Avoid These COBRA Mistakes At All Costs

COBRA requires that employers provide former employees and dependents who lose group health benefits with an opportunity to continue group health insurance coverage for a limited period of time. Compliance with the complex rules regarding COBRA coverage can be difficult and mistakes can be costly. Penalties for non-compliance can include IRS excise taxes and ERISA statutory fines. The following are some tips for avoiding these penalties and other risks that go along with COBRA.

#1 – Assuming COBRA Doesn’t Apply to You

A threshold issue for COBRA compliance is whether COBRA even applies to you as an employer. The general rule is that COBRA applies to group health plans maintained by employers that have 20 or more employees. This includes private-sector employers, as well as state and local government employers. The rule includes a built-in exemption for those employers that have fewer than 20 employees. Employers may be aware that there is an exemption, but may not know exactly how it works. Depending on the circumstances, determining how many employees you have for COBRA purposes can be a complicated calculation.

In general, COBRA will apply to employers that have 20 or more employees on more than 50 percent of the typical business days in the previous calendar year. This means that the calculation will apply for the entire calendar year; it does not change if the number of employees goes up or down. So it can be dangerous to assume that you don’t have to offer COBRA if your staff levels decrease. Also, take care to count employees of companies that are under common control and both full- and part-time employees. A part-time employee counts as a fraction: divide the number of hours the employee worked by the number of hours required to be full time.

#2 – Assuming COBRA Doesn’t Apply to Your Plan

Once you have determined that COBRA applies to you as an employer, the next step is to figure out whether your health plan is subject to COBRA. As noted above, COBRA applies to group health plans maintained by employers. A group health plan is an arrangement established to provide medical care to employees and their families and can be provided in a number of ways, including through insurance or a self-funded arrangement. A key point to note is whether the plan provides medical care.

Examples of health plans that may be subject to COBRA include:

• Medical, dental, vision and prescription drug plans;
• Drug and alcohol treatment programs;
• Employee assistance plans or wellness programs that provide medical care;
• On-site health care;
• Health FSAs and HRAs; and
• Self-funded medical reimbursement plans.

The following are examples of plans that may not be subject to COBRA if they do not offer medical care:

• Long-term care plans;
• Accidental death & dismemberment plans;
• Group term life insurance plans;
• Long-term and short-term disability plans;
• Wellness programs or employee assistance programs that do not provide medical care;
• Exercise or fitness centers; and
• On-site first-aid facilities.

Another potential pitfall to keep in mind is assuming that cancelling or terminating a health plan means that COBRA obligations terminate as well. If an employer terminates one plan, but continues to provide any group health plan, the obligation to provide COBRA coverage continues. Determining COBRA obligations in this type of situation can be especially complex when there is a merger or acquisition involved.

#3 – Not Knowing Who Gets COBRA and When

Employers and plan administrators should make sure to know who is entitled to COBRA coverage. Problems can arise if COBRA is not offered to someone who is eligible or if it is offered to a person who is not eligible to elect COBRA coverage.

Under the COBRA rules, a “qualifying event” triggers COBRA coverage for “qualified beneficiaries” (QBs). A QB is an individual covered by a group health plan on the day before the qualifying event. A QB can be the employee, the employee’s spouse and/or the employee’s dependent child(ren). In some cases, a retired employee (and his/her spouse and/or dependent children) can be a QB. In addition, a child born to or placed for adoption with the covered employee during the COBRA coverage period will become a QB. Depending on the plan’s eligibility rules, agents, independent contractors and directors could also be QBs.

A qualifying event is a specified triggering event that:

• Is listed in the COBRA statute;
• Causes a loss of coverage under the plan; and
• Occurs within the “maximum coverage period” (this is discussed below) while the plan is subject to COBRA.

The triggering events that will give rise to COBRA coverage depend on who is affected. The following chart shows which events are qualifying events for each type of individual:

TRIGGERING EVENT	QUALIFYING EVENT FOR:
Termination of covered employee’s employment (for reasons other than gross misconduct)	Covered employee Spouse Dependent children
Reduction in hours of covered employee’s employment	Covered employee Spouse Dependent children
Covered employee becoming entitled to Medicare	Spouse Dependent children
Divorce or legal separation of covered employee	Spouse Dependent children
Death of covered employee	Spouse Dependent children
Loss of dependent child status under plan rules	Dependent child

 

In addition to being familiar with the rules provided by the COBRA statute, it is important to look at the terms of the plan document. To be a qualifying event, the event must cause a loss of plan coverage. Just because a certain event is permitted to be a triggering event under COBRA does not mean it will cause a loss of coverage under the plan. For example, COBRA allows legal separation of the employee and his or her spouse to be a qualifying event, but the plan may only terminate coverage if the employee and spouse are divorced.

