Common COBRA Mistakes & How to Fix Them Webinar By Larry Grudzien Attorney at Law
About Larry Lawrence (Larry) Grudzien, JD, LLM is an attorney practicing exclusively in the field of employee benefits. He has experience in dealing with qualified plans, health and welfare, fringe benefits and executive compensation areas. He has more than 35 years experience in employee benefit law. Mr. Grudzien was also an adjunct faculty member of John Marshall Law School s LL.M. program in Employee Benefits and at the Valparaiso University s School of Law. Mr. Grudzien has a B.A. degree in history and political science from Indiana University, J.D. degree from Valparaiso University School of Law and LL.M. degree in tax from Boston University School of Law. He is a member of Indiana and Illinois Bars.
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Assuming COBRA Doesn t Apply to You 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.
Assuming COBRA Doesn t Apply to You 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 a a fraction: divide the number of hours the employee worked by the number of hours required to be full time.
Assuming COBRA Doesn t Apply to Your Plan or Plans 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.
Assuming COBRA Doesn t Apply to Your Plan or Plans 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.
Assuming COBRA Doesn t Apply to Your Plan or 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.
Assuming COBRA Doesn t Apply to Your Plan or Plans 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. Common COBRA Mistakes
Forgetting About State Law Many states have enacted what are commonly referred to as "mini-cobra" laws, which typically require continuation of group health plan coverage provided by employers with fewer than 20 employees. States may also have different requirements for employee eligibility and different maximum periods of coverage.
Not Sending Required Notices or Providing Inaccurate or Insufficient Information in the Notices Group health plans are required to provide qualified beneficiaries with specific notices explaining their COBRA rights, with very specific requirements as to what information must be included in these notices. One way to avoid mistakes is to use the Model General Notice and the Model Election Notice provided by the U.S. Department of Labor, filling in the blanks with your plan information. Other notices, such as the Notice of Unavailability of Continuation Coverage and the Notice of Early Termination of COBRA Coverage, should be sent to qualified beneficiaries as necessary.
Not Sending Required Notices or Providing Inaccurate or Insufficient Information in the Notices It is also important to have procedures in place for keeping track of when and to whom notices are sent. Consider using a form of delivery that will provide documentation that the notice was delivered (such as a return receipt or other written proof of delivery). In the event a qualified beneficiary asserts that he or she did not receive a required COBRA notice, these records can provide evidence of your compliance.
Correcting No COBRA Notice provided Send or resend Election Notice No COBRA Coverage provided Consider offering retroactive coverage Consider offering prospective coverage when notice is very late
An employer that discovers a failure to offer COBRA coverage should take immediate steps to correct it. The urgency is due to the variety of possible consequences mentioned below: IRS excise tax penalties for failure to comply with COBRA; ERISA $110 per day statutory penalties for failure to provide certain notices plus the possibility of extra-contractual damages under COBRA's special other relief provision; Lawsuits to compel coverage, which can create liability for attorneys' fees as well; Increased risk of adverse selection (i.e., of incurring obligations in the future to qualified beneficiaries who would decline COBRA coverage now); and Possible inability to terminate COBRA coverage even if the qualified beneficiary became covered under another group health plan.
Failing to Include the Spouse (and Other Qualified Beneficiaries) When Sending Required Notices In certain circumstances, a COBRA notice must be given not only to the employee but also to the spouse and/or other qualified beneficiaries. A plan may generally satisfy the requirement to provide notices under COBRA to a covered employee and his or her spouse by furnishing a single notice addressed to both if, on the basis of the most recent information available to the plan, the two reside at the same location. Similarly, there is typically no requirement to provide a separate notice to dependent children who share a residence with a covered employee or the employee's spouse to whom proper notice is provided.
