COBRA: How to Avoid Compliance Missteps

While the financial consequences for noncompliance can be steep, there are some ways to minimize your liability risks.   

Group health insurance plans are generally subject to the Employee Retirement Income Security Act (ERISA), which mandates the temporary continuation of health care coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA covers individuals who would otherwise lose their health care coverage due to certain life events.

COBRA Eligibility

To be eligible for COBRA, an insurance plan must cover “medical care,” such as inpatient and outpatient hospital, physician, surgery and prescription drug treatments. Dental and vision plans are also covered, but life insurance and disability plans are not.

In addition to meeting medical care requirements, COBRA eligibility is also based on whether:

  • The group health plan is sponsored by a private, state or local entity.
  • The employer had at least 20 employees for more than 50% of its typical days in operation during the prior calendar year.

Church-related and federal government-sponsored plans aren’t subject to COBRA.

To determine if COBRA coverage is available, calculate how many employees you have. This can get tricky, since part-time employees count, but only for a fraction of what full-time employees count for.

To help employers properly count their employees, the Employee Benefits Security Administration (EBSA) says to divide the number of hours a part-time employee works by the number of hours a full-time employee works. This will give you the number of hours to be counted for a part-time employee. Generally, leased employees, non-employee directors, independent contractors and those who are self-employed don’t count toward the 20-plus employee threshold.

If COBRA applies, there are several individuals (“qualified beneficiaries”) who may be eligible for plan continuation benefits. These are:

  • Covered employees and former employees
  • The spouses or former spouses of covered employees
  • The dependent children of covered employees

If a qualified beneficiary experiences a “qualifying event” resulting in loss of coverage, they are entitled to COBRA coverage so long as they were covered by the group health plan on the day before the qualifying event occurred. The EBSA notes that a child born to or placed for adoption with a covered employee is automatically deemed a qualified beneficiary. For a covered employee, a qualifying event would be:

  • Their termination for any reason except gross misconduct (While this type of misconduct could exempt them from COBRA coverage, you should tread carefully if using this as the reason for coverage disqualification.)
  • A reduction in their hours that disqualifies them from group health insurance benefits

If a covered employee experiences a loss of coverage for either of the above reasons, their spouse (or former spouse) and any dependent children would also experience a qualifying event. And there are a few other reasons a child or spouse would be entitled to COBRA coverage:

  • The covered employee becomes eligible for Medicare.
  • A divorce or legal separation from the covered employee takes place.
  • The covered employee dies.
  • The child of the covered employee loses dependent status under the group health plan.
Duration of COBRA benefits

Coverage starts on the date of the qualifying event and lasts for the next 18 or 36 months. The length of time depends on the type of qualifying event that led to coverage under COBRA. For instance: 

  • If a covered employee is terminated or they no longer qualify for their group health plan due to a reduction in hours, they are entitled to 18 months of continuation coverage.
  • If a beneficiary is deemed disabled before the 60th day of their continuation coverage and their disability continues for the rest of the 18-month period, they are entitled to an additional 11 months of coverage under COBRA (for a maximum of 29 months). Note that the disability must be recognized by the Social Security Administration for the extension to apply.
  • If the employee became eligible for Medicare less than 18 months before the qualifying event, COBRA coverage for their spouse and dependents may last for 36 months after the date they became entitled to Medicare.

A qualified beneficiary may also be entitled to up to 36 months of coverage if they experience a second qualifying event. According to the Department of Labor, a second qualifying event only arises if the event would have caused the beneficiary to lose coverage had the first qualifying event not happened. If that is the case, any of these may constitute a second qualifying event:

  • The covered employee dies.
  • The covered employee gets divorced or legally separated from their spouse.
  • The covered employee becomes eligible for Medicare.
  • A child of the covered employee loses dependent status under the plan.

If a second qualifying event occurs, the qualified beneficiary has a duty to inform the plan.

COBRA notice and election procedures

There are several types of COBRA notices to be aware of:

General Notice

A COBRA general notice describes plan participants’ rights to COBRA continuation coverage. It must be given to all covered employees and spouses within 90 days of enrollment. The notice may be included in the plan’s summary plan description (SPD), since both are due to plan participants within 90 days of enrollment.

The COBRA general notice must include:

  • The name of the plan and the name, address and phone number of someone to contact for more information about the plan and COBRA
  • A general description of the continuation coverage provided under the plan
  • An explanation of how a qualified beneficiary can notify the plan of a qualifying event or disability
  • A statement about the importance of keeping their address up to date
  • A statement that more information about COBRA rights can be found in the SPD or by contacting the plan administrator

If you choose to satisfy the general notice requirement through your SPD, ask for a written acknowledgment from all covered employees and spouses.

