Continuation Coverage Requirements
Applicable to Group Health Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 54 TD 8928 RIN 1545-AW94

Continuation Coverage Requirements Applicable to Group Health Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that provide
guidance on certain issues that arise in connection with the COBRA
continuation coverage requirements applicable to group health plans.
The regulations in this document supplement final COBRA regulations
published on February 3, 1999 in the Federal Register. The
regulations will generally affect sponsors and administrators of,
and participants in, group health plans, and they provide plan
sponsors and plan administrators with guidance necessary to comply
with the law.

DATES: Effective date: These regulations are effective January 10,
2001. Applicability DATES: For dates of applicability, see the
discussion under the heading "Effective Date" in this preamble.

FOR FURTHER INFORMATION CONTACT: Yurlinda Mathis at 202-622-6080
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
imposes continuation coverage requirements on group health plans in
certain situations. This document contains amendments to the COBRA
health care continuation coverage regulations in 26 CFR part 54.
Proposed regulations interpreting COBRA were published in the
Federal Register on June 15, 1987 (52 FR 22716). On February 3,
1999, final COBRA regulations were published in the Federal Register
(64 FR 5160) (the 1999 final regulations), and a notice of proposed
rulemaking (REG-121865-98) was published the same day (64 FR 5237)
for certain issues not addressed in the final regulations (the 1999
proposed regulations). A public hearing was held on June 8, 1999. In
addition, written comments responding to the notice of proposed
rulemaking and to the final regulations were received. After
consideration of all the comments, the proposed regulations are
adopted as amended by this Treasury decision. The revisions are
discussed below.

Explanation and Summary of Comments

Small Employer Plan Exception

Group health plans maintained by an employer that had fewer than 20
employees on a typical business day in the previous calendar year
are not subject to COBRA. The 1999 proposed regulations relating to
plans maintained by an employer with fewer than 20 employees in the
previous calendar year are adopted as final regulations without
change. Unlike the 1987 proposed regulations, the 1999 proposed
regulations use a full-time equivalency method in counting part-time
employees for purposes of determining if an employer had fewer than
20 employees. Several commenters expressed disapproval of this
approach or inquired why it was being considered..- The 1987
proposed regulations contained rules about how to count part-time
employees.

An example can be used to illustrate how the 1987 rules were
proposed to apply. In a calendar year two employers each employ 15
full-time employees and 12 part-time employees. Each part-time
employee works 15 hours per week. Each employer has six typical
business days each week. One employer schedules all 12 of the part-
time employees to work two-and-a-half hours each typical business
day per week. The other employer staggers the schedule of the part-
time employees so that they each work seven-and-a-half hours on two
typical business days per week, so that four part-time employees
work on each typical business day. Under the 1987 proposed
regulations, the part-time employees of the first employer counted
as 12 employees whereas the part-time employees of the second
employer counted only as four employees. In the following calendar
year, a group health plan maintained by the first employer would
have been subject to COBRA (because the first employer employed 27
employees on a typical business day in the preceding calendar year)
but a group health plan maintained by the second employer would not
have been subject to COBRA (because the second employer employed
only 19 employees on a typical business day in the preceding
calendar year).

The exception for employers with fewer than 20 employees reflects
Congress' judgment that the costs and administrative burden
associated with COBRA should not be imposed on small employers and
that imposing such requirements on small employers may discourage
them from providing group health coverage to their employees. There
is no reason to distinguish, as the approach in the 1987 proposed
regulations would have done, between two employers with identical
numbers of full- and part-time employees based on the particular
days that the part-time employees work.

In contrast to the result under the 1987 proposed regulations, the
1999 proposed regulations and these final regulations provide for
the uniform treatment of employers employing the same number of
part-time employees for equivalent periods, regardless of how the
hours are scheduled. The full-time equivalency approach therefore
avoids creating an incentive for employers to schedule the work of
their part-time employees in a manner that is inconsistent with the
convenience of the employees or the needs of the business.

One commenter asked if it is permissible to count part-time
employees on an aggregate basis rather than an individual basis. On
an individual basis, the number of part-time employees is computed
by dividing the hours worked by each part-time employee by the hours
required to be considered working full-time and then by adding all
the quotients together. On an aggregate basis, the number of part-
time employees is computed by adding all the hours worked by part-
time employees and dividing that sum by the number of hours required
for one worker to be considered working full-time. Because the two
methods produce identical results, both methods are permissible.

Determination of Number of Plans

The 1999 proposed regulations relating to the determination of the
number of plans that an employer or employee organization maintains
are modified and reorganized. Under the 1999 proposed regulations,
the number of plans is determined by the instruments governing the
employer's or employee organization's arrangement or arrangements to
provide health care benefits (the instruments rule). Another rule
(the default rule) in the 1999 proposed regulations provides that if
there are no instruments or if the instruments are unclear about
whether there is one plan or more than one plan, all health care
benefits (except benefits for long-term care).provided by a
corporation, partnership, or other entity or trade or business, or
by an employee organization, constitute one group health plan.