To minimize the possibility of errors involving notice recipients, employees should be required (and periodically reminded) to notify the plan administrator promptly of a separation, divorce, or any other event that results in a spouse and/or dependents no longer living at the same address as the employee. The plan should also have procedures in place to ensure that any changes in address are promptly and accurately recorded. Common COBRA Mistakes Failing to Include the Spouse (and Other Qualified Beneficiaries) When Sending Required Notices
Not Recognizing When a Qualifying Event Has Occurred The employer is responsible for notifying the plan administrator (if other than the employer) within 30 days of the following qualifying events: Termination or reduction in hours of employment of the covered employee; Death of the covered employee; or The covered employee becoming entitled to Medicare. Common COBRA Mistakes
Not Recognizing When a Qualifying Event Has Occurred A reduction of hours occurs whenever there is a decrease in the hours that a covered employee is required to work or actually works (such as an absence from work due to disability or a temporary layoff but not including absences due to FMLA leave), but only if the decrease is not accompanied by an immediate termination of employment. If a group health plan measures eligibility for coverage by the number of hours worked in a given time period, and an employee covered under the plan fails to work the minimum number of hours during that time period, the failure to work the minimum number of required hours is a reduction of hours of that covered employee's employment and a COBRA qualifying event. Note that the plan must have established procedures for how qualified beneficiaries can provide notice of a divorce, legal separation or child s loss of dependent status, including how, and to whom, notice should be given, and what information must be included in the notice.
Miscalculating the Period of COBRA Coverage Employers must offer employees and other qualified beneficiaries the maximum period of COBRA coverage to which they are entitled. The type of qualifying event determines who the qualified beneficiaries are and the amount of time the plan must offer health coverage to them under COBRA.
Miscalculating the Period of COBRA Coverage In certain circumstances, qualified beneficiaries entitled to 18 months of COBRA coverage may be entitled to a disability extension of 11 months (for a total maximum period of 29 months), or an extension of an additional 18 months due to the occurrence of a second qualifying event (for a total maximum period of 36 months). Your plan rules, as well as your election notice for any offer of an 18-month period of COBRA, should describe the notice required in either instance for the qualified beneficiary to request an extension of COBRA. Also keep in mind that certain events, such as failure to pay premiums, may justify termination of COBRA before the end of the maximum period of coverage.
Miscalculating the Period of COBRA Coverage Special rules of Health FSA is an excepted Benefit: Coverage period is only to end of the plan year, COBRA coverage does not have to be offered if account is overspent.
Charging the Incorrect Amount A health plan may charge COBRA QBs for the cost of providing COBRA coverage. It may require QBs to pay up to 102% of the applicable premium for the plan. In the case of a disability extension, it may charge up to 150% of the applicable premium for certain QBs. The applicable premium is the cost to the plan of providing coverage. For insured plans, the applicable premium is usually equal to the insurance premium paid to the insurance carrier. However, the calculation can be more difficult for self-funded plans and can be determined using past costs or an actuarial estimate of future costs. The applicable premium is the total cost to the plan for providing coverage, so it includes both employerand employee-paid portions and can also include the administrative cost of providing COBRA coverage.
Charging the Incorrect Amount The plan must calculate the COBRA applicable premium in advance for a 12-month determination period. The plan can choose any 12-month period to be the determination period, but it must remain consistent every year. The COBRA premium may be changed for a new determination period if the applicable premium changes and there are certain limited situations where the COBRA premium may be changed during the determination period (for example, if the QB changes coverage to another benefit package with a higher applicable premium)
Charging the Incorrect Amount The plan administrator should use caution in calculating the COBRA premium as well as in communicating that premium to QBs. Fixing mistakes that result in over or undercharging QBs for COBRA premiums can be administratively burdensome and raise COBRA compliance issues.
Ignoring Incorrect Premium Payments Qualified beneficiaries may be required to pay the full premium for COBRA continuation coverage, even if the employer made a contribution prior to the loss of benefits. A plan must allow premiums to be paid on a monthly basis.
Ignoring Incorrect Premium Payments If the amount of a premium payment made to the plan is wrong, but is not significantly less than the amount due, the amount paid will be deemed to satisfy the plan's requirement for the amount that must be paid, unless the plan notifies the qualified beneficiary of the amount of the deficiency and grants a reasonable period of time (not less than 30 days) to pay the difference. Even if your plan does not send monthly premium notices, it must provide this notice of underpayment or the amount submitted will be treated as full payment.
