Compliance Q&A: Retroactive Termination of Individuals' Benefits Coverage

Summary

Because the Affordable Care Act (ACA) generally prohibits termination of coverage that has a retroactive effect, the plan administrator* will likely need to terminate coverage prospectively instead of back to the original date of ineligibility for coverage. Many plan administrators choose to make the loss-of-coverage date the last day of the end of the current month in which the error is discovered and offer COBRA as of that date.

The timing of COBRA should also be considered, and the plan administrator may need to work with the COBRA administrator and relevant carriers to avoid inadvertently self-insuring claims due to the error.  The risk involved in these decisions can vary based on factors such as the length of time that has passed since eligibility was lost, the probability of the participant electing COBRA, and the carrier/vendors’ willingness or ability to accommodate the desired approach. 

 

Detail

When to terminate an individual's coverage following a loss of eligibility for benefits is not always cut and dried. Hopefully, the plan administrator has monitored the absence and consulted internal company policy and any carrier-imposed policies to ensure that ineligible individuals are terminated as timely as possible. It is very important to regularly audit carrier bills and audit for accuracy to avoid these situations. However, when oversight does occur, plan administrators should be aware of applicable laws that impact their options (specifically the ACA and COBRA) and consider whether vendor partners are willing or able to accommodate the desired approach.

 

The ACA’s Anti-Rescission Rules

The ACA prohibits insurers and group health plans from rescinding coverage for covered individuals except in very limited circumstances, specifically fraud or “intentional misrepresentation of material fact.”[i] To rescind coverage is to retroactively cancel it, and even in rare circumstances where rescission is permitted, an advance notice of 30 days is required. The plan document(s) should clearly indicate circumstances when rescission is permissible (i.e., in the event of fraud or intentional misrepresentation).

Both fraud and intentional misrepresentation are a high standard and require being able to show that something beyond an inadvertent misstatement or plan error has occurred. For example, regulators addressed whether or not it would be permissible to cancel coverage due to an employee’s misrepresentation of their use of tobacco to qualify for a lower premium, and the regulators indicated that the remedy would be to recoup the appropriate premium rather than rescind the coverage altogether.[ii] This means that, in most circumstances, coverage termination must be prospective, even if the loss of eligibility occurred in the past.

A retroactive cancellation of coverage is not a rescission to the extent it can be attributed to a failure to pay premiums timely,[iii] or where it was initiated by the participant. (However, even if requested by the participant and permissible under the ACA, most mid-year election changes must be prospective according to the Section 125 irrevocability rules, which apply where premiums can be paid on a pre-tax basis.)

 

COBRA Complexities

When a participant is left on coverage, particularly in circumstances where the individual remains on the plan well beyond the date of eligibility for benefits, the question of when COBRA should be offered becomes complex. While the employer/plan administrator may want to terminate coverage as of the date of the loss of eligibility for benefits (which also typically raises rescission concerns), they are left with the problem of timely notification and how to recoup the participant’s share of premium payments.

There are specific rules on COBRA notices and timing. COBRA election notices must be provided to qualified beneficiaries within 14 days after an administrator receives notice of a qualified event from the employer or a qualified beneficiary.[iv] Where the employer is also the COBRA administrator, the employer must provide an election notice to the qualified beneficiary within 44 days of the latter of the date of the qualifying event or the date when the qualified beneficiary loses coverage due to the qualifying event.[v] If an employer fails to meet these requirements, it can be at risk of statutory penalties and/or lawsuits brought by participants who did not receive a timely notice.

As an example, say that ABC Company uses a COBRA administrator, COBRA Admin Company, and has a former employee who terminated employment on June 10 whose coverage should have been terminated on June 30. It is now October 30 and ABC Company wants to terminate coverage as of the loss of eligibility. Clearly, ABC Company has failed to notify COBRA Admin Company of the qualifying event within the required timeframe, so no approach is without some risk.

ABC Company could choose to terminate coverage as of June 30 and request that COBRA Admin Company send the COBRA election notice to the former employee’s last known address as soon as possible. Or ABC Company could terminate coverage immediately and notify COBRA Admin of a termination date of October 30 (or October 31 if coverage runs through the end of the month). In either case, the former employee must be provided 60 days to decide whether to elect COBRA and then 45 days from the date of their COBRA election to make the first payment.

Under the first option, it may be more difficult for the former employee to come up with several months of payment for COBRA premiums upfront, and it may increase the likelihood that the former employee is upset about the delinquent notice. An advantage is that, unless there is a second qualifying event, the plan sponsor would only be tied to offering 18 months of COBRA. Some plan sponsors will give individuals an extended period of time in which to make initial payments when there has been a delinquent notice, and others will offer to pay some or all of the retroactive premiums in order to offset concerns with the delinquent notice.