Under these final regulations, these rules are reorganized so that
the default rule, under which all health care benefits provided by
one entity or trade or business are treated as one plan, is
presented first. The default rule applies unless it is clear from
the instruments governing an arrangement or arrangements to provide
health care benefits that the benefits are being provided under
separate plans and the arrangement or arrangements are operated
pursuant to such instruments as separate plans. In effect, this rule
revises the instruments rule in the 1999 proposed regulations by
adding the requirement that the arrangement or arrangements must be
operated pursuant to the instruments as separate plans to avoid the
application of the default rule. These organizational and
substantive changes from the 1999 proposed regulations were
developed at the suggestion of and with substantial assistance from
the U.S. Department of Labor, Pension and Welfare Benefits
Administration.

Health Flexible Spending Arrangements

The 1999 proposed regulations relating to health flexible spending
arrangements (health FSAs) are adopted with one minor change and one
addition. The minor change is the cross-reference in which a health
FSA is defined. The 1999 proposed regulations cite the definition in
proposed regulations under section 125. These final regulations cite
the definition in section 106(c)(2) of the Internal Revenue Code.
(Regulations published recently under section 125 also use the
section 106(c)(2) definition. See 65 FR 15548, 15553 (March 23,
2000).) The one addition is a clarification that, to the extent a
health FSA is obligated to make COBRA continuation coverage
available to a qualified beneficiary, all the general
COBRA.continuation coverage rules apply in the same way that they
apply to coverage under other group health plans, including the rule
for how plan limits on coverage apply to someone on COBRA
continuation coverage. This addition was made in response to the
request of one commenter and numerous inquiries about how the annual
election of a certain dollar amount by an employee under a health
FSA applies once there is a qualifying event.

Several commenters were pleased with the limited exception from the
COBRA rules for health FSAs under the 1999 proposed regulations and
asked that the final regulations go even further. They requested
that when participants under a health FSA experience a qualifying
event (and the benefits under the health FSA are excepted benefits
under sections 9831 and 9832), the final regulations should allow
the health FSA to compute the contributions made during that plan
year on the participant's behalf, reduce that amount by
reimbursements already made during the plan year, and -- instead of
requiring the health FSA to offer COBRA continuation coverage in
those cases in which there is a positive balance -- allow the
participant to spend whatever balance remains during the remainder
of the plan year without requiring or allowing additional
contributions. However, such an approach is inconsistent with the
requirements under sections 125 and 4980B and thus has not been
adopted.

One commenter requested that the final regulations clarify that the
applicable premium includes any employer subsidy. The statute makes
clear that the applicable premium is computed based on the total
cost of coverage, regardless of whether paid by the employer or
employee. The regulations generally do not address how to calculate
the applicable premium. However, the example for the health FSA
exception makes clear that the maximum amount a plan is permitted to
charge for COBRA coverage under a health FSA includes any employer
subsidy. One commenter requested that the final regulations clarify
that a health FSA is obligated to make COBRA continuation coverage
available only in connection with qualifying events that are a
termination of employment or reduction of hours of employment. This
suggestion is not adopted in the final regulations because it is
inconsistent with the statute. If health care expenses incurred for
a spouse or dependent child of an active employee can be reimbursed
under a health FSA, but, were it not for the COBRA continuation
coverage rules, would not be reimbursed after the death of the
employee, the divorce from the employee, or a dependent child's
ceasing to be a dependent child under the generally applicable
requirements under the health FSA, then the spouse or dependent
child has experienced a qualifying event and is entitled to continue
coverage under the health FSA to the same extent as they would
following termination of the employee's employment.

Increase in Premium is Loss of Coverage

The 1999 final regulations provide, in describing what constitutes a
loss of coverage for determining whether a qualifying event has
occurred, that any increase in premium or contribution that must be
paid for coverage as a result of one of the events that can be a
qualifying event is a loss of coverage. Several commenters
questioned why this rule was adopted and pointed out that it creates
administrative burdens in two situations without apparently
providing any advantage to the people whose premium is being
increased. The two situations concern retiring employees and full-
time employees reducing their work hours to become part-time
employees. In both situations, often employers will grant the
employees access to the same coverage but will require them to pay a
premium that is higher than what active employees pay though still
significantly less than the 102 percent rate permitted under COBRA.
The commenters wondered why it is necessary to.-provide these
individuals with a COBRA notice if it is always advantageous for the
individual to take the other coverage. They suggested that a loss of
coverage should not be considered to have occurred if employees (or
other qualified beneficiaries) can get access to the same coverage
for less than the applicable premium under COBRA.

The IRS and Treasury were mindful of these situations before they
adopted the rule in the 1999 final regulations. However, if a mere
increase in premium were not considered a loss in coverage, the
person whose premium is being increased would not be entitled by law
to a 60-day election period nor to a 45-day period after the
election for making the first premium payment. Although in many
cases a qualified beneficiary might prefer a lower premium over
these procedural protections under COBRA, in some cases these
procedural protections might be more valuable. The likelihood of the
COBRA procedural protections being more valuable than the lower
premium becomes substantial as the amount required to be paid for
part-time or retiree coverage approaches the amount of the
applicable premium. Accordingly, the final regulations retain the
rule in the 1999 final regulations so as not to deprive qualified
beneficiaries of potentially valuable rights.

Termination of Coverage in Anticipation of a Qualifying Event

The 1999 final regulations provide that if coverage is reduced or
eliminated in anticipation of an event, the elimination or reduction
is disregarded in determining whether the event causes a loss of
coverage. The regulations provide examples of an employer
eliminating an employee's coverage in anticipation of a termination
of employment and of an employee eliminating a spouse's coverage in
anticipation of a divorce.

One commenter requested a clarification that a reduction or
elimination more than six months before an event could not be
considered to be in anticipation of the event. However, in many
cases where coverage is eliminated by an employee in anticipation of
a divorce, the divorce will follow the elimination by more than six
months. Whether a reduction or elimination of coverage is in
anticipation of a qualifying event is a question to be resolved
based on all the relevant facts and circumstances. Thus, these final
regulations do not amend the rule in the 1999 final regulations to
limit the window during which an anticipatory reduction or
elimination can be considered to have occurred.

The commenter also requested a clarification that the coverage the
qualified beneficiary is entitled to in such a situation is the
coverage the qualified beneficiary had before coverage was reduced
or eliminated. The general rule in the 1999 final regulations for
determining what is COBRA continuation coverage applies in this
situation. Under the rule in the 1999 final regulations, the
qualified beneficiary will generally be entitled to the coverage
that the qualified beneficiary had before the qualifying event.
However, if between the date of the elimination or reduction in
coverage and the date of the qualifying event coverage is modified
for similarly situated nonCOBRA beneficiaries, then the modified
coverage must be made available to the qualified beneficiary.

Moving Outside Region of Region-Specific Coverage

The 1999 final regulations require employers and employee
organizations to make alternative coverage available to qualified
beneficiaries moving outside the service area of a region-specific
benefit package. One commenter asked for a clarification that the
alternative coverage must be made available immediately and cannot
be deferred until the beginning of the.-plan's next open enrollment
period. These final regulations clarify that the alternative
coverage must be made available not later than the date of the
qualified beneficiary's relocation, or, if later, the first day of
the month following the month in which the qualified beneficiary
requests the alternative coverage.

Another commenter expressed concern that a plan might have to incur
extraordinary costs (such as negotiating for a separate network of
providers in an indemnity plan with a preferred provider
organization, or establishing a separate schedule of usual,
customary, and reasonable costs) to provide coverage in areas to
which a qualified beneficiary might relocate but in which there were
no active employees of the employer or employee organization. The
rule in the 1999 final regulations does not require employers or
employee organizations to incur extraordinary costs to extend
coverage to qualified beneficiaries in areas in which the employer
or employee organization does not have active employees. In the case
of an indemnity plan with a preferred provider organization, the
plan need only provide benefits at the standard rate (that is, not
at the rate for preferred providers) to a qualified beneficiary who
moves outside the service area of the preferred provider network.
Similarly, a plan is not required to establish a separate schedule
of usual, customary, and reasonable costs solely for qualified
beneficiaries who reside in a region where no active employees work
or reside (regardless of whether this is to the qualified
beneficiary's benefit or detriment based on prevailing costs in the
region where the qualified beneficiary resides). Accordingly, these
final regulations do not modify the rule in the 1999 final
regulations based on this commenter's concern.

When COBRA Continuation Coverage Must Become Effective

The 1999 final regulations provide that, in the case of an indemnity
or reimbursement arrangement, claims incurred during the election
period do not have to be paid before the election (and, if
applicable, payment for the coverage) is made. In the case of
indemnity or reimbursement arrangements that allow retroactive
reinstatement of coverage, the 1999 final regulations provide that
coverage for qualified beneficiaries can be terminated and then
reinstated when the election is made. One commenter asked if these
two rules mean that coverage must be reinstated at the time of the
election even if payment is not made but that no claims need be paid
under that coverage until payment for the coverage is made. The
commenter pointed out that this would a pose a problem for employers
and employee organizations maintaining insured plans in that they
would have to pay the insurer premiums for the coverage even if
payment for the coverage was never made (whereas the insurer would
never have to pay any claim under the coverage). These final
regulations clarify this rule by explicitly providing that in the
case of indemnity plans and reimbursement arrangements that allow
retroactive reinstatement of coverage, coverage can be terminated
and later reinstated when the election (and, if applicable, payment
for the coverage) is made. Thus, under these final regulations, the
rules for when coverage must be reinstated and when claims must be
paid are the same.

Maximum Coverage Period

The 1999 proposed regulations relating to the maximum coverage
period are adopted as final regulations with a minor change to a
cross-reference.

Insignificant Underpayments

The 1999 final regulations prescribe how plans are to treat payments
for COBRA continuation coverage that are short by an amount that is
not significant. They require the plan to.-treat the payment as full
payment unless the plan notifies the qualified beneficiary of the
amount of the deficiency and grants a reasonable period for payment
of the deficiency. The regulations provide as a safe harbor that a
period of 30 days after the notice is provided is a reasonable
period for this purpose.

Many commenters requested that the regulations specify what is
considered a significant amount. These final regulations provide
that a shortfall is not significant if it is no greater than the
lesser of $50 (or another amount specified by the Commissioner in
guidance of general applicability) or 10 percent of the required
amount.

Several commenters also requested that the regulations specify a
period shorter than 30 days for payment of the deficiency to be
considered timely, but these final regulations do not adopt this
suggestion. The regulations require only that a plan grant a
reasonable period for payment of the deficiency. In some
circumstances, a period shorter than 30 days may be reasonable.
However, in other circumstances, a shorter period might not be
reasonable. The IRS and Treasury believe it is useful to provide the
certainty of a safe harbor, but they do not believe that a period
shorter than 30 days is sufficiently long in all cases.

Business Reorganizations

The 1999 proposed regulations relating to business reorganizations
are adopted as final regulations with two clarifications. The
proposed regulations provide that, in an asset sale (which is
defined as the sale of substantial assets such as a plant or
division or substantially all the assets of a trade or business), a
purchaser of assets is considered a successor employer if the seller
ceases to provide any group health plan to any employee in
connection with the sale and if the buyer continues the business
operations associated with those assets without substantial change
or interruption.

Several inquiries raised the question whether this rule applies if
the assets are purchased as part of a bankruptcy proceeding. The
final regulations clarify this rule for assets purchased in
bankruptcy by providing that a buying group does not fail to be a
successor employer in connection with an asset sale merely because
the sale takes place in connection with a bankruptcy proceeding.
Thus, the general rule for determining whether a buyer is a
successor employer applies in bankruptcy the same way that it does
outside of bankruptcy. These final regulations also clarify that
asset sale includes not only sales but other transfers as well.

Comments were received about other aspects of the proposed rules for
business reorganizations. Several commenters requested additional
guidance on the amount of assets that would constitute "substantial
assets" for purposes of the asset sale rules. The final regulations
retain the definition in the proposed regulations. This definition
is intended to be flexible enough to apply reasonably to the myriad
situations in which this issue arises. The asset sale rules,
including the definition of asset sale, are similar to the various
formulations of successor employer rules that have been fashioned by
the courts for various labor law purposes, adapted to the peculiar
circumstances that the COBRA continuation coverage requirements
create. In those cases, as in the final rule, a case-by-case
approach is favored. See, for example, Golden State Bottling Co. v.
NLRB, 414 U.S. 168 (1973); Howard Johnson Co. v. Detroit Local Joint
Executive Board, Hotel & Restaurant Employees & Bartenders
International Union, 417 U.S. 249 (1974); John Wiley & Sons, Inc. v.
Livingston, 376 U.S. 543 (1964); NLRB v. Burns International
Security Services, Inc., 406 U.S. 272 (1972); Fall River Dyeing &
Finishing Corp. v. NLRB, 482 U.S. 27 (1987); EEOC v. MacMillan
Bloedel Containers, Inc., 503 F.2d 1086 (6 th.-Cir. 1974); In re
National Airlines, Inc., 700 F.2d 695 (11 Cir. 1983); Upholsterers'
International th Union Pension Fund v. Artistic Furniture of
Pontiac, 920 F.2d 1323 (7 Cir. 1990); Central th States, Southeast &
Southwest Areas Pension Fund v. PYA/Monarch of Texas, Inc., 851 F.2d
780 (5 Cir. 1988).

One commenter requested clarification that the cessation of a plan
shortly before an asset sale is in connection with the sale (and
thus that the buying group would be responsible for making COBRA
continuation coverage available to M&A qualified beneficiaries in
connection with the sale if the buying group is a successor
employer). The regulations have not been modified for this request.
In many circumstances, cessation of a plan shortly before an asset
sale would be considered to be in connection with the sale. However,
there may be cases in which the plan was being terminated for an
unrelated reason. The application of this rule in any particular
case depends on all the relevant facts and circumstances.

The preamble to the 1999 proposed regulations included a description
of a potential rule that the IRS and Treasury were considering
adopting and solicited comments on that potential rule. The rule
would have provided that no loss of coverage occurs, and thus no
qualifying event occurs, if a purchaser of assets maintains
substantially the same plan for continuing employees for what would
otherwise be the maximum coverage period (generally 18 months). The
IRS and Treasury also acknowledged in the 1999 preamble concerns
about protecting the rights of qualified beneficiaries in this
situation. After consideration of the comments, the IRS and Treasury
have determined not to adopt such a special rule. Thus, under these
final regulations, in an asset sale, employees who terminate
employment with the seller and who no longer get health coverage
from the seller experience a qualifying event with respect to the
seller's plan even.-though they are employed by the buyer at the
same jobs they had with the seller and have the same health coverage
through the buyer.

Like the 1999 proposed regulations, these final 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. However, it is intended that, in general, the
principles reflected in the rules in the final regulations for
transfers of ownership interests in corporate entities should apply
in a similar fashion in analogous cases involving the transfer of
ownership interests in noncorporate entities.

Employer Withdrawals from Multiemployer Plans

The 1999 proposed regulations relating to employer withdrawals from
a multiemployer plan are adopted with two changes and two additional
examples to illustrate the rules as changed. The general approach of
the 1999 proposed regulations is retained. However, the proposed
rule renders an employer who stops contributing to a multiemployer
plan responsible for making COBRA continuation coverage available to
qualified beneficiaries associated with that employer only if the
employer establishes a new plan to cover active employees formerly
covered under the multiemployer plan. Several commenters suggested
that the employer should also be responsible for COBRA if the
coverage provided to employees formerly covered under the
multiemployer plan comes from an existing plan of the employer
(rather than from a new plan). The final rules have been revised to
apply the general approach to existing plans as well as to new
plans.

The 1999 proposed regulations also place a threshold condition on
the obligation of an employer or subsequent multiemployer plan to
make COBRA coverage available to existing qualified beneficiaries
associated with the withdrawing employer. That threshold is that
the.employer or subsequent multiemployer plan must cover a
significant number of the employer's employees formerly covered
under the multiemployer plan. Several commenters requested further
guidance on what a significant number was in this context. Some of
them also wanted to know what purpose this threshold condition
serves. The intent in imposing this threshold condition in the
proposed regulations was to leave responsibility for COBRA
compliance with the existing multiemployer plan in a case where, for
example, only one or two of the employees formerly covered under the
multiemployer plan were transferred into management and became
covered under a plan of the employer for which union employees were
not eligible. The final rule has been revised to more clearly
accomplish this intent. This threshold condition has been revised so
that the employer plan or subsequent multiemployer plan has
responsibility for COBRA compliance once coverage under the plan is
available to a class of employees formerly covered under the
multiemployer plan. New examples illustrate the application of this
standard.

Several commenters expressed concern that the proposed regulations
would require multiemployer plans to begin investigating why an
employer stops contributing to the multiemployer plan and to
determine whether the withdrawing employer subsequently covered
union (or former union) employees under a single employer plan.
Concern was also expressed that the proposed regulations would
require the multiemployer plan to keep employer-by-employer data for
qualified beneficiaries receiving COBRA continuation coverage. The
IRS and Treasury recognized when they proposed these rules that in
many industries it is impracticable for multiemployer plans to
determine whether an employer that stops contributing to a
multiemployer plan covers union employees under its own plan and
that it is impracticable to maintain employer- specific data on
employees and qualified beneficiaries. If a multiemployer plan finds
it easier to make COBRA coverage available for the maximum coverage
period, these final regulations do not require the plan to start
gathering information that is difficult to assemble. Such a plan can
comply with the COBRA continuation coverage requirements by making
COBRA continuation coverage available to existing qualified
beneficiaries in accordance with the general rules for the duration
of COBRA continuation coverage (in §54.4980B-7).

One commenter requested clarification of the proposed rules if an
employer establishes a plan for employees formerly covered under the
multiemployer plan but applies a waiting period before the employees
are eligible for coverage under that plan. These final regulations
clarify that the employer's obligation does not arise until the
employer makes coverage available. Thus, the multiemployer plan
would be responsible for COBRA coverage until the waiting period
under the employer's plan had expired for a class of employees
formerly covered under the multiemployer plan.

Several commenters submitted substantially similar comments
requesting that the rules be revised so that a multiemployer plan no
longer receiving contributions from a certain employer would not be
required to make COBRA continuation coverage available to any
qualified beneficiaries affiliated with that employer. Such an
approach, however, would not resolve the problem of qualified
beneficiaries not having access to COBRA coverage, and the statutory
basis for such a position is questionable in situations in which
none of the statutory reasons for ending a plan's obligation to make
COBRA coverage available to a particular qualified beneficiary is
present. The final regulations do not adopt this suggestion.

