By Rachel Meinke www.paycom.com
INTRODUCTION Is your company COBRA compliant? Do your COBRA administration processes include sending all 25 written notices and tracking all 29 possible dates for each employee? Does your employer have proof, including copies, that Initial Notices and Election Notices were mailed? A serious exposure risk for employers is not being COBRA compliant. The increasing number of COBRA lawsuits is staggering. Businesses that cannot keep up with each new COBRA regulation are paying for it with exorbitant settlements. Discover the COBRA administration processes you and your employer can implement to limit your COBRA exposure.
WHAT IS COBRA? The Consolidated Omnibus Budget Reconciliation Act (COBRA), which was signed into law in 1986, 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 under certain circumstances. These circumstances include: layoffs, termination, reduction in hours worked, death, divorce and 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 COBRA mandate, being non-cobra compliant has become a major area of exposure for employers. Businesses face hefty fines if found noncompliant with any procedure or regulation. 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. The IRS estimates that 90 percent of employers are non-compliant and lose approximately 75 percent of all COBRA cases in federal court. COBRA administration responsibilities include: Always 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. This is crucial to the proper administration of COBRA. Maintaining your Summary Plan Description and COBRA procedures manual to reflect the latest changes in COBRA rules. Outdated compliance documents may be an indication that the employer has failed to comply adequately with COBRA implementation. Updating the COBRA election notice to reflect coverage alternatives, in lieu of COBRA, that may be available through the healthcare marketplace. 2014, Paycom www.paycom.com 1
Failure to Comply With COBRA Can be Costly for Employers If a company is found to be noncompliant, there are many penalties which could be imposed under the Tax Code, Employee Retirement Income Security Act (ERISA) and under the Public Health Service Act. The IRS penalty is a nondeductible excise tax of $100 per day, per violation. If there is more than one Qualified Beneficiary in the family, the IRS excise tax is $200 per day. The ERISA penalty is $110 per day, per violation. The ERISA penalty can be levied per Qualified Beneficiary with no family maximum. In other words, if there were four Qualified Beneficiaries in a family that the employer neglected to notify of COBRA, a judge could fine the employer up to $640 per day. In addition to fines and penalties, employers can 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 with COBRA. Three Questions to Ask When Reviewing a COBRA Administrator When selecting a COBRA Administrator, employers should keep in mind that COBRA administration is more than just taking care of those qualified beneficiaries who elect COBRA it 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 COBRA 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 who elect COBRA. A strong COBRA administrator should have automated processes and procedures, respond to regulation changes in a timely fashion, release documents and communicate thoroughly. If they fail to follow the regulations your company could suffer. There are three important questions you should ask a potential COBRA administrator to ensure that they are the best choice for keeping you in compliance. 2 2014, Paycom www.paycom.com
1. ARE YOUR COBRA ADMINISTRATION PROCESSES AUTOMATED? How do you notify the COBRA administrator when a new employee elects benefits? When a qualifying event has occurred? What is the CO- BRA administrator s process for sending the appropriate notices? Relying on manual submission of qualifying events to a COBRA administrator by phone call, email or letter increases the possibility of human error. Ideally, qualifying events would be entered into your HRIS system once to trigger the steps for COBRA compliance including the notifying of the COBRA administrator. Dates would automatically be tracked and required notices sent. 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 Linden v. Harding Tube v. ADP COBRA Services, Inc., 2005, a Michigan District Court awarded almost $63,000 to a participant to cover claims that were unpaid due to an untimely Election Notice. Harding Tube terminated Linden s employment on June 15, 2001. In late July, he was admitted to a hospital for two months. In late August, Harding Tube was made aware of the situation and instructed ADP, its COBRA administrator to send the Election Notice. It was not sent until November of 2001. The hospital that treated the ex-employee authorized MedAssist to coordinate the COBRA election and handle the payments. MedAssist sent ADP payment for three months of coverage. The Court ruled that the personal representative of the estate of the now deceased individual was entitled to reimbursement for the claims. The court decided that neither Harding Tube nor ADP was entitled to judgment against each other. Harding Tube was ordered to pay $62,923.45 in medical bills. This case stresses the importance of automating your compliance processes along with monitoring the fulfillment of any outsourced COBRA administration. Ideally, if Harden Tube had an automated system, Linden s termination would have triggered the notification of the qualifying event to their COBRA administrator who also should have had automated procedures in place for the timely sending of the Election Notice. 2014, Paycom www.paycom.com 3
