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Compliance With Vermont's Mandatory Group Health Insurance Continuation Statute

Tuesday, July 29, 1986
Insurance Bulletin # 78


July 29, 1986


Recently, both the state and the federal governments enacted laws providing for the continuation of group health insurance benefits to terminated employees. The Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) was signed by President Reagan on April 7, 1986. The federal law (copy attached) only applies to employers with twenty or more employees (on a typical business day during the preceding calendar year). The scope of the Vermont law, which applies to group insurance contracts is somewhat more broad than COBRA because it impacts on virtually all employers (by virtue of their insurance contracts, including self-insurers), even those employers with less than twenty employees.

Since the minimum standards for group health insurance benefits continuation set forth in COBRA are “generally” more stringent than Vermont’s law, employers with twenty or more employees should be primarily concerned with COBRA. In most instances (but not all), compliance with COBRA means that the requirements set forth in the Vermont statute have also been met. Correspondingly, employers with less than twenty employees are not covered by COBRA. Thus, they need only comply with Vermont law.

The following explanation will describe the operation and the nature of Vermont’s statute. The operation of COBRA will be discussed only to the extent necessary to explain compliance with Vermont law. It is worth noting, however, that COBRA is a complicated statute which amends the Internal Revenue Code, ERISA and the Public Health Service Act. Furthermore, the respective federal agencies charged with administration of the various provisions of COBRA have not yet promulgated regulations construing the statutory language. Thus, it is not possible to specify with absolute certainty how COBRA will be applied. Nonetheless, with these disclaimers in mind, the Department will touch upon the application of COBRA as it affects or relates to the Vermont law. [We have also attached, for informational purposes only, descriptive matter produced by the National Association of Insurance Commissioners outlining the major coverage provisions of COBRA. See Appendix A.]

The Vermont statute regulates group health insurance policies by providing covered persons (e.g. employees) and certain dependents with a right to continue group health insurance policies (at the “group rate”) after termination of employment. 8 V.S.A. Section 8090a(a). After providing this coverage, the legislature describes the situations in which the right to continued coverage does not attach. 8 V.S.A. Section 8090a(b). The question has been raised whether this statutory right can be modified by a collective bargaining agreement. The answer is no. The statute provides a benefit which exists outside the terms of an employment contract. That is not to say, however, that an employment contract cannot be fashioned which provides more extensive coverage. The statute simply sets a minimum standard. The law also requires that notice of the statutory continuation privilege be included in each certificate (or other evidence) of coverage given to employees.

Assuming a person who is entitled to continue a group health insurance policy decides to exercise the option, written notice to the employer, the group agent (contractor), or insurer activates the continuation provision. 8 V.S.A. Section 4090b. If the covered employee is deceased, the employer should be notified within sixty days. The notification period is reduced to thirty days in the case of terminated employees.

An important distinction between the Vermont statute and COBRA is the length of their respective continuation periods. See 8 V.S.A. Section 4090c. Under Vermont law, there is a six (6) month continuation period, while COBRA extends group health insurance benefits for a minimum of eighteen (18) months. Thus, COBRA provides more extensive coverage in terms of length of the continuation period. A question has been asked whether Vermont’s six month period tacks on or is added to the eighteen month federal continuation period. (i.e., a month term is simply the minimum period prescribed by Vermont legislators. For employers subject to COBRA, the state period is satisfied at the end of the first six months under the COBRA (18 month) continuation period.

The Vermont continuation period expires after six months, however, a right or entitlement to a subsequent conversion policy is provided under 8 V.S.A. Section 4090d which the employee or dependent may exercise. Bases for termination of the continuation period before the end of six months include: 1) failure of a covered person to make timely payment of his/her contribution; 2) the covered person is covered or is eligible for coverage under Medicare; or 3) the group policy is terminated (in this case, the covered person is entitled to coverage under any replacement policy). This last item may present some problems for the insurer processing a replacement policy since covered persons are entitled to the same level of benefits provided by the prior policy. Specifically, the law states: “the minimum level of benefits payable under the prior group policy shall be the applicable level of benefits of the prior group policy…” The statute does allow a reduction in the level of benefits to the extent benefits were paid or are payable under the prior policy. If a person had, for example, a million dollar lifetime policy and twenty thousand in benefits had already been paid out to this person, then the minimum conversion policy level of benefits would be $980,000. That figure controls even if the lifetime maximum coverage under the replacement group health insurance plan is reduced, for example, to $500,000.

The Vermont law also requires that covered persons be provided with an opportunity to convert his/her group health insurance policy to an individual or a personal health insurance policy without evidence of insurability. 8 V.S.A. Section 4090d. The terms and conditions for exercising this right are specified by the statute. 8 V.S.A. Section 4090e. Basically, written application for conversion must be made at least 30 days before the end of the six month continuation period. The first premium payment must also be made before that date. The premium for converted policies is determined on a nongroup basis. One exception occurs when such a premium is for coverage of “qualified dependents” (widows and orphans). In that instance, the premium is limited to 102 percent of the group rate.

Employers covered by COBRA are impacted, albeit indirectly, by Vermont’s conversion provisions (the word “indirectly” is used because the Vermont statute regulates insurance/self-insurance contracts, not employers). COBRA does not have any language concerning conversion. Thus, under the applicable federal statutes, the insurance coverage automatically ends when the continuation period expires. Accordingly, it is appropriate to give special attention to the Vermont law in the conversion area since it impacts on all employers.

The Vermont law allows the insurer to modify some components of converted policies. See 8 V.S.A. Section 4090e. Nevertheless, the law also requires the insurer to provide certain options to individuals exercising their conversion rights. 8 V.S.A. Section 4090g. Basically, the statute requires insurers to offer lesser levels of coverage at lower rates. The Commissioner of Banking and Insurance (“Commissioner”) has discretion to adopt rules describing the lesser types of coverage which may be offered under this law. The Commissioner has not promulgated any rules concerning “lesser coverage” options and may not be doing so pending the forthcoming recommendations of the “Health Insurance Summer Study Committee of the Legislature.”

While there are differences between COBRA and the Vermont statute, as stated above, in many cases compliance with COBRA will also satisfy the requirements of applicable Vermont laws. Although a conclusive analysis of COBRA is not yet possible, there does not appear to be any statutory sections which are directly or substantially inconsistent with Vermont’s continuation law. As such, knowledge of and compliance with 8 V.S.A. Section 4090 is of vital importance to affected employers and insurers.

Thomas P. Menson