Qualifying event notice

If a beneficiary experiences a qualifying event, continuation coverage must be offered. Depending on the nature of the qualifying event, it is up to the employer, employee or beneficiary to notify the plan administrator. The plan does not have a duty to act until notice is received. 

The EBSA notes that employers are responsible for notifying the plan within 30 days if any of the following qualifying events occurs:

  • The covered employee is terminated or has their hours reduced.
  • The employee becomes eligible for Medicare.
  • The employee dies.
  • The employer goes bankrupt.

The employee or their qualified beneficiary is responsible for reporting the other qualifying events:

  • The covered employee gets divorced or legally separated from their spouse.
  • A child of the covered employee loses dependent status under the plan.

Group health plans should have procedures for plan participants to provide notice of qualifying events. Those procedures should specify who to notify, and what information needs to be included in the notice.

A plan may limit the time frame for reporting qualifying events to 60 days from the date of the qualifying event or the date the individual loses or would lose plan coverage due to the qualifying event. Note that one notice of a qualifying event is enough to cover all the impacted beneficiaries.

Election notice

Qualified beneficiaries must be notified of their right to elect COBRA benefits within 14 days after the plan is made aware of the qualifying event. ERISA regulations include a lengthy list of notice requirements. For instance, the election notice must include: 

  • The name, address and phone number of the plan administrator for the continuation of coverage benefits
  • A statement about the qualifying event and the qualified beneficiaries eligible for COBRA coverage
  • A statement that each person identified as a qualified beneficiary may independently elect to continue coverage
  • The date the plan coverage will terminate if COBRA coverage is not elected (or the date that coverage was terminated)
  • The procedures for electing continuation coverage, including the time frame in which the election must be made
  • The consequences of not electing or waiving coverage
  • When continuation coverage will start if elected
  • The maximum period for which continuation coverage is available (between 18 and 36 months), and an explanation of:
    • The termination date
    • Any events that could lead to early termination of coverage
    • Any circumstances under which the coverage may be extended
  • The amount each qualified beneficiary must pay (if any) for continuation coverage
  • A statement that the beneficiary has the right to pay premiums on a monthly basis
  • Payment due dates, information on payment grace periods, the address to which payments should be sent and the consequences of delayed payment or nonpayment
  • An explanation of the importance of keeping the plan administrator informed about address changes

The notice should state that it’s not meant to fully describe COBRA coverage and the beneficiary may have other rights under the plan. It should also explain how to obtain more information (for example, by looking at the SPD or contacting the plan administrator).

Note that if someone waives COBRA coverage during the election period, they have the right to revoke that waiver and elect coverage in the future, so long as they do so within the election period (at least 60 days). If this occurs, the plan only needs to provide continuation coverage starting on the date the individual revoked their waiver.

Covered benefits and payments under COBRA

Now that we’ve discussed who might be eligible for COBRA and the most common notice requirements, let’s dive into the scope of benefits and payment terms.

Scope of benefits

Under COBRA, qualified beneficiaries must be provided identical coverage to what similarly situated individuals receive. In other words, they’re entitled to the same rights to select coverage during open enrollment and must be offered the same:

  • Benefits
  • Copayments
  • Deductibles
  • Coverage limits

If there are any changes to the terms of the employer’s group health plan that apply to similarly situated(active) plan participants, those same changes apply to qualified beneficiaries under COBRA.

Timing and amount of premium payments

Under COBRA, an employer may require a qualified beneficiary to pay fully for continuation coverage. Or it may decide to provide coverage at a reduced cost or no cost at all (as a term of severance, for example).

If the beneficiary is charged for continuation coverage, there is a cap of 102% of the plan cost that similarly situated individuals pay under the group health plan. This accounts for a charge of up to 2% for administrative costs.

According to the EBSA, a qualified beneficiary:

  • Has the right to pay premiums on a monthly basis but may request to pay them on a different schedule, such as biweekly or quarterly
  • Pays any cost increases associated with the plan, just as any similarly situated individual who is actively enrolled in the plan would
  • Does not need to pay the initial premium when electing COBRA coverage (Instead, there’s a 45-day window following the election date during which they can make their initial premium payment.)
  • Is entitled to a 30-day grace period for subsequent payments

Once a qualified beneficiary elects COBRA coverage, there are several reasons why rights to COBRA benefits may be terminated. Their group health plan benefits may be terminated if:

  • They don’t pay the first premium within the first 45 days, or they don’t make a full payment for a subsequent premium (after the 30-day grace period has been accounted for).*
  • The employer stops offering group health insurance for its employees.
  • They obtain coverage under another group health plan or become eligible for Medicare.
  • They engage in behavior, such as committing fraud, that would exclude a similarly situated plan participant or beneficiary from coverage.

