MAY LEAVE YOU EXPOSED

Transcription

1 HOW YOUR COBRA ADMINISTRATION MAY LEAVE YOU EXPOSED WHITE PAPER JANUARY

2 TABLE OF CONTENTS How Your COBRA Administration May Leave You Exposed Introduction 1 Chapter 1: What is COBRA? Chapter 2: 3 Questions to Ask a Potential COBRA Administrator Chapter 3 3 Reasons Why Paycom s COBRA Administration Works Conclusion

3 Introduction As federal law, COBRA is something many organizations simply must handle, and therefore, COBRA compliance may present a serious risk of exposure. Despite this knowledge, among the employers required to offer COBRA, nine out of 10 of them are out of compliance. The increasing number of COBRA lawsuits is staggering, and businesses that cannot ensure adherence to regulations are paying for it with exorbitant fines and settlements. In one court case, as you ll soon read, an employer was ordered to pay nearly $120,000 for its failure to comply. Discover the COBRA administration processes you and your employer can implement to limit your COBRA exposure. COBRA ADMINISTRATION 1

4 Chapter 1: What Is COBRA? Signed into law in 1986, the Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who have lost their health benefits the right to continue group health coverage under their previous employer s group health plan, for limited periods of time and under certain circumstances. These circumstances include: layoffs termination reduction in hours worked death divorce other life events Companies with 20 or more employees and a group health plan are required to offer COBRA coverage. To remain COBRA-compliant, employers must send information and notification letters to the qualified individuals. Since the mandate s inception, COBRA has become a major area of exposure for employers. Businesses face hefty fines if found noncompliant with any of its procedures or regulations, and in fact, the IRS estimates that 90% of employers are not compliant. 1 Failure to administer COBRA correctly can result in the employer not the insurance company being found liable and required to pay harsh fines, penalties and employee medical claims. COBRA administration responsibilities include: sending COBRA notices on time and to the proper parties carefully maintaining records that accurately track and document COBRA implementation staying current with relevant COBRA rules and court interpretations of COBRA issues updating the COBRA election notice to reflect coverage alternatives that may be available through the health care marketplace COBRA ADMINISTRATION 2

5 FAILURE TO COMPLY CAN BE COSTLY If a company is found to be noncompliant, penalties may be imposed under the Tax Code, Employee Retirement Income Security Act (ERISA) and the Public Health Service Act. The IRS penalty is a nondeductible excise tax of $100 per day, per violation. If more than one qualified beneficiary exists in the family, the tax increases to $200 per day. The ERISA penalty is $110 per day, per violation, and may be levied per qualified beneficiary with no family maximum. In other words, if a family has four qualified beneficiaries an employer neglects to notify of COBRA coverage, a judge could fine the employer up to $640 per day. In addition to these fines and penalties, employers also may be held liable for attorney fees, court costs and medical claims of qualified beneficiaries who lost health care coverage due to the employer s failure to comply. IRS PENALTY IS A NONDEDUCTABLE EXCISE TAX OF: $100 IRS x # = PER DAY OF VIOLATIONS PENALTY COBRA ADMINISTRATION 3

6 Chapter 2: 3 Questions to Ask a Potential COBRA Administrator COBRA administration is more than just taking care of those qualified beneficiaries who elect COBRA coverage; it also is a complete process of notifying, tracking and documenting all aspects of compliance with this complex law. If your company is sued by former employees or audited by regulators, the IRS or the Department of Labor, your company must be able to prove proper compliance with COBRA regulations. Due to the complexity of said compliance, many companies opt to outsource COBRA administration. An administrator is tasked with the complicated and detail-oriented job of managing your compliance, including the sending of required notices and accepting premium payments for qualified beneficiaries. A strong COBRA administrator will: have automated processes and procedures respond to regulation changes in a timely fashion release documents and communicate thoroughly If an administrator fails at any of the above, your company could suffer. Therefore, when vetting potential COBRA administrators, ask these three questions to ensure they are the best choice for keeping you in compliance. COBRA ADMINISTRATION 4