2. WHAT ARE YOUR RECORDKEEPING POLICIES AND PROCEDURES? Meticulous recordkeeping and proof of mailing can be what saves 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 do they 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? A pending COBRA case is serving as an example of the risk involved when having to make employee and former employee changes to multiple systems. In Munsamy v. Rittenhouse Senior Living of Indianapolis, the employer used two systems to track employee records, one for payroll and one for insurance benefits. One of their employees was evicted from her apartment. She claimed she told the employer of her new address, but her address never made it into the insurance benefits system. When the employee was terminated the COBRA Election Notice went to the wrong address. Consistent record keeping across all systems and departments is critical to COBRA compliance. When the employer is the COBRA administrator, and even if the employer outsources the responsibility of COBRA administration, they can still be found liable if failure occurs. Employers must be proactive in ensuring that they and their COBRA administrator are not only complying with the correspondence requirements of CO- BRA but also in all recordkeeping and communication responsibilities or they 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. In Sluka v. Landau Uniforms, 2005, the employer learned a costly lesson about the importance of good recordkeeping. 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 almost 14 months after the qualifying 4 2014, Paycom www.paycom.com
event. The employer, Landau Uniforms, said there was no evidence of malice or bad faith in its failure to provide the notice. It was simply a case of honest error. It took Laundau 415 days to send an Election Notice. The Court considered the fact that the omission did appear to be an honest error and acknowledged that Landau was now offering health coverage retroactive to the loss of coverage date, at its own cost. Nevertheless, the Court used its discretion in assessing the daily penalty, totaling $8,300 and award of attorney fees which were more than likely more than the penalty. However, the penalty could have been worse as the maximum penalty is $110 a day. The lesson here is simple. Any COBRA recordkeeping errors that result in noncompliance, honest or otherwise, expose employers to fines and penalties, as well as possible legal and medical claims. Would your current practices hold up under the scrutiny of an IRS examiner? In addition to being able to provide documentation on your COBRA 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? What about a list of individuals covered on the first and last days of the current and preceding years for each plan? Can you produce 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, correcting violations before they are found and implementing proper COBRA administration procedures. Did you know employers are required to keep COBRA records for a minimum 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 CO- BRA administrator should be able to provide adequate proof of mailing and compliance two to even six years after a qualifying event. 2014, Paycom www.paycom.com 5
3. HOW DOES THE COBRA ADMINISTRATOR COMMUNICATE WITH THE EMPLOYER WHEN THEY ARE HANDLING INQUIRIES, PREMIUM COLLECTION AND REMITTANCE? One of the most common COBRA related roles offered by insurers or administrators is collecting monthly premiums. Employers are not legally required to send monthly bills to qualified beneficiaries and are often relieved to hear that the carrier or administrator will handle that responsibility. There are problems that could arise when employers are left out of the loop when it comes to premium collection by their carrier/administrator. If a COBRA beneficiary believes the billing contact is the only party they need to communicate with, the employer is placed out of the communication loop and does 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. Administrators should also be providing employers detailed COBRA activity reports on when COBRA premiums were received and remitted to carriers. The following failure in communication and follow through found employer O Quinn on the losing side of this COBRA compliance case. In Shephard v. O Quinn, 2006, the employee was awarded $119,968. Shephard, the employee had knee surgery a few days after his employer, O Quinn 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 knee surgery and that the employer would pay for his first two months of COBRA coverage. 6 2014, Paycom www.paycom.com