#4 – Giving No Information

Once it is determined that a plan has to provide COBRA coverage, it is important to make sure that plan participants and beneficiaries are given adequate information about COBRA. The COBRA notice rules, which became effective for many plans on January 1, 2005, provided guidelines and consistency to COBRA’s general mandates regarding notice obligations, but did not otherwise change the substantive COBRA rules. However, they are important because failure to comply can lead to penalties under ERISA. Also, if participants and beneficiaries are not notified of their obligations, the plan’s rules cannot be enforced.

The following are the required COBRA notices:

• General (or Initial) Notice. This notice provides general information to plan participants regarding COBRA and the plan’s procedures. It must be provided within 90 days after plan coverage begins and must be written to be understood by the average plan participant. It may be provided as part of a Summary Plan Description. The COBRA notice rules specify the required content (see below) and also provide a model notice.
• Election Notice. The election notice is the most important notice for participants and beneficiaries who will be electing COBRA. It provides information about a QB’s rights and obligations regarding a specific qualifying event and available COBRA coverage. It must be provided to QBs within 14 days after the plan administrator is notified of the qualifying event. However, if the employer is the plan administrator, the notice must be provided within 44 days of the qualifying event or the loss of coverage (whichever is later). The COBRA notice regulations include a model election notice as well.
• Notice of Unavailability. This is a new notice mandated by the COBRA notice rules. If an individual gives notice of a qualifying event, but for some reason is not entitled to COBRA coverage, the plan administrator must give the individual an explanation of why coverage is not available. The deadline for this notice is the same as for the election notice.
• Notice of Early Termination. Normally, COBRA coverage will terminate at the end of the maximum coverage period. If coverage terminates early, QBs must be notified. This notice must be provided “as soon as practicable” after it is known that coverage will terminate (or has terminated). It must contain the reason for the early termination, the date coverage terminated or will terminate and a description of any available conversion rights.
• Employer’s Notice of Qualifying Event. For certain qualifying events, the employer has the responsibility to notify the plan administrator of the event’s occurrence. However, if the employer is the plan administrator, this notice is not required. If the event is the employee’s death, termination of employment, reduction in hours of employment or Medicare entitlement, the employer must notify the plan administrator within 14 days of the qualifying event or the loss of coverage, whichever is later. The notice must include sufficient information to determine the plan, the employee, the qualifying event and the date it occurred.

#5 – Giving Bad Information

Unfortunately, making sure you are providing notices in certain situations is not always enough. It is important to make sure that the notices you provide contain all the required information and that the information is accurate. This section describes the content requirements for the two major COBRA notices – the general notice and the election notice.

The general notice must contain the following information to be compliant:

• The plan name;
• The name, address and phone number of a contact person who can provide information about the plan and COBRA;
• A description of COBRA coverage under the plan (including who can be a QB, the types of qualifying events under the plan, a description of the maximum coverage period and ways to extend it, and the plan’s requirements for payment);
• The plan’s procedures for QBs to provide notice of certain qualifying events or Social Security Administration (SSA) disability determinations;
• A statement that the notice does not fully describe COBRA coverage or other rights under the plan and that more information is available from the plan administrator or the SPD; and
• A statement regarding the importance of advising the plan administrator of any change of address.

The election notice is the most detailed notice, since it relates to a specific qualifying event for specific QBs. It must contain the following elements:

• The plan name;
• The name, address and phone number of a contact person who can provide information about the plan and COBRA;
• Identification of the specific qualifying event;
• The date plan coverage will terminate;
• Identification of the QBs by status or name;
• A statement that each QB has an independent right to elect COBRA coverage;
• A description of the COBRA coverage under the plan;
• The amount that each QB is required to pay for coverage and the procedures for making payments;
• An explanation of how to elect coverage and the date by which the election must be made;
• The consequences of failing to elect or of waiving COBRA coverage;
• The duration of COBRA coverage and how coverage may be extended;
• An explanation of the QB’s responsibility to provide notice of a second qualifying event or SSA disability determination (or determination that the QB is no longer disabled), including a description of the procedures for providing notice;
• A statement that the notice does not fully describe COBRA coverage or other rights under the plan and that more information is available from the plan administrator or the SPD; and
• A statement regarding the importance of advising the plan administrator of any change of address.

Keep in mind that COBRA rules can be very complex and this is not intended to be an exhaustive discussion of the legal requirements. You should consult with your broker or legal counsel with any questions about the material covered above.