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"Are You Protected?"

Employer groups with 20 or more employees are subject to Federal COBRA laws. COBRA (which stands for the Comprehensive Omnibus Budget Reconciliation Act) was created to give certain continuation rights to employees and their families If they lose their insurance coverage due to a qualified event.

The Importance of Good COBRA Administration

Since the fines and penalties for failure to comply with COBRA rules are high (over $110 per day for ERISA violations plus possible additional employer claim liability and legal fees), employers need to prepare themselves by obtaining the correct information. This information is available by hiring the services of an attorney (costly and time-consuming), subscribing to information publishing sources (time-consuming), or partnering with a knowledgeable information source. For most companies, the last option is the best.

The first area that an employer should be concerned about is to make sure they have correct COBRA information. Most employers self-administering COBRA commonly fall short of the requirements because of the complexity of the regulations and the frequent changes and precedent-setting court cases. The last major change to the COBRA regulations was as recent as 2003. Employers who are self-administering COBRA with information they acquired prior to that may well be out of compliance.

Many employers assume that another entity is taking care of the COBRA notifications, and updates for their clients. In most cases the impression is that the insurance carrier is providing this information. Insurance companies have distanced themselves from COBRA due to the potential liability and may only provide assistance if contracted to do so. Insurance carriers may offer separate fee for service COBRA administration, especially in the case of self-funded plans, but COBRA is an employer law, and therefore the employer is the only one "required" to ensure that they are abiding by the law. Not knowing where to turn is a major concern for the employer.

Since COBRA is an employer law, the employer will be the defendant in any lawsuits and the one responsible for any fines and penalties, which can run into the hundreds of thousands of dollars. Employing the services of a professional COBRA Third Party Administrator (TPA) can be the answer. The group can not only export the time-consuming tasks, but can export the liability as well.

In today's litigious society, more and more COBRA issues are being brought before the courts. Approximately half of these disputes arise from a letter, which most employers are not aware needs to be provided to their employees. This letter, the Initial Notification Letter (INL) or General Notice forms the foundation for the employer's COBRA program. The INL is required to be mailed to all employees on the employer's benefit plans and informs the employee of the COBRA law and their responsibility to notify the employer of family changes resulting in a loss of coverage. Many employers provide this letter to the employees in a handbook, SPD, or have them sign off at the time of enrollment. The problem with all of these methods is the spouse and/or dependents may never have seen this notification. Mailing to the employee's address and directing it to the employee and family is the required method of notification. The other common mistake is that the letter is out of date with the new regulations. In fact, many employers are using a letter designed by the DOL, which has never been updated by the DOL. It is the employer's responsibility to ensure compliance and update any letters and forms. Without an ERISA attorney or out-sourced TPA, this is nearly impossible.

In addition to the common errors made in invoicing continuants, tracking payment due dates, tracking late payment grace periods, monitoring for expiration of eligibility, handling extension for secondary events or disability, and the offering of COBRA in general, the new regulations have added additional employer responsibilities. These include:

  • The establishment of a Determination Period for each of the benefits.
  • Setting a policy of accepting an insignificant premium payment shortfall amount.
  • Responding to insurance carrier inquiries.
  • Designing forms for beneficiary's independent election rights.
  • A change in how Medicare entitlement is treated as a secondary COBRA event.

Mistakes in COBRA administration can also result in financial losses to the employer not related to litigation. Studies have shown that fear of lawsuits tends to cause employers self-administering COBRA to allow many who are no longer eligible for COBRA to continue receiving benefits (the "When in doubt, keep them on" philosophy). By making exceptions for one employee and not another, the employer sets a dangerous precedent, which can result in future litigation and abuses. Not providing an employee the same consideration as another is inviting problems.

For self-insured or experience-rated groups, removing those no longer eligible for COBRA can eliminate problems and lower average claim costs resulting in lower premium costs. Insurance carriers also have the right to seek any back claim payments from the employer if they discover the employer is not following the COBRA rules and keeping employees on too long, accepting late payments, etc. More and more carriers are performing payroll audits concerning COBRA. Employer-groups should take a serious look at how they are handling COBRA.

© Professional Benefit Plans, Inc., 2003. This article may not be reproduced in whole or in part without the expressed written permission of Professional Benefit Plans, Inc.

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