After his surgery, the employee learned he did not have COBRA coverage and his health coverage had lapsed before his surgery. The lapse occurred because the employer, despite deducting contributions from the employee s pay, failed to pay the premiums for the employee s coverage and made no arrangements for the employee to receive COBRA coverage. The employee sued both the employer and the employer s representative, but they defaulted (i.e., they did not respond to the employee s lawsuit) and the court entered judgment against them. First, the court awarded the employee s medical expenses for his knee surgery, $12,199. Then the court approved the employee s 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 continuants can be daunting for employers who may fare better outsourcing this particular COBRA challenge to a third-party administrator or even their insurance carrier. Before outsourcing to a benefits carrier, 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 NOTIFICATION UPDATED DUE TO HEALTHCARE REFORM In connection with changes to healthcare reform through the Affordable Care Act, the U.S. 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 percent more than current workers. For this reason, be sure your COBRA notice is updated accordingly. 2014, Paycom www.paycom.com 7
INTEGRATED, AUTOMATED COBRA ADMINISTRATION Paycom is one of the largest COBRA Administrators in the U.S. and the only provider to offer Payroll, HR, Benefits and COBRA Administration through a single application. With all data stored in one system, when a qualifying event is entered, compliance is initiated. Before selecting a COBRA administrator, get the answers you need to reduce your exposure. Paycom s COBRA Administration Processes are Automated When an employee is added to benefits or a COBRA Qualifying Event is entered such as a termination, 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 s system, an address change can be entered in Employee Self-Service and it is updated throughout the system for Payroll, HR, Benefits, COBRA, etc., which eliminates the need to rekey the information and greatly reduces the chance of a notice being sent to an old address. Paycom s Recordkeeping Policies and Procedures 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 system, processes are automated and proof of compliance can be easily generated. The IRS has recently updated its standards for COBRA audits requiring employers to provide at least 15 different pieces of information to prove they complied with the law. Now more than ever employers should consider switching to a single-application solution for Payroll, HR, Benefits and COBRA to reduce their exposure. 8 2014, Paycom www.paycom.com
Would your current practices hold up under the scrutiny of an IRS examiner? In addition to being able to provide documentation on your COBRA 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? What about a list of individuals covered on the first and last days of the current and preceding years for each plan? Can you produce 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, correcting violations before they are found and implementing proper COBRA administration procedures. As a COBRA Administrator Paycom Provides Detailed COBRA Activity Reports to Employers Each Month When you choose Paycom as your COBRA Administrator, our COBRA department answers participant s questions, collects and remits all premiums and sends you monthly statements detailing any COBRA-related activity that 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 our proprietary system and procedures to keep you in compliance. 2014, Paycom www.paycom.com 9
CONCLUSION Businesses have multiple regulations they have to adhere to to keep their doors open. A major HR challenge is being COBRA compliant and based on the terrifying fact that only 10 percent of companies are compliant, the majority of businesses are failing in their COBRA administration. The court cases contained in this white paper stress how detrimental improper COBRA implementation can be to a company. 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. 2014, Paycom. All rights reserved. INTELLECTUAL PROPERTY DISCLAIMER: THIS WHITE PAPER IS FOR INFORMATIONAL PURPOSES ONLY AND IS PROVIDED AS IS WITH NO WARRANTIES WHATSOEVER INCLUDING ANY WARRANTY OF MER- CHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY WARRANTY OTHERWISE ARISING OUT OF ANY PROPOSAL, SPECIFICATION, OR SAMPLE. NO LICENSE, EXPRESS OR IMPLIED, TO ANY INTELLECTUAL PROPERTY RIGHTS IS GRANTED OR INTENDED HEREBY. This white paper is protected by copyright law. Individuals may reproduce and distribute this white paper for individual, non-commercial use. DISCLAIMER: The content of this white paper is intended to keep interested parties informed of legal and industry developments for educational purposes only. It is not intended as legal opinion or tax advice and should not be regarded as a substitute for legal or tax advice. Product or company names mentioned herein may be the trademarks of their respective owners. 10 2014, Paycom www.paycom.com