Benefits & Compensation News

Cardinal sins of COBRA: 6 costly mistakes to avoid

For HR & benefits pros, COBRA administration is one of those tasks that can easily slip through the cracks. But whether you’re handling everything in-house or outsourcing your COBRA responsibilities to a TPA, you’re who’s ultimately responsible for any mistakes.

And even the smallest mistake can prove to be very costly.

If you remember, HR Benefits Alert previously reported on an employer’s “unwieldy” COBRA process that ended up costing it $126K — nearly $40K of that coming from late penalties alone.

Common COBRA mistakes

So how can employers protect themselves from costly COBRA mistakes? By being fully aware of all of the common COBRA errors that firms fall victim to — and working to make sure your company doesn’t repeat those sins.

To that end, here are the six cardinal sins of COBRA administration, as well as a few real-life examples of employers who ended up in serious trouble for making them.

1. Ignoring state laws

COBRA has a 20-employee threshold where businesses with fewer than 20 employees aren’t subject to the law’s requirements. (Note: both full- and part-time employees are counted for COBRA-purposes.)

However, there are many states that have “mini-COBRA” laws that generally apply to employers with fewer than 20 employees. Employers get into legal trouble when they think they’re exempt from federal COBRA requirements and forget to check their state’s laws.

2. Failing to send required notices — or sending inaccurate info

COBRA has some very specific requirements when it comes to the info employers must give to qualified beneficiaries regarding their COBRA rights — and how quickly the former employees need to receive that info. Failing to fulfill those requirements can prove to be very costly — particularly if a large group of employees is involved.

Case in point: When Macon County Greyhound Park, Inc., decided to institute a reduction in force (RIF), it sent 1,625 employees packing. And Macon allegedly didn’t notify any of the employees involved in the RIF of their COBRA rights. That led to a settlement where Macon wound up forking over $1.3 million.

Employers also get themselves in trouble when they don’t have solid recordkeeping processes in place to track when and to whom their notices are delivered. That’s because when a qualified beneficiary makes the claim that he or she didn’t receive a required COBRA notice, the burden is on the employer to prove that it did everything in its power to get the notice out — and the delivery failure isn’t on its end.

In addition to good recordkeeping, employers can safeguard themselves from employee complaints that their notices are lacking info by using the feds’ COBRA forms.

The DOL offers Model General Notice and the Model Election Notices forms where all employers have to do is fill in the blanks with their own plan info.

3. Not including spouses or other qualified beneficiaries

In some cases, COBRA notices must be given to the employees as well as the employees’ spouses and/or other qualified beneficiaries. A single notice addressed to both the employee and the spouse or other qualified beneficiary will suffice if everyone resides at the same address. However, problems occur when employees get separated or divorced and the spouse no longer lives at the same address.

To prevent issues in this area, employers should require workers to provide updates to the company or the plan administrator in the event of a separation, divorce or other circumstance that causes a spouse and/or dependents to live in a different address from the employee.

Of course, firms should also have solid recordkeeping processes in place to make sure address changes are recorded in a timely manner. It also pays to regularly remind employees about address-change policies.

4. Not calculating the coverage period correctly

Under COBRA, employers are required to offer workers — and other qualified beneficiaries — the maximum amount of coverage continuation they are entitled to, which is normally 18 months. But this can get tricky.

Example: ADA-protected disabled individuals may be entitled to an extension of 11 months on top of the 18 months of standard COBRA coverage, extending the total coverage period to 29 months.

5. Terminating an employee’s coverage too soon

It’s true that employers can terminate a qualified beneficiary’s COBRA coverage before the expiration of the maximum period of coverage in some situations. However, this can only be done for the following five reasons:

  • The beneficiary’s premiums are not paid in full on a timely basis
  • The company ceases to maintain any group health plan
  • A qualified beneficiary begins coverage under another group health plan after electing COBRA
  • A qualified beneficiary becomes entitled to Medicare benefits after electing COBRA coverage, or
  • A qualified beneficiary engages in conduct that would justify the plan terminating coverage of a similarly situated participant or beneficiary not receiving COBRA (e.g., fraud).

If an employer terminates coverage early, it must provide an early termination notice “as soon as practicable,” describing the date coverage will terminate, the reason for the decision, as well as any rights the qualified beneficiary may have under the plan or the law when it comes to electing alternative group or individual health care coverage.

6. Relying too heavily on a TPA

Even if employers outsource their COBRA administration to a TPA, they still have certain responsibilities. And the case of Boddicker v. Esurance Insurances, Inc. is a perfect example of how employers can end up paying in the long run.

Background: An employee for Esurance had changed his mailing address from a P.O. box to his apartment’s street address. Then, he began taking intermittent FMLA leave for post-traumatic stress disorder until his leave was exhausted.

The employee ended up getting fired, and the TPA that handled the company’s COBRA administration sent him a COBRA notice. However, the TPA sent it to the employee’s old P.O. address, and he didn’t receive it.

Eventually, he received a COBRA notice – around a year and a half later – but he sued the company for COBRA notice violations. His argument: He didn’t receive his election notice until well after the 44-day qualifying event time frame plan sponsors are required to send notices within.

In court, the company was unable to offer an adequate explanation for how its TPA obtained employees’ addresses.

The court ruled that Esurance failed to meet its COBRA responsibility by offering “no reliable, first-hand evidence” about its TPA’s process.

Result: Esurance was hit with a total COBRA notice penalty of $22,700 plus undetermined attorneys’ fees and costs.

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