The IRS and Treasury received an inquiry about who has the
obligation to make COBRA continuation coverage available to existing
qualified beneficiaries in a situation that reverses the situation.

addressed in the proposed rules, one in which employees cease to be
covered under a plan maintained by their employer and commence to be
covered under a multiemployer plan. In such a situation, the
existing qualified beneficiaries should get the same coverage that
similarly situated nonCOBRA beneficiaries are receiving, that is,
the coverage under the multiemployer plan. The 1999 final
regulations suggest this result in describing what COBRA
continuation coverage is. However, the language used in the 1999
final regulations can be read to suggest that this is the result
only when coverage is under the same plan: "If coverage under the
plan is modified for similarly situated nonCOBRA beneficiaries, then
the coverage made available to qualified beneficiaries is modified
in the same way." (Q&A-1(a) of §54.4980B-5; emphasis added.)
These final regulations delete the phrase "under the plan" from the
quoted language to make clear that if coverage for the similarly
situated nonCOBRA beneficiaries is modified by switching from one
plan to another, then coverage for the qualified beneficiaries is
modified by switching to the other plan too. Although this amendment
is being made due to an inquiry about a switch from a single-
employer plan to a multiemployer plan, it applies in any situation
in which coverage for nonCOBRA beneficiaries is terminated under one
plan and commences under another, including those situations in
which a single employer maintains both plans.

COBRA and FMLA

The 1999 proposed regulations relating to how COBRA applies in
connection with leave taken under the Family and Medical Leave Act
of 1993 (FMLA) are adopted as final regulations with one minor
addition. One commenter observed that the 1999 proposed regulations
suggest by way of cross reference in an example that the Labor
regulations in 29 CFR part 825, not the COBRA regulations, determine
when FMLA leave ends. This commenter requested that this.suggestion
in an example be made express in the text of the rules. The final
regulations add in the text of the rules (preceding the examples)
that the end of FMLA leave is not determined under these regulations
but under the regulations in 29 CFR part 825.

Effective Date

This Treasury decision applies with respect to qualifying events
occurring on or after January 1, 2002, except as provided in the
following paragraphs.

Paragraphs (d), (e), and (f) in Q&A-5 of §54.4980B-2 (relating
to the counting of employees for purposes of the small employer plan
exception) are applicable beginning January 1, 2002 for
determinations made with reference to the number of employees in
calendar year 2001 or later.

Q&A-4 of §54.4980B-7 (describing the maximum coverage period)
is applicable with respect to individuals who are qualified
beneficiaries on or after January 1, 2002. (See Q&A-1(f) of
§54.4980B-3, under which an individual ceases to be a qualified
beneficiary once the plan's obligation to provide COBRA continuation
coverage to the individual has ended.) Q&A-1 through Q&A-8 of
§54.4980B-9 (containing rules for business reorganizations) are
applicable with respect to business reorganizations that take effect
on or after January 1, 2002.

Q&A-9 and Q&A-10 of §54.4980B-9 (containing rules for employer
withdrawals from a multiemployer plan) are applicable with respect
to cessations of contributions that occur on or after January 1,
2002. For this purpose, a cessation of contributions occurs on or
after January 1, 2002 if the employer's last contribution to the
plan is made on or after January 1, 2002.. -Section 54.4980B-10
(relating to the interaction of COBRA and FMLA leave) is applicable
with respect to FMLA leave that begins on or after January 1, 2002.

Special Analyses

It has been determined that this Treasury decision 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 is not required. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemaking preceding these
regulations was submitted to the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal author of these regulations is Russ Weinheimer, Office
of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). 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.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 54 is amended as follows:

PART 54 - PENSION EXCISE TAXESParagraph

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 entry for Q-2 of §54.4980B-1 in the "List of
Questions".

4. Revising the entries for Q-3 and Q-6 of §54.4980B-2 in the
"List of Questions".

5. Revising the entry for Q-4 of §54.4980B-7 in the "List of
Questions".

6. Adding entries for the section headings for
§§54.4980B-9 and 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-1 COBRA in general.

* * * * *

Q-2: What standard applies for topics not addressed in
§§54.4980B-1 through 54.4980B-10?

* * * * *

§54.4980B-2 Plans that must comply.

* * * * *

Q-3: What is a multiemployer plan?

* * * * *

Q-6: 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?.

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 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) in A-1.

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

3. Removing the last sentence of paragraph (c) in A-1 and adding two
sentences in its place.

4. Revising Q&A-2. The addition and revision 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.

Q-2: What standard applies for topics not addressed in
§§54.4980B-1 through 54.4980B-10?. -A-

2: For purposes of section 4980B, for topics relating to the COBRA
continuation coverage requirements of section 4980B that are not
addressed in §§54.4980B-1 through 54.4980B-10 (such as
methods for calculating the applicable premium), plans and employers
must operate in good faith compliance with a reasonable
interpretation of the statutory requirements in section 4980B.

