One of the more common qualifying events is a divorce or legal separation from the covered employee. In most cases, this is fairly straightforward in practice – for example, employee’s spouse is covered under the plan, employees gets a divorce and, as a result of the divorce, the spouse loses coverage, and so the plan is obligated to offer 36-months of COBRA coverage to the ex-spouse. This assumes, of course, that one of the parties notified the plan or COBRA administrator within 60 days of the date of the divorce or legal separation.
However, an employee’s separation or divorce is not always this straightforward in real life. For example, take the following set of facts:
The “In Anticipation of Divorce” rule is often a surprise to plan administrators. Under this rule, which is included in the COBRA regulations (but not the COBRA statute), a plan is required to make COBRA continuation coverage available to a spouse following a divorce – even if that spouse is not enrolled in the plan at the time of the divorce – if the spouse’s coverage was eliminated by the covered employee in anticipation of the divorce (or legal separation if the separation would trigger a loss of coverage under the terms of the plan).
One of the reasons that this rule is commonly overlooked may be because the Internal Revenue Service has never issued additional guidance about the definition of “in anticipation of divorce” and the Department of Labor has never included this rule in any of its model COBRA notices. Even if not overlooked, the rule is difficult to administer because it requires the plan administrator to make a judgment call about why the employee dropped his or her spouse from coverage. Was it in anticipation of the divorce or legal separation? Or was it for another reason, such as the spouse getting a new job which offered her more affordable or more comprehensive health coverage?
Given the lack of guidance from the IRS, our recommendation to plan administrators is to adopt the following practices:
The potential non-compliance consequences include excise tax penalties that may be assessed by the IRS for each day on which the plan fails to comply with COBRA (up to $200 per day) and the risk that the ex-spouse may sue for COBRA coverage, which carries the potential for damages equal to the claims that should have been paid by the plan and the award of attorneys’ fees for the prevailing party.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:
Casey K. Fleming
Leigh C. Riley