The Consolidated Omnibus Budget Reconciliation Act, which stands for COBRA, has been around for a long time. Still, it remains the source of thorny compliance problems and a fertile ground for litigation. The sheer complexity of the COBRA scheme, and the timing issues involved, can throw off even the most diligent and conscientious employer.
COBRA comes into play most commonly when someone’s employment is terminated voluntarily or otherwise. Keeping a few key essential steps in mind can help you steer clear of agency fines and employee lawsuits.
Understanding the COBRA Basics
COBRA applies to nearly all businesses with 20 or more employees, and many states have mini-COBRA laws for smaller employers.
The Internal Revenue Service (IRS) and the Department of Labor (DOL) share COBRA enforcement authority, and each can impose penalties. Employers also need to be wary of lawsuits from individual employees and other COBRA beneficiaries. Even if an outside service provider is utilized to administer COBRA, it’s generally still the actual employer that’s on the hook for any violations.
Employers must remain diligent in fulfilling their COBRA obligations to avoid legal issues and ensure compliance.
Determine Who Is Eligible
COBRA rights apply to “qualified beneficiaries” as defined in the law. This includes employees, their spouses, and dependent children who were covered by a group health plan on the day prior to the “qualifying event” that triggers eligibility.
Termination of employment is the most common of these qualifying events. If an employee, spouse, or dependent loses group health coverage in connection with a termination or reduction in hours, they become eligible for up to 18 months (about one and a half years) of continuation coverage.
An exception applies if the employee is terminated for “gross misconduct.” However, the standard for gross misconduct is vague, heavily litigated, and often turns out to be a very high bar, so denying COBRA based on gross misconduct is not something to be entered into lightly.
Send Out Required Notices
Employers often face challenges with COBRA’s notice requirements, as the rules are detailed and prescriptive and often can give a terminated employee an opening to sue the company.
If an employee, spouse, or dependent child loses coverage from a qualifying event, the “plan administrator” (usually the employer) must send an election notice. The notice must go to each qualified beneficiary, except that a single notice may go to a covered employee and spouse residing at the same address or to the covered employee or spouse for each dependent child residing at that address.
Employers must have procedures in place for providing COBRA election notices, and they must be reasonable. Ensure you have a process that can withstand court scrutiny, especially given the recent growth in COBRA notice litigation.
COBRA’s notice penalties of up to $110 per participant per day can quickly, especially in a class action. And plaintiffs need not demonstrate bad faith or concealment on the plan’s part or even that they were harmed.
To help avoid being the subject of a notice lawsuit, review the Labor Department’s content requirements, which are very specific, and check your own notice against the models the agency has posted. And if you have an outside service provider, ensure they’re on the same page.
When you contract with these vendors, retain the authority to have them modify their template if necessary. And do your part to keep them apprised of qualifying events as they occur.
Apply The COBRA Election
When a COBRA qualifying event occurs, the qualified beneficiary must be afforded 60 days (about two months) to elect COBRA after losing the group health coverage or receiving the election notice, whichever is later.
If the individual elects COBRA coverage, they may be charged a premium of 102 percent of the total cost of coverage, including both the employer and employee share.
Determine What Benefits Apply
If an employer is subject to COBRA, the benefits covered include major medical, dental, and vision. Health flexible spending accounts and health reimbursement arrangements are also subject to COBRA, but usually not health savings accounts.
Once a qualified beneficiary is on COBRA, they must be afforded the same rights to open enrollment and special enrollment as a regular participant in the group health plan. This means they should receive the annual enrollment materials just like employees do.
However, a beneficiary who moves out of a plan’s coverage area could lose COBRA entitlement unless the employer offers other coverage where they are.
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