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 the introductory text 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: 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 in determining the number of
group health plans that an employer or employee organization
maintains. 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. Except as provided in paragraph (b) or (c) of this Q&A-6, all
health care benefits, other than 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,
unless --

(1) It is clear from the instruments governing an arrangement or
arrangements to provide health care benefits that the benefits are
being provided under separate plans; and

(2) The arrangement or arrangements are operated pursuant to such
instruments as separate plans.

(b) A multiemployer plan and a nonmultiemployer plan are always
separate plans.

(c) 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)(1) 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.

(2) 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 section 106(c)(2), 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. To the extent that a health FSA is obligated to make COBRA
continuation coverage available to a qualified beneficiary, the
health FSA must comply with all the applicable rules of
§§54.4980B-1 through 54.4980B-10, including the rules of
Q&A-3 in §54.4980B-5 (relating to limits).

(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.)

* * * * *

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.

* * * * *

§54.4980B-3 [Amended] Par. 5. Section 54.4980B-3 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)(3) in A-1.

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

3. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the first and second sentences of paragraph (a)(1) in
A-2.

4. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the first sentence of paragraph (a)(2) in A-2.

5. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in the first and last sentences in paragraph (b) in A-2.

6. Removing the language "54.4980B-8" and adding "54.4980B-10" in
its place in A.

7. Removing the language "section 9801(f)(2), and
§54.9801-6T(b)" and adding "and section 9801(f)(2)" in its
place in the last sentence of paragraph (b) in A-1,.

8. Removing the language "and §54.9801-6T(b)" in the second
sentence of paragraph (i) in Example 1 of paragraph (h) of A-1.

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.

4. Removing the language "section 9801(f)(2), and
§54.9801-6T(b)" and adding "and section 9801(f)(2)" in its
place in paragraph (i) in Example 4 of paragraph (g) in 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. Section 54.4980B-5 is amended by:

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

2. Revising paragraph (b) in A-4.

3. Removing the language "and §54.9801-6T" in the second
sentence of paragraph (a) in

A-5.The revisions read as follows: §54.4980B-5 COBRA
continuation coverage.

* * * * *

A-1: (a) If a qualifying event occurs, each qualified beneficiary
(other than a qualified beneficiary for whom the qualifying event
will not result in any immediate or deferred loss of coverage) must
be offered an opportunity to elect to receive the group health plan
coverage that is provided to similarly situated nonCOBRA
beneficiaries (ordinarily, the same coverage that the qualified
beneficiary had on the day before the qualifying event). See Q&A-3
of §54.4980B-3 for the definition of similarly situated
nonCOBRA beneficiaries. This coverage is COBRA continuation
coverage. If coverage is modified for similarly situated nonCOBRA
beneficiaries, then the coverage made available to qualified
beneficiaries is modified in the same way. If the continuation
coverage offered differs in any way from the coverage made available
to similarly situated nonCOBRA beneficiaries, the coverage offered
does not constitute COBRA continuation coverage and the group health
plan is not in compliance with COBRA unless other coverage that does
constitute COBRA continuation coverage is also offered. Any
elimination or reduction of coverage in anticipation of an event
described in paragraph (b) of Q&A-1 of §54.4980B-4 is
disregarded for purposes of this Q&A-1 and for purposes of any other
reference in §§54.4980B-1 through 54.4980B-10 to coverage
in effect immediately before (or on the day before) a qualifying
event. COBRA continuation coverage must not be conditioned upon, or
discriminate on the basis of lack of, evidence of insurability.

* * * * *

A-4: * * *

(b) If a qualified beneficiary participates in a region-specific
benefit package (such as an HMO or an on-site clinic) that will not
service her or his health needs in the area to which she or he is
relocating (regardless of the reason for the relocation), the
qualified beneficiary must be given, within a reasonable period
after requesting other coverage, an opportunity to elect alternative
coverage that the employer or employee organization makes available
to active employees. If the employer or employee organization makes
group health plan coverage available to similarly situated nonCOBRA
beneficiaries that can be extended in the area to which the
qualified beneficiary is relocating, then that coverage is the
alternative coverage that must be made available to the relocating
qualified beneficiary. If the employer or employee organization does
not make group health plan coverage available to similarly situated
nonCOBRA beneficiaries that can be extended in the area to which the
qualified beneficiary is relocating but makes coverage available to
other employees that can be extended in that area, then the coverage
made available to those other employees must be made available to
the relocating qualified beneficiary. The effective date of the
alternative coverage must be not later than the date of the
qualified beneficiary's relocation, or, if later, the first day of
the month following the month in which the qualified beneficiary
requests the alternative coverage. However, the employer or employee
organization is not required to make any other coverage available to
the relocating qualified beneficiary if the only coverage the
employer or employee organization makes available to active
employees is not available in the area to which the qualified
beneficiary relocates (because all such coverage is region-specific
and does not service individuals in that area).