7 QUESTION 1: ARE YOUR COBRA ADMINISTRATION PROCESSES AUTOMATED? You will want to find out how the COBRA administrator is notified when a new employee elects benefits or a qualifying event has occurred, as well as the administrator s process for sending the appropriate notices. Why? Because relying on manual submission of qualifying events to a COBRA administrator by phone call, or letter increases the possibility of human error. Ideally, a COBRA-qualifying event would be entered into your HR software once and only once to trigger the required steps for compliance, including notifying of the COBRA administrator. The software then would automatically track dates and send required notices. Without automated and standardized procedures, the risk of noncompliance increases, along with the employer s exposure to fines and penalties. One missed notice, for one employee is all it takes. In Chenoweth v. Wal-Mart Stores, Inc., 2 the plaintiff was an employee who was terminated by Wal-Mart when she took leave to care for her husband, who had suffered a stroke. Following her termination, Wal-Mart failed to provide her the required COBRA election notice, due to an error in the corporation s computer system. Wal-Mart argued that the plaintiff was not prejudiced by the late COBRA notification, because she could not have afforded COBRA coverage anyway. The court found Wal-Mart liable to the plaintiff for medical bills, less applicable deductibles and premium fees, plus attorney s fees and costs, in amounts to be determined. Although the court found that Wal-Mart did not act in bad faith by failing to notify the plaintiff of her COBRA rights, to impress upon Wal-Mart the importance of providing employees with notice, the corporation was ordered to pay a penalty of $5 per day, for a total statutory penalty of $1, This case stresses the importance of monitoring your compliance processes carefully, or in the alternative, outsourcing COBRA administration to a specialized COBRA administrator, which would have automated procedures in place for the timely sending of election notices. Ideally, a COBRA-qualifying event would be entered into your HR software once and only once to trigger the required steps for compliance. COBRA ADMINISTRATION 5

8 QUESTION 2: WHAT ARE YOUR RECORDKEEPING POLICIES AND PROCEDURES? Meticulous recordkeeping and proof of mailing can save your company in court. One area of exposure for employers is in the maintenance of employee records in multiple systems. If your qualified beneficiary has a change of address, how does he or she inform you? Do you have to enter it into a payroll system, HR system or benefits system in addition to notifying your insurance carriers and COBRA administrator? One recent COBRA case highlights the risk that can be involved when having to make changes for a current employee and/or former employees within multiple systems. In Newton v. Prater, 3 the court denied summary judgment and refused to dismiss the case against an employer, the Sheriff of Caddo Parish ( CPSO ) for an employee s claim for failure to send a COBRA election notice to the correct address. CPSO s administrator, Ameriflex, was notified of the plaintiff s termination, but CPSO provided Ameriflex with an old address he had used more than four years prior. The plaintiff presented copies of mailings and a W-4 withholding certificate, which CPSO had sent to the correct address. He also had spoken to his employer s personnel office after his termination and given them the correct address. Consistent recordkeeping across all systems and departments is critical to compliance. No matter whether the employer is the COBRA administrator or outsources that responsibility, it still can be found liable if failure occurs. Therefore, employers must be proactive in ensuring that they and the COBRA administrator not only comply with the correspondence requirements of COBRA, but also in all recordkeeping and communication responsibilities. Otherwise, employers could be left defenseless when the IRS or a court demands supporting documentation.? Even honest errors in recordkeeping do not prevent an employer s liability when found noncompliant. COBRA ADMINISTRATION 6

9 In Sluka v. Landau Uniforms, 4 a New Jersey District Court assessed a $20 per-day penalty and attorney s fees against an employer that neglected to send an election notice to a terminated employee until 415 days almost 14 months after the qualifying event. The employer said there was no evidence of malice or bad faith in its failure to provide the notice, and that it was simply a case of honest error. The court considered that the omission appeared to be an honest error and acknowledged that the employer now was offering health coverage retroactive to the loss of coverage date, at its own cost. Nevertheless, the court used its discretion in assessing a daily penalty, totaling $8,300, as well as attorney fees. However, the penalty could have been worse as the maximum penalty is $110 a day; in this case, that would have been nearly $46,000. The lesson here is simple: Any COBRA recordkeeping errors accidental or otherwise expose employers to potential fines and penalties, as well as possible legal and medical claims. UNDER SCRUTINY Could your current COBRA practices hold up under IRS or Department of Labor scrutiny? In addition to being able to provide documentation on those processes and internal-audit procedures of your COBRA implementation, could you produce: reports on your total number of qualifying events for the year? a list of all individuals affected by a qualifying event during the current year? a list of individuals covered on the first and last days of the current and preceding years for each plan? a name and current address for each beneficiary? copies of COBRA notices? the reasons for the termination of COBRA coverage properly elected by a beneficiary? If not, you should consider undertaking a COBRA compliance review, in order to correct violations before they are found and implement proper COBRA administration procedures. HOW LONG TO KEEP COBRA RECORDS? Did you know that COBRA has no explicit requirement for retaining records? However, since COBRA amends ERISA, many commentators recommend that employers apply ERISA s requirement of six years. For example, if an attorney contacts you about a COBRA situation from five years ago, will you be ready? His client, your former employee, is ill and he wants to prove that the election notice was not sent correctly and that s why his client is not covered. Both the employer and the COBRA administrator should be able to provide adequate proof of mailing and compliance two to six years after a qualifying event. COBRA ADMINISTRATION 7

