New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on May 14, 2002, representing the position of the New York State Insurance Department.

Re: Group Health Insurance, Continuation and Conversion Requirements

Question Presented:

Is an employee who is terminated from his or her employment because of a reduction in the work force entitled to either a continuation or a conversion benefit under the former employer’s existing group health insurance plan?

Conclusion:

Yes, both Federal and New York State law require a continuation benefit. In addition, New York law also requires a conversion benefit.

Facts:

Ms. A was terminated from her employment in January 2002 when her employer eliminated the department in which she was employed. As part of Ms. A’s severance package, her former employer is continuing her former coverage under its health insurance plan.

After Ms. A was terminated, her former employer went bankrupt and attempted to reorganize under the Bankruptcy Code, 11 U.S.C.A. Chapter 11 (West 1993 and 2001 Supplement). It is anticipated that another company will purchase the former employer’s operations and that the former employer will cease to exist as an independent entity. It is further anticipated that the company purchasing the operations of the former employer will terminate most of the remaining employees.

Analysis:

It is presumed that Ms. A’s former employer provided health benefits through an insurance policy or contract issued in New York State. If, however, the benefits were provided through a self-funded plan, then only Federal, and not New York law would be applicable.

Under the provisions of the Employee Retirement Income Security Act (ERISA), found at 29 U.S.C.A. § 1001 et seq. (West 1999), primary regulation of Employee Welfare Benefit Plans is by the United States Department of Labor. Health benefits are encompassed within the definition of an Employee Welfare Benefit Plan, as set forth in 29 U.S.C.A. § 1002(1) (West 1999). A continuation requirement for employer sponsored health insurance is mandated by the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The continuation requirements of COBRA have been codified in ERISA at 29 U.S.C.A. § 1161 et seq. (West 1999).

In accordance with COBRA, employers with more than 20 employees must provide continuation coverage. This requirement in 29 U.S.C.A. § 1161 (West 1999) provides:

In general. The plan sponsor of each group health plan shall provide, in accordance with this part, that each qualified beneficiary who would lose coverage under the plan as a result of a qualifying event is entitled, under the plan, to elect, within the election period, continuation coverage under the plan.

The required continuation coverage in 29 U.S.C.A. § 1162 (West 1999), which provides in pertinent part:

The term ‘continuation coverage’ means coverage under the plan which meets the following requirements: (1) Type of benefit coverage. The coverage must consist of coverage which, as of the time the coverage is being provided, is identical to the coverage provided under the plan to similarly situated beneficiaries under the plan with respect to whom a qualifying event has not occurred. … (3) Premium requirements. The plan may require payment of a premium for any period of continuation coverage, except that such premium--(A) shall not exceed 102 percent of the applicable premium for such period, and (B) may, at the election of the payor, be made in monthly installments.

COBRA defines a qualifying event at 29 U.S.C.A. § 1163 (West 1999):

For purposes of this part, the term ‘qualifying event’ means, with respect to any covered employee, any of the following events which, but for the continuation coverage required under this part, would result in the loss of coverage of a qualified beneficiary: . . . (2) The termination (other than by reason of such employee's gross misconduct), or reduction of hours, of the covered employee's employment. . . . .

The Bankruptcy Code, 29 U.S.C.A. §§ 1113 and 1129 (West 1993 and 2001 Supplement), allow the debtor, Ms. A’s former employer, to abrogate benefits, or the corporation purchasing Ms. A’s former employer not to assume responsibility for employee benefits to former employees. Both actions would have to be taken as part of the reorganization plan and would be subject to approval by the Bankruptcy Court. In addition, the Internal Revenue Service has promulgated a regulation, found at 26 C.F.R. § 54.4980B-9 (2000), that regulates the respective COBRA obligations of both buyers and sellers in a business reorganization.

Accordingly, whether Ms. A would still have COBRA benefits upon bankruptcy of her former employer depends upon the content of the bankruptcy plan approved by the court.

There is also a continuation requirement in New York State law, New York Insurance § 3221(m) (McKinney 2001) (dealing with commercial insurance policies) and New York Insurance Law § 4305(e) (McKinney 2001) (dealing with contracts by not-for-profit insurers and Health Maintenance Organizations), which becomes operative when the requirements of COBRA are not applicable. However, here again, there may not be an actual continuation benefit because of the bankruptcy of Ms. A’s former employer.

In addition to continuation benefits, New York State also requires a conversion benefit, New York Insurance Law §§ 3221(e) and 4305(d), which is operative upon the inapplicability of the continuation benefit or the exhaustion of that benefit. Those sections of the Insurance Law provide in pertinent part:

A group contract issued pursuant to this section shall contain a provision to the effect that in case of a termination of coverage under such contract of any member of the group because of (I) termination for any reason whatsoever of his employment or membership, if he has been covered under the group contract for at least three months, or (II) termination for any reason whatsoever of the group contract itself unless the group contractholder has replaced the group contract with similar and continuous coverage for the same group, whether insured or self-insured, he shall be entitled to have issued to him by the corporation, without evidence of insurability, upon application therefor and payment of the first premium made to the corporation within forty-five days after termination of the coverage for at least three months, . . . he shall be entitled to have issued to him by the corporation, without evidence of insurability, upon application therefor and payment of the first premium made to the corporation within forty-five days after termination of the coverage, an individual direct payment contract, covering such member and his eligible dependents who were covered by the group contract, which provides coverage most nearly comparable to the type of coverage under the group contract, which coverage shall be no less than the minimum standards for basic hospital, basic medical, or major medical as provided for in insurance department regulation . . . .

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.