Demystifying COBRA Compliance: How to Navigate the Law and Fill the Employee Health-Insurance Gap

What is COBRA compliance?

COBRA compliance refers to the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, which amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act (PHSA) to require group health plans sponsored by employers with 20 or more employees to provide a temporary continuation of group health coverage to covered workers and their families under certain circumstances – or "qualifying events" - including:

• Voluntary or involuntary job loss
• Reduction in work hