Compliance Q&A: Common COBRA Compliance Pitfalls

Summary

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) grants individuals the right to continue employer-sponsored health insurance coverage for a limited period after experiencing qualifying events such as a job loss or reduction in work hours. Despite its longstanding presence, the law’s complexity and associated compliance challenges often lead to inadvertent violations.

When you have an organization subject to COBRA (to oversimplify, one with 20 or more employees)¹, that sponsors a group health plan providing medical care, COBRA must be offered to qualified beneficiaries² upon the occurrence of a qualifying event that triggers a loss of coverage. COBRA-qualifying events include termination of employment, reduction in the number of hours of employment, a covered employee becoming entitled to Medicare,³ divorce or legal separation of the spouse from the covered employee, death of a covered employee, and a child’s loss of dependent status under plan rules.

Detail

Common missteps that employer plan sponsors should be cautious to avoid

With the general rules set forth in the summary in mind, the following discussion highlights some common missteps that employer plan sponsors should be cautious to avoid.

Failing to provide a general (initial) notice

A COBRA notice isn’t just required when coverage terminates; there’s also an initial notice – Department of Labor (DOL) regulations use the term “general notice” – that must be provided to participants (a covered employee and their spouse, if applicable) – within 90 days of becoming covered by a plan that is subject to COBRA.⁴ The obligation to provide this notice ultimately lies with the plan administrator of the group health plan.⁵ However, responsibility for this notice often falls to the COBRA administrator as a contractual matter. Documentation should be maintained in case it’s questioned whether the notice was properly sent. (If you can’t prove it, did it happen?)

Importance of the general notice

This notice provides individuals with information about their rights, as well as their obligations, such as the need to timely notify the plan administrator about the occurrence of a COBRA-qualifying event. Failing to provide this notice can expose the plan sponsor to potential litigation, statutory penalties, and, even absent the threat of litigation or penalties, make it more difficult to hold individuals accountable for providing the plan administrator with information about qualifying events within a particular timeframe.

The requirement to provide an initial notice can be satisfied by using a summary plan description (SPD) with language that meets the necessary requirements and is delivered within the prescribed 90-day timeframe. A stand-alone notice (in addition to the mandatory SPD) may nonetheless be a better means of disclosure since it’s more likely to be seen and read. Note that an SPD must contain certain COBRA information: specifically, it must include “a description of the rights and obligations of participants and beneficiaries with respect to continuation coverage, including, among other things, information concerning qualifying events and qualified beneficiaries, premiums, notice and election requirements and procedures, and duration of coverage.”⁶

Failing to recognize which coverage is subject to COBRA

Overlooked benefits, especially health flexible spending accounts (Health FSAs), health reimbursement accounts (HRAs), and employee assistance programs (EAPs) may require an offer of COBRA continuation coverage. It may be helpful to keep the following (admittedly oversimplified) background in mind: COBRA is required when there is a group health plan – a program maintained by a covered employer – that provides medical care. Note that federal regulations make it clear that COBRA applies to group health plans “whether provided directly or through insurance, reimbursement, or otherwise….”⁷ In other words, the structure of the arrangement isn’t determinative.

Medical care is an expansive definition that includes “the diagnosis, cure, mitigation, treatment or prevention of disease and any other undertaking affecting any structure or function of the body.”⁸ While income replacement benefits such as long-term disability, and things that are beneficial to general health such as vacation, aren’t subject to these rules, any time you have a group health plan (regardless of whether the employer contributes to the cost of coverage), you should ask whether medical care is potentially provided. It’s not uncommon for a vendor to tout the expansiveness of their program and then take the contrary position that the program is nonetheless not subject to COBRA because it doesn’t provide medical care. Telemedicine is a particularly salient example.

