COBRA and Spousal Coverage

The Basics

Spouses who are covered under a group health plan on the day before a qualifying event have an independent right to elect COBRA.

Six qualifying events apply to spouses: (1) employee’s termination of employment, (2) employee’s reduction of hours, (3) an employer’s bankruptcy, (4) death of the employee, (5) divorce or legal separation, and (6) a covered employee becoming entitled to Medicare.

In most cases, an employer must offer COBRA to a spouse when a qualifying event causes (or will cause) a loss of group health plan coverage. The spouse is given an independent right to elect COBRA, meaning that the spouse can elect coverage even if the employee does not.

Nuance 1: When Employers Stop Offering Spousal Health Coverage

The Affordable Care Act (ACA) does not require that employers offer group health insurance coverage to spouses and dependents. As a cost-saving measure, some employers choose to eliminate spousal health coverage and only offer coverage to employees. So, if an employer chooses to stop offering spousal health coverage, must the employer offer COBRA to spouses who were previously covered?

You may be shaking your head “yes” after reading the previous paragraph. Common sense says that because the plan is still in existence you cannot simply drop the spouses and not offer continuation. However, sometimes in the world of governmental regulation, common sense does not prevail.

Remember that a qualifying event must cause the loss of coverage. The qualifying events that apply to spouses are listed above. The termination or amendment of plan is not a qualifying event under COBRA. Thus, the employer does not have to offer COBRA to the spouses who lose coverage.

Nuance 2: When the Employee is Terminated for Gross Misconduct

If an employee is terminated for gross misconduct, the termination of employment is not a qualifying event. Because no qualifying event has occurred there is no right to COBRA for the employee, spouse and/or any dependents. No one gets a COBRA election.

For once in the compliance world, this seems like a clear rule. Not so fast. The kicker is that COBRA does not define “gross misconduct” and the courts cannot agree on a definition. A good piece of advice is to clearly define “gross misconduct” and communicate this definition with employees before any situations arise.

After consulting with a benefits attorney, if a situation appears to constitute “gross misconduct,” the employer does not need to offer COBRA to a spouse covered under the group health plan.

Nuance 3: When Spousal Coverage is Voluntarily Terminated Before a Divorce

Divorce is rarely a pretty thing. It is possible that an employee may remove a spouse from coverage before a divorce actually occurs. This voluntary termination of coverage is not technically a qualifying event because a divorce has not caused the loss of coverage – the coverage was voluntarily dropped. The IRS recognizes that, in these circumstances, spouses need protection.

The COBRA regulations provide that when spousal coverage is terminated in anticipation of a divorce, the spouse is entitled to COBRA. The tricky part is that COBRA does not begin until the actual divorce occurs – creating a gap in coverage. Thus, the regulations tie the earlier “voluntary” loss of coverage to the eventual divorce but do not start COBRA until the qualifying event (the divorce) happens. Once the employer is notified of the divorce, the employer must offer COBRA to the spouse.

Spousal COBRA Notice Best Practices

In certain circumstances, the Department of Labor requires that employers send a Notice of Unavailability. The notice must be sent under the same deadlines as an election notice. The notice of unavailability is required when the plan administrator receives notice that a qualifying event has occurred and the plan administrator determines that the individual is not entitled to COBRA.

Even when not required, a Notice of Unavailability can prevent confusion and limit disputes. A best practice is to send a Notice of Unavailability to spouses who are determined to be ineligible for COBRA.

Consequences: The Case of the Stale Cake

The potential consequences for failing to offer COBRA are best summed up by the stale cake case. Yes. You read that right. Mayes v. Winco Holdings, Inc., 846 F.3d 1274, 9th Cir (Feb. 3, 2017). In 2011, a nightshift supervisor took a cake from the store’s stales cart and put it in the breakroom to motivate nightshift employees. Even though the supervisor claimed this was a common practice, she was fired for theft. The employer claimed she was fired for gross misconduct and did not offer COBRA.

She sued alleging that she was fired not for stealing a stale cake, but was really the victim of gender discrimination. Her lawsuit included a claim for COBRA coverage. The trial court found for the employer on all counts. She appealed. In February 2017, the appeals court determined that enough evidence of discrimination existed for a trial to proceed. The case was remanded and will proceed to trial.

If the supervisor ultimately wins her case, the employer could be on the hook for retroactive COBRA coverage for the employee and her spouse, outstanding claims of the employee and her spouse and may face a potential penalty of up to $110 per day for failing to offer COBRA.

The moral of this story is to review spousal coverage situations closely. Know when you do not have to offer coverage but make sure to offer coverage when it is required. Also, keep in mind that the COBRA regulations provide the minimum requirements. An employer (following approval by its insurer or stop loss provider) may choose to offer COBRA to the spouse and/or dependents even when the law does not require it.