Treating Employees on COBRA Different from Similarly Situated Employees Who Are Not on COBRA The continuation coverage offered under COBRA must be identical to the coverage that is currently available under the plan to similarly situated individuals who are covered under the plan and not receiving COBRA. (Generally, this is the same coverage that the qualified beneficiary had immediately before the qualifying event.) Qualified beneficiaries must receive the same benefits, choices, and services as similarly situated non-cobra participants and beneficiaries under the plan, such as the right during an open enrollment season to choose among available coverage options. Any changes made to the plan's terms that apply to similarly situated active employees and their families will also apply to qualified beneficiaries receiving COBRA continuation coverage. Common COBRA Mistakes
Terminating COBRA Continuation Coverage Too Early The continuation coverage offered under COBRA must be identical to the coverage that is currently available under the plan to similarly situated individuals who are covered under the plan and not receiving COBRA. (Generally, this is the same coverage that the qualified beneficiary had immediately before the qualifying event.) Qualified beneficiaries must receive the same benefits, choices, and services as similarly situated non-cobra participants and beneficiaries under the plan, such as the right during an open enrollment season to choose among available coverage options. Any changes made to the plan's terms that apply to similarly situated active employees and their families will also apply to qualified beneficiaries receiving COBRA continuation coverage. Common COBRA Mistakes
Terminating COBRA Continuation Coverage Too Early If continuation coverage is terminated early, the plan must provide each qualified beneficiary with an early termination notice. The notice must be given as soon as practicable after the decision is made and it must describe the date coverage will terminate, the reason for termination, and any rights the qualified beneficiary may have under the plan or applicable law to elect alternative group or individual coverage (such as a right to convert to an individual policy).
Failing to Understand the Relationship Between Medicare and COBRA Whether an employee or family member is covered by Medicare may affect the right to continuation coverage. Note the following general rules: An employee's spouse or child who loses group coverage because the employee becomes entitled to Medicare may elect up to 36 months of COBRA continuation coverage. Where a spouse or child is already receiving COBRA due to the employee's termination or reduction in hours, the employee s becoming entitled to Medicare may be a second qualifying event that would allow the 18-month maximum period of continuation coverage to be extended for an additional 18 months, for a total of up to 36 months. Common COBRA Mistakes
Failing to Understand the Relationship Between Medicare and COBRA Whether an employee or family member is covered by Medicare may affect the right to continuation coverage. Note the following general rules: If a qualified beneficiary first becomes entitled to Medicare benefits on or before the date that COBRA is elected, the qualified beneficiary's entitlement to Medicare benefits cannot be a basis for terminating his or her continuation coverage. If a qualified beneficiary first becomes entitled to Medicare benefits after the date on which COBRA continuation coverage is elected, the plan may terminate the qualified beneficiary's COBRA coverage upon the date on which the qualified beneficiary becomes so entitled. A qualified beneficiary becomes entitled to Medicare benefits upon the effective date of enrollment in either part A or B, whichever occurs earlier. Thus, merely being eligible to enroll in Medicare does not constitute being entitled to Medicare benefits Common COBRA Mistakes
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.
Not Following Your Own Rules Notice Procedures With respect to the notice rules, plans must have reasonable procedures in place for covered employees and QBs to notify the plan administrator of certain events: Qualifying events that are the divorce or legal separation of the covered employee or a dependent child losing dependent status under the plan; Second qualifying events (triggering events that occur during the period of COBRA coverage that would have caused a loss of coverage under the plan if the QB were still covered); and SSA disability determinations (or cessation of disability).
Not Following Your Own Rules In order to be reasonable, the procedures must: Be described in the SPD; Specify the individual or entity that should receive the notice; Specify how notice is to be given (for example, in writing or on a specific form); Describe the information required (such as the QBs involved, the date of the event, the nature of the event, the plan name and any additional documentation the plan administrator might want, such as a copy of a divorce decree); Specify the timeline for giving notice; and Provide for the proper handling of incomplete notices.
Not Providing COBRA elections at retirement Qualifying event Retiree Coverage offered Loss of coverage If no COBRA notice given, then COBRA notice must be given when retiree coverage ends. Common COBRA Mistakes
Asset Sale Buyer may have to offer COBRA coverage to seller s employees. Seller does not continue medical coverage after sale, Buyer continues business after sale, COBRA coverage not addressed in sales agreement.
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Contact Larry 708.717.9638 larry@larrygrudzien.com www.larrygrudzien.com Larry Grudzien Attorney at Law