COBRA and EAPs

Whether an EAP provides medical care and thus whether COBRA is required is a fact-specific determination, and compliance-conservative employers will necessarily err on the side of offering COBRA if it’s unclear where the DOL would fall if the program were ever questioned. This is not a heavily audited area, but that could change or become a potential liability in the merger and acquisition (M&A) context or if terminated employees question why COBRA wasn’t offered for this benefit.

For more context, in determining whether medical care is being provided, it comes down to what benefits are being offered through the EAP and whether the EAP is simply making referrals to health care providers or whether it is offering any health services (e.g., direct counseling) itself. For example, some EAPs are staffed with trained counselors – whether internally or through an outside service provider – and offer some form of direct counseling. EAPs that provide this kind of benefit are generally considered to be providing medical care and will most likely be subject to COBRA. In contrast, other EAPs do not offer counseling services but rather only referrals to trained counselors. In DOL Advisory Opinion 91-26A (July 9, 1991), the DOL concluded that a referral-only EAP, staffed by persons who were not trained counselors, did not provide medical benefits and therefore was not an ERISA welfare benefit plan subject to COBRA.

If it’s determined that COBRA is required, this necessarily then requires determining how to calculate the applicable premium and how to administer it. Ideally these challenges should also be considered and proactively addressed before rolling out the benefit.

Special considerations with COBRA and Health FSAs

Health FSAs are group health plans that are generally subject to COBRA. Most Health FSAs are considered “excepted benefits,” (which matters outside of this context for purposes of compliance with the ACA) and are therefore subject to special COBRA rules.⁹ When a Health FSA is an excepted benefit, the standard requirement that COBRA be offered for 18 or 36 months (depending on the type of qualifying event and qualified beneficiary) will not apply. Instead, employers must only offer COBRA for a Health FSA until the end of the plan year in which a qualifying event occurs – and only if the account is underspent. However, if the employer’s Section 125/cafeteria plan document permits carryovers of Health FSA balances, then a qualified beneficiary may elect COBRA to carry over their unused balance. Carryovers pose unique issues because they must be counted in determining whether an account is “overspent” or “underspent” and in determining the remaining annual limit for contributions that may be continued by a COBRA election.

Because COBRA administration for Health FSAs can be complex, employers should ensure they are partnered with a good COBRA administrator who can help navigate these challenges.

Failing to recognize when a COBRA qualifying event occurs (or doesn’t occur)

Not all losses of coverage are COBRA-qualifying events. For example, a termination of coverage due to an untimely premium payment does not trigger an obligation to offer COBRA.¹⁰ It’s probably more common for plan administrators to miss a COBRA-qualifying event than to inadvertently offer continuation coverage, such as when a reduction in hours or leave of absence causes, or should cause, a termination of coverage under the terms of the plan.

Adhering to COBRA obligations with respect to leaves of absence or temporary furloughs is a common challenge and source of confusion for plan sponsors. According to the IRS COBRA regulations, “a reduction of hours of a covered employee’s employment occurs whenever there is a decrease in the hours that a covered employee is required to work or actually works, but only if the decrease is not accompanied by an immediate termination of employment.”¹¹ Said another way, when an individual is not actively working but their employment is not terminated and this reduction in hours causes a loss of coverage under the plan, COBRA must be offered. Failing to recognize when an employee is no longer eligible under the terms of the plan risks the carrier/third party administrator (TPA) (and stop-loss provider, if applicable) denying claims for coverage that should have been terminated, effectively leaving the employer to selfinsure those claims. Some carrier contracts include language that provides for continued coverage for a certain period, such as 12 weeks, to mirror the federal Family and Medical Leave Act (FMLA) requirements that group health plan coverage be maintained on the same basis as if the employee had been continuously employed during the period of FMLA.

However, many carrier/TPA contracts do not directly address this issue at all. Some employers may have their own policy or practice for continuing benefits when an employee is not actively working (or, if they don’t, should consider adopting a policy that can be consistently administered) – either way, these policies should be run by the carrier/TPA (and stoploss provider, if applicable) to confirm they will honor what the employer wants to do.

While coverage termination due to an employee’s failure to timely remit premiums is not a COBRA-qualifying event, plan sponsors should be aware of what is sometimes called a “springing COBRA obligation.” If an employee on a leave of absence covered by the FMLA has coverage canceled due to non-payment and does not return to work, there is a springing obligation to offer COBRA following the exhaustion of FMLA leave as of the last day of the protected leave.

This means there can be a gap between the loss of coverage date (for failure to timely pay the employee share of premium) and the date of the COBRA-qualifying event (end of the protected leave period). For example, if an employee’s coverage is terminated as of September 30 for failure to timely pay premiums while on leave, and the employee exhausted FMLA and failed to return as of November 1, the month of October would be a coverage gap under the employer’s group health plan. The employee’s active coverage would have run through September, but COBRA rights would not be available until November 1 (the date of the qualifying event).

Failing to (timely) consider COBRA when engaging in M&A

We often receive questions related to who has the obligation to provide COBRA when a merger or acquisition is imminent; the buyer, the seller, or whether the obligation can somehow be avoided. IRS COBRA regulations provide default rules as to which party has the obligation to provide COBRA coverage absent an agreement to the contrary. Since the parties to the transaction can contract around application of the default rules, being proactive and ensuring that COBRA obligations are addressed in the deal documents can reduce unpleasant surprises and ensure that parties to a transaction – and, more importantly, participants whose coverage may be impacted – aren’t negatively impacted. Below is a very broad overview of the default rules for informational purposes, but plan sponsors should keep in mind that there may be room for negotiation if COBRA isn’t overlooked until the last minute.

The IRS COBRA regulations generally place liability on either the “Selling Group” or the “Buying Group.” These terms generally mean a group composed of either the seller or buyer and, in each case, those entities to which it is sufficiently related to be considered a single employer for benefit plan purposes.

For simplicity we will refer to the “seller” and “buyer” below but keep in mind that the responsible party for each entity includes all members of their Selling or Buying Group, as applicable. Also, the discussion below describes basic COBRA liability rules for providing COBRA continuation coverage for medical plans of employers subject to COBRA to their “M&A Qualified Beneficiaries.” Special rules can apply for other types of plans, such as health FSAs, in an acquisition.

The term “M&A Qualified Beneficiaries” generally includes two groups. The first group includes those individuals who are already receiving COBRA coverage under the seller’s health plan at the time of the sale as a consequence of employment associated with the entity being sold in a stock deal or the assets being sold in an asset deal.¹²

In a stock sale, the second group includes former employees of the target (and their covered spouses and dependents) who are not hired by the buyer. In an asset sale, the composition of the second group depends on whether the buyer is a “Successor Employer.” A Successor Employer is generally one that continues the business operations associated with the purchased assets without interruption or substantial change, or results from a merger, consolidation, or similar restructuring, or functions as a “mere continuation” of the employer.¹³

In an asset sale, the second group of M&A Qualified Beneficiaries includes all employees who worked for the target and whose employment immediately before the sale was associated with the purchased assets (along with their covered spouses and dependents). This is true regardless of whether the employees are hired by the buyer and offered group health coverage by the buyer – unless the buyer is a Successor Employer.

Note that these employees generally must also lose coverage under the seller’s plan to have a COBRA-qualifying event. If the buyer is a Successor Employer, then it has the obligation to offer and provide COBRA coverage to those employees of the seller who lost their jobs in connection with the transaction. Thus, in the scenario where the buyer is a Successor Employer, the COBRA obligation is similar to that of a stock transaction in that the only employees of the seller who are entitled to COBRA coverage are those that lost their jobs in connection with the transaction (rather than all employees of the seller, which is the case for asset transactions where the buyer is not a Successor Employer).