*The EBSA cautions that if a qualified beneficiary only owes a small portion of an unpaid premium, they are entitled to receive notice of the deficiency and should be given a reasonable period of time (for example, 30 days) to make up the difference.

If their plan is being terminated early, the qualified beneficiary is entitled to written notice of the termination of continuation coverage, which should be provided as practicable and must describe:

  • The date coverage terminates and the reason for the termination
  • Any rights they may have under the plan or applicable laws to elect alternative coverage

A qualified beneficiary is not entitled to reminder notices about making regular premium payments.

Liability for noncompliance

The EBSA and IRS have jurisdiction over private group health plans. The Centers for Medicare and Medicaid Services (CMS) has jurisdiction over public plans. Claims of deficient or untimely notice of the right to COBRA benefits when a qualified beneficiary experiences a qualifying event could get regulators’ attention, as could claims that they didn’t receive SPD documents. 

Under ERISA, a deficient or untimely notice can result in:

  • A penalty of up to $110 per day per violation (which essentially means per affected individual)
  • Liability for any medical expenses the qualified beneficiary may have incurred due to lack of coverage
  • Liability for attorney fees 

In addition, the IRS could charge an excise tax of $100 per qualified beneficiary, or $200 per family per day, for COBRA noncompliance. The maximum amount of tax that a plan may be charged for an unintentional failure to provide proper notice is the lesser of:

  • 10% of the amount the employer paid or incurred during the preceding tax year for their group health plan
  • $500,000

There are a lot of overlapping regulations, notices and memorandums regarding COBRA eligibility, coverage and payments. Therefore, it’s important to keep up with the guidance coming from various government agencies. But if a compliance question ever arises, seek out an employee benefits attorney who can walk you through the red tape.

Tips for minimizing noncompliance risk

While the financial consequences for noncompliance can be steep, there are some ways to minimize your liability risks. For instance:

  • Develop uniform procedures for sending COBRA notices to qualified beneficiaries. Plan administrators aren’t required to prove that beneficiaries received their COBRA notices. But being able to demonstrate that the usual and customary methods for ensuring delivery were followed may help refute any claims that an individual didn’t receive a required notice.
  • Double-check that notices include key information. For example, the election notice should include the name, address and phone number of the COBRA plan administrator, the coverage available, how to elect coverage, coverage dates and payment requirements.
  • Use plain language that the average plan participant can understand. Consider that most people don’t have a sophisticated understanding of legalese, so keep the wording as simple as possible.
  • Translate notices into other languages for participants who don’t have a strong command of the English language.
Where to turn for help

The EBSA and CMS offer a variety of resources to help organizations meet COBRA compliance requirements.

For instance, the EBSA has published FAQs and model COBRA notices, which can be used to notify plan participants and qualified beneficiaries of their rights to elect COBRA coverage. 

The EBSA also publishes a guide for employers, An Employer’s Guide to Group Health ContinuationCoverage Under COBRA. In addition to discussing many of the topics covered here, the guide provides insight into:

  • Alternatives to coverage for COBRA-eligible individuals who may be entitled to more affordable or generous coverage, such as: “Special enrollment” in other group health plans
  • Enrolling in a state health insurance marketplace
  • When special notices apply, such as: A notice of unavailability of continuation coverage for an extension of benefits
  • A notice of early termination of continuation coverage
  • Special rules for multiemployer plans
  • When a Health Coverage Tax Credit may be available
  • Why an employee’s absence under the Family and Medical Leave Act does not constitute a qualifying event unless they do not return to work
  • Extensions of the 18-month period of continuation coverage due to disability or a second qualifying event

The guide also includes a chart illustrating specific qualifying events and their maximum period of continuation coverage, and which qualified beneficiaries may elect continuation coverage when such an event occurs.

For specific questions or to speak with a benefits advisor, you can call the EBSA at 866-444-3272.

Public employers can visit the CMS website for COBRA guidance

According to the National Conference of State Legislatures, more than 40 states have mini-COBRA laws. Check with your state insurance commissioner to determine whether your group health plan may be subject to such a law.

The number of federal and state regulations governing COBRA compliance can be overwhelming, so it’s always best to consult an expert. An experienced employee benefits attorney can help you make sure thatyour COBRA notices and election procedures are in compliance.

For more information

To learn more, reach out to our Employee Benefits team.

This content is for informational purposes only, should not be considered professional, financial, medical or legal advice, and no representations or warranties are made regarding its accuracy, timeliness or currency. With all information, consult with appropriate licensed professionals to determine if implementing any recommendations would be in accordance with applicable laws and regulations or to obtain advice with respect to any particular issue or problem.

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