10 QUESTION 3: HOW DO YOU COMMUNICATE WITH THE EMPLOYER WHEN HANDLING INQUIRIES, PREMIUM COLLECTION AND REMITTANCE? One of the most common COBRA-related roles offered by insurers or administrators is collecting monthly premiums. COBRA does not require that participants receive monthly bills. Employers are often relieved to hear that the carrier or administrator will provide the service of premium collection, but problems could arise if employers are left out of this loop. If a COBRA beneficiary believes the billing contact is the only party they need to communicate with, the employer may not receive information critical to the administration of COBRA. In some instances, when the carrier handles billing, the employer may not even know when a beneficiary s COBRA coverage terminates. Without having complete and accurate information regarding the status of qualified beneficiaries, the employer s exposure for noncompliance increases. NO SERVICE Failure in communication and follow-through found an employer on the losing side, with a former employee being awarded $119,968. Administrators should also provide employers with detailed COBRA activity reports on when COBRA premiums were received and remitted to the employer or the carrier. In the 2006 COBRA compliance case of Shephard v. O Quinn, 5 failure in communication and follow-through found an employer on the losing side, with a former employee being awarded $119,968. The employee had knee surgery a few days after his employer laid him off. At the time of the layoff, a representative of the employer assured the employee that his health coverage would remain effective for the scheduled surgery and that the employer would pay for his first two months of COBRA coverage. After his surgery, the employee learned he did not have COBRA coverage and his health coverage had lapsed before the procedure. This occurred because the employer, despite deducting contributions from the employee s pay, failed to pay the premiums for his coverage and made no arrangements for him to receive COBRA coverage. COBRA ADMINISTRATION 8

11 The employee sued both the employer and the employer s representative, but they defaulted (meaning they did not respond to the lawsuit) and the court entered judgment against them. The employee was awarded the medical expenses for his surgery, $12,199, as well as his request for $16,909 in attorneys fees and court costs. The court explained the employer s conduct was at best incompetent and at worst fraudulent, and the award would act as a deterrent and caution to other employers who may purport to provide a group health insurance benefit to their employees. Finally, the court awarded the maximum $110 per day statutory penalty for 826 days (a total of $90,860) for the employer s failure to inform the employee of his COBRA rights. The responsibility for collecting and remitting premiums for COBRA participants can be daunting for employers who may fare better outsourcing this particular challenge to a third-party administrator or even their insurance carrier. Before outsourcing COBRA, review all your health plan designs that may require special notices (including health flexible spending accounts, vision and dental plans, etc.) to ensure compliance. COBRA AND THE ACA In connection with changes to health care reform through the Affordable Care Act (ACA), the Department of Labor updated its COBRA model election notice for single-employer group health plans. The revised notice adds references to coverage alternatives, in lieu of COBRA, that may be available through the ACA marketplace, and both the employer and the former employee stand to benefit. For employers with former employees who choose to be insured through the ACA marketplace, it allows them to save on their group plans, as the average COBRA participant can cost the employer 54% more than current workers. For this reason, be sure your COBRA notice is updated accordingly. 6 The average COBRA PARTICIPANT can cost the employer 54% more than CURRENT WORKERS. COBRA ADMINISTRATION 9

12 Chapter 3: 3 Reasons Why Paycom s COBRA Administration Works Before selecting a COBRA administrator, get the answers you need to reduce your exposure. Paycom is one of the largest COBRA administrators in the nation, and the only provider to offer payroll, HR, benefits and COBRA administration through a single application. Here are three reasons to consider outsourcing to Paycom. COBRA ADMINISTRATION 10