Remember that the parties to a transaction can generally contract to shift COBRA liability in both asset and stock sales, typically through specific language in the purchase agreement. If the seller maintains a group health plan, then it must provide COBRA. If the seller terminates its plan, then responsibility depends on the sale type. In a stock sale, the buyer’s plan must provide COBRA. In an asset sale, the buyer’s plan provides COBRA only if the business continues without interruption or substantial change.

Because parties can typically contract around COBRA liability regardless of the sale type, reviewing the deal documents carefully is an essential first step to understanding who will be responsible for providing COBRA coverage after the transaction. However, it’s important to understand that if the contractually responsible party does not satisfy its obligation, then the COBRA liability will generally spring to the other party assigned the obligation under the default rules in the IRS COBRA regulations.

Failing to offer COBRA as an alternative to retiree coverage

Termination of employment, whether voluntary or involuntary, is a COBRA-qualifying event. This means a covered employee’s retirement typically causes a loss of coverage.

However, some employers offer coverage to retirees on the same basis as actives, in which case COBRA would not be required as long as the retiree coverage period lasts at least as long as the maximum COBRA period. Keep in mind that there are reasons to avoid offering retiree coverage on the same plan and basis as actives – which is beyond the scope of this publication other than to raise it as something to consider.

Many employers structure their retiree health plan as an alternative to COBRA, and this retiree coverage option is often more attractive as premiums tend to be lower.

Employers may condition the availability of the retiree health plan upon a retiree waiving COBRA coverage. This is because, when a retiree health plan is offered, the obligation to offer COBRA remains, however potentially unattractive the COBRA continuation coverage might be compared to the retiree option. It’s also possible to have simultaneous COBRA and retiree coverage. For example, a retired employee may find it desirable to elect COBRA for dental coverage and waive COBRA for medical in order to become covered under the retiree medical plan.

Deferred losses of coverage are a common source of confusion. If a plan has not previously offered COBRA coverage and an event occurs that causes a loss of retiree coverage before the maximum coverage period ends, this constitutes a COBRA-qualifying event. The plan therefore must provide COBRA continuation coverage to the retiree and any qualified beneficiaries for the remaining duration of the maximum coverage period.

Final thoughts that aren’t necessarily missteps but certainly can be

Avoid making promises you can’t keep or might not want to keep later.

For example, the offer to pay all or a portion of a departing employee’s premiums is generous and common. However, keep in mind that a current (or future) carrier/TPA (and stop-loss provider, if applicable) might not be as generous as the former employer. For that matter, a successor employer also might not wish to be as generous. It’s often advisable to provide a lump sum that the departing employee can use to purchase COBRA or other coverage. There are a variety of other reasons for this, which are described in more detail in another publication.

Another example is the extension of COBRA to domestic partners. Because domestic partners are not qualified beneficiaries, employers are not required to offer them continuation coverage under COBRA. Employers may choose to extend COBRA-like coverage to domestic partners (e.g., when a domestic partnership ends), but care should be taken not to advertise a right that doesn’t otherwise exist.

For example, election materials should distinguish what is being offered from federal COBRA, because if the employer ever wants to stop offering this additional continue coverage or wants to administer it differently, they may not be able to do so if they’ve already suggested to these participants that their continuation coverage is under federal COBRA.

Additionally, before offering COBRA-like coverage to domestic partners, plan administrators should confirm that carriers/TPAs (and stop-loss provider, if applicable) are willing to honor the offer if the domestic partner elects to continue coverage. Otherwise, the plan could end up on the hook for those claims, effectively self-insuring that coverage.

Conclusion

The complexity of COBRA presents challenges for many group health plan sponsors. And even with regulations to help navigate these rules, regulators haven’t anticipated every possible situation that might arise when administering continuation coverage. Because COBRA is a relatively common source of litigation, employers should be diligent to correctly administer COBRA – or, more likely, hire an experienced COBRA administrator to help them comply with these rules – and become familiar with some common missteps with an eye to avoiding them and the associated risk.