* * * * *

Par. 8. Section 54.4980B-6 is amended by:. -1. Revising the Example
in paragraph (c) of A-1. 2. Revising the first sentence in paragraph
(b) of A-3. The revisions read as follows: §54.4980B-6 Electing
COBRA continuation coverage.

* * * * *

A-1: * * *

(c) * * *

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).

* * * * *

3: * * *

(b) In the case of an indemnity or reimbursement arrangement, the
employer or employee organization can provide for plan coverage
during the election period or, if the plan allows retroactive
reinstatement, the employer or employee organization can terminate
the coverage of the qualified beneficiary and reinstate her or him
when the election (and, if applicable, payment for the coverage) is
made. * * *

* * * * *

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 the
determination of 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. Section 54.4980B-8 is amended by:

1. Revising paragraph (c) in A-1.

2. Adding a new sentence at the end of paragraph (d) and adding
paragraphs (d)(1) and (d)(2) in A-5.

The revision and addition read as follows: §54.4980B-8 Paying
for COBRA continuation coverage.

* * * * *

A-1: * * *

* * * * *

(c) A group health plan does not fail to comply with section 9802(b)
(which generally prohibits an individual from being charged, on the
basis of health status, a higher premium than that charged for
similarly situated individuals enrolled in the plan) with respect to
a qualified beneficiary entitled to the disability extension merely
because the plan requires payment of an amount permitted under
paragraph (b) of this Q&A-1.

* * * * *

A-5: * * * (d) * * * An amount is not significantly less than the
amount the plan requires to be paid for a period of coverage if and
only if the shortfall is no greater than the lesser of the following
two amounts --

(1) Fifty dollars (or such other amount as the Commissioner may
provide in a revenue ruling, notice, or other guidance published in
the Internal Revenue Bulletin (see §601.601(d)(2)(ii) of this
chapter)); or

(2) 10 percent of the amount the plan requires to be paid.

* * * * *

Par. 11. 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 transfer 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. A buying group does not fail to be a successor employer
in connection with an asset sale merely because the asset sale takes
place in connection with a proceeding in bankruptcy under Title 11
of the United States Code. 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?.

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 makes group health plan
coverage available to (or starts contributing to another
multiemployer plan that is a group health plan with respect to) a
class of the employer's employees formerly covered under the
multiemployer plan, the plan maintained by the employer (or the
other multiemployer plan), from that date forward, 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..- 59

(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
make group health plan coverage available to 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) The facts are the same as in Example 1 except that B, one of the
employees covered under M before Z stops contributing to M, is
transferred into management. Z maintains a group health plan for
managers and B becomes eligible for coverage under the plan on the
day of B's transfer.

(ii) Under these facts, Z does not make group health plan coverage
available to a class of employees formerly covered under M after B
becomes eligible under Z's group health plan for managers.
Accordingly, 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.

Example 3.

(i) Employer Y employs two classes of employees - skilled and
unskilled laborers - 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 stops making contributions to M but continues
to employ all the employees covered by the collective bargaining
agreement. Y's cessation of contributions to M causes those
employees (and their spouses and dependent children) to lose
coverage under M. Y makes group health plan coverage available to
the skilled laborers immediately after their coverage ceases under
M, but Y does not make group health plan coverage available to any
of the unskilled laborers.

(ii) Under these facts, because Y makes group health plan coverage
available to a class of employees previously covered under M
immediately after both classes of employees lose coverage.- 60 -
under M, Y alone 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 Y,
regardless of whether the employment affiliation was as a skilled or
unskilled laborer. However, 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 4.

(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. X experiences financial difficulties
and is forced into bankruptcy by its creditors. X continues to
employ all of the employees covered by the collective bargaining
agreement. X also continues to make contributions to M until the
current collective bargaining agreement expires, on June 30, 2001,
and then X stops making contributions to M. X's employees (and their
spouses and dependent children) lose coverage under M effective July
1, 2001. X does not enter into another collective bargaining
agreement covering the class of employees covered by the expired
collective bargaining agreement. Effective September 1, 2001, X
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 X 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 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.

Example 5.

(i) Employer W 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, W 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 W. The loss of coverage.- 61 - under M for those employees of W
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..- 62

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 determination of when FMLA leave
ends is not made under the rules of this section. See the FMLA
regulations, 29 CFR Part 825 (§§825.100-825.800).) 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

Approved: December 18, 2000

Jonathan Talisman
Acting Assistant Secretary of the Treasury

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

2001 Regulations Main | IRS Regulations Main | Home