13 REASON 1: PAYCOM'S COBRA ADMINISTRATION PROCESSES ARE AUTOMATED When an employee is added to benefits or a COBRA-qualifying event (such as a termination) is entered, Paycom s application immediately prompts you to send a COBRA notice. Simply enter the necessary information and Paycom sends the required notices the next day via certificate of mailing and tracks all dates and activities for you. By using a single-application solution, you reduce the manual entry of data in multiple systems and decrease the opportunity for human error. For example, with Paycom, an address change entered by an employee through the self-service tool automatically updates systemwide, including the tools for payroll, HR, benefits, COBRA and more. This eliminates the need to rekey the information and greatly reduces the chance of a notice being sent to an old address. REASON 2: PAYCOM S RECORDKEEPING POLICIES AND PROCEDURES HELP KEEP CLIENTS COBRA-COMPLIANT Paycom tracks all dates, sends all notices, and collects and remits all premium payments in accordance with COBRA. With all beneficiary information and COBRA activity tracked in one online application, processes are automated and proof of compliance can be generated easily. The IRS recently updated its standards for COBRA audits, requiring employers to provide up to 15 different pieces of information to prove they complied with the law. 7 Now more than ever, employers should consider switching to a single-application solution for payroll, HR, benefits and COBRA to reduce their exposure. REASON 3: PAYCOM PROVIDES DETAILED COBRA ACTIVITY REPORTS TO EMPLOYERS EACH MONTH When you choose Paycom as your COBRA administrator, the COBRA department answers participants questions, collects and remits all premiums to you, and sends you monthly statements detailing any COBRA-related activity Paycom has performed on your behalf. Any beneficiary changes received by Paycom are updated in your system to keep you in the loop. Plus, Paycom monitors changes in COBRA regulations and updates its proprietary system and procedures to help keep you in compliance. ADDRESS CHANGES THROUGH EMPLOYEE SELF-SERVICE AUTOMATICALLY UPDATES SYSTEMWIDE, INCLUDING THE TOOLS FOR: HR COBRA BENEFITS PAYROLL COBRA ADMINISTRATION 11

14 Conclusion Businesses have multiple regulations they must adhere to in order to keep their doors open. A major HR challenge is being COBRA-compliant, and based on the alarming fact that only 10% of companies are estimated to be compliant, 8 a large majority of U.S. businesses are failing in their COBRA administration. The court cases contained in this white paper illustrate how detrimental improper COBRA implementation can be to a company s bottom line. Paycom s automated payroll and HR application completes the compliance cycle by administering notices based on the qualifying events you enter into the system, collecting and remitting premiums, and diligently keeping records that document all activity. Automation with Paycom reduces your exposure. Alleviate the headache of COBRA regulation today with COBRA Administration from Paycom. COBRA ADMINISTRATION 12

15 Learn more about how Paycom helps businesses with their COBRA administration at Paycom.com or call SOURCES 1 Jeong, June, Are You Part of the 90% Club - Businesses Who do not Administer COBRA Correctly?, EQHR Solutions, eqhrsolutions.blogspot.com, March 30, Internal Revenue Service, Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of Employee Health Care Coverage), irs.gov, March Chenoweth v. Wal-Mart Stores, Inc., 159 F. Supp. 2d 1032 (S.D. Ohio Aug. 17, 2001). 8 Jeong 3 Newton v. Prater, No , 2016 WL (W.D. La. Feb. 18, 2016). 4 Sluka v. Landau Uniforms, 383 F. Supp. 2d 649 (D. N.J. Aug. 15, 2005). 5 Shephard v. O Quinn, No. 3:05-CV-79, 2006 U.S. Dist. LEXIS (E.D. Tenn. Apr. 26, 2006). 6 Hancock, Jay, Swapping COBRA For Obamacare Likely To Be Windfall For Big Business, Kaiser Health News/ Chicago Tribune, khn.org, Sept. 23, DISCLAIMER: THE INFORMATION PROVIDED HEREIN IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. ACCORDINGLY, PAYCOM DOES NOT WARRANT THE COMPLETENESS OR ACCURACY OF THE ABOVE INFORMATION. THE INFORMATION DISPLAYED HEREIN IS PROVIDED ON AN AS IS BASIS WITH NO ASSURANCE OF COMPLETENESS, ACCURACY OR TIMELINESS OF THE INFORMATION, AND WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF PERFORMANCE, MERCHANTABILITY, FITNESS, OR FOR ANY PARTICULAR PURPOSE. NO LICENSE, EXPRESS OR IMPLIED IS GRANTED OR INTENDED HEREBY. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Product or company names mentioned herein may be the trademarks of their respective owners. This guide is protected by copyright law. Individuals may reproduce and distribute this guide for individual, non-commercial use. Paycom is not responsible for any liabilities that may arise out of the reproduction or distribution of the information herein Paycom. All rights reserved. COBRA ADMINISTRATION 13