The second option leaves the plan sponsor on the hook for several months of premium during those months when the former employee had not elected coverage but was nonetheless on the plan. This approach effectively extends the amount of time during which the former employee could be on COBRA to 22 months – the four months they were left on the plan when they should have been terminated plus the 18 months of actual COBRA coverage they are eligible for due to the termination of employment.

Clearly, neither option is ideal. However, even if retroactive termination would be permitted under the rescission rules – such as in cases where termination is occurring due to non-payment of premiums —because of the administrative challenges and potential for an upset former employee, terming an individual prospectively and offering COBRA from that date of termination is typically the better approach.

 

Avoiding Inadvertently Self-Insuring Claims

As a general rule, insurers and reinsurers expect employers to abide by the terms of their contracts and the employers’ own policy and plan documents when monitoring participants’ eligibility for coverage. While the principle is fairly basic, this can be a painful lesson for the unwary when a participant who is ineligible under the terms of the contract hits the plan with large claims. Vendors do not typically police eligibility, at least until a large claimant is identified; however, it is not uncommon for carrier documents to include provisions limiting coverage to 12 weeks of FMLA or 30 days of non-FMLA leave.

We have seen carriers deny large medical claims because coverage was continued for employees on extended leaves of absence where the plan sponsors had no written policy or documentation of the practice of continuing benefits. Even where a carrier contract does not state a specific length of time under which coverage may be continued, there is then the expectation that the employer abides by their plan’s own eligibility provisions. No plan document is, nor should it be, so generous as to provide coverage to former employees, or even current employees, on extended leaves of absence for an indefinite period.

Carriers may be willing to honor COBRA only for the statutorily required length of time – 18 months for termination of employment or reduction in hours, and 36 months for divorce, death, loss of dependent status, etc.[vi] Where an employer fails to timely terminate coverage and wishes to extend an offer of COBRA from the date of termination of benefits rather than the actual qualifying event, a carrier could challenge this more generous approach and refuse to provide coverage for a longer period, a more likely scenario when large claims are involved.

In these situations, some employers opt to treat COBRA as having effectively been offered and subsidized after the time when termination should have occurred. Qualified beneficiaries would then be offered the choice of whether or not to enroll in COBRA moving forward. In our example above, the technical date from when COBRA should have been offered would be June 1, and if ABC Company wants to treat COBRA as having been subsidized from July 1 to October 31, the COBRA election materials would need to indicate that coverage could be elected for 14 more months (18 months minus the four months of subsidized coverage.)

In these circumstances, any communications to qualified beneficiaries would need to be customized, something not every COBRA administrator may be willing or able to do. So, it is often necessary for plan administrators to consult with the COBRA administrator and insurers and to determine what the parties can or will accommodate.

 

Conclusion

The best practice of course is a timely termination of coverage, especially since no subsequent fix is without some risk. That said, in situations like the one posed by the questioner, the best approach typically involves terminating coverage prospectively and offering COBRA as of the date of the loss of coverage. 

Plan administrators often need to weigh their risk tolerance and may be wise to consult with carrier/vendor partners as well as their COBRA administrator when considering when to terminate coverage for ineligible participants whose technical eligibility for benefits ended months before the discovery of the error.

 

Authored by Stephanie Raborn, JD

McGriff National Specialty Practices, Employee Benefit Solutions

 

*A note on terminology: the terms “employer,” “plan sponsor,” and “plan administrator” often refer to the same individuals or individuals employed by the same entity. For example, the COBRA rules directly apply to “group health plans,” which are most often sponsored by an employer. The default assumption is that an employer is also the “plan administrator” of a group health plan.

References

1. [i] PHSA § 2712.
2. [ii] PPACA; Health Insurance Market Rules; Rate Review, 45 CFR Parts 144, 147, 150, 154 and 156, 78 Fed. Reg. 13406, 13414 (Feb. 27, 2013).
3. [iii] Treas. Reg. § 54.9815-2712(a)(2); DOL Reg. § 2590.715-2712(a)(2); HHS Reg. § 147.128(a)(2).
4. [iv] ERISA § 606(c); IRC § 4980B(f)(6); PHSA § 2206; DOL Reg. § 2590.606(4)(b).
5. [v] DOL Reg. § 2590.606-4(b)(2).
6. [vi] COBRA maximum coverage periods describe the longest period for which COBRA coverage must be provided. Absent limiting extending rules, the maximum coverage period is 18 months or 36 months, generally measured from the date of the triggering event. See ERISA § 602(a)(2); IRC § 4980B(f)(2)(B); PHSA § 2202(2); and Treas. Reg. § 54.4980B-7Q/A-4(a).