the “current Determination Period” (Jan 1st) but would continue and be subsidized by the employer until the beginning of the new Determination Period.

Alternative #3 – Change the Determination Period from the current to the new one based upon the change in plans for all COBRA Participants. In our example, the Administrator would change the Determination Period from January 1 – December 31 to July 1 to June 30. It could be argued the COBRA Participants did not receive a twelve month rate. On the other hand, the rate and plan had changed for similarly-situated employees therefore COBRA Participants would also be required to change. The risk this could be argued in court (and will be in time we venture to guess) is greater for self-funded plans because of the control employers have over setting the COBRA rates.

There is no set method for changing the Determination Period for COBRA premiums. We produce this article to illustrate the issues involved when a midyear change is made. It is recommended you seek the advice of a Benefit Attorney if your organization decides to implement a plan midyear.