Would the loss of a COBRA subsidy be a qualifying event to change plan elections?

Sometimes new employees receive employer-subsidized COBRA coverage from their former employer. When they do so, they often seek to delay their enrollment in their new employer’s plan in order to take advantage of the subsidized COBRA. However, there’s an argument that the end of the subsidized coverage wouldn’t be a qualifying event under Section 125. While there’s one permissible qualifying event that might allow for such a qualifying event, it isn’t clear since the IRS hasn’t provided direct guidance.

First, the “significant change in cost” qualifying event wouldn’t apply whenever the cost of COBRA increases. Instead, this would only apply if the employer raised the cost of the entire health plan midyear. In this instance, the employer plan’s cost of coverage isn’t changing and the former employer is just offering a lesser contribution to cover COBRA premiums.

Second, a HIPAA special enrollment right wouldn’t apply either, because this enrollment right only allows an election change when COBRA is exhausted, not when COBRA is dropped voluntarily (assuming the individual would choose to drop COBRA after the employer-provided subsidy ends).

Third, although there’s a qualifying event for a “change under another employer’s plan,” it isn’t clear whether this event would be permitted when a COBRA subsidy ends. For one, the rules don’t address whether COBRA coverage would actually be included in the definition of “other employer coverage.” Additionally, this particular event allows midyear changes in one of two circumstances: 1) when the other employer’s plan allows an election change that’s permissible under the regulations, and 2) when the other employer’s plan has a different period of coverage (i.e., has a different plan year). However, it isn’t clear whether or not this change in employer contribution to the COBRA premium is really a change in coverage that would fit under either of these options. So, while there’s an argument that this could be considered a qualifying event, it isn’t specifically discussed in IRS regulations or guidance, and it remains a gray area.

Therefore, the most conservative strategy for an employer is to proceed as if the COBRA subsidy ending were not a qualifying event. This would mean the employee would need to enroll upon hire (after completion of any applicable waiting period), upon experiencing another permissible qualifying event or during open enrollment. However, if an employer decides to treat the end of a COBRA subsidy as a qualifying event (preferably with the assistance of outside counsel), the employer would at least need to make sure the cafeteria plan documents provide for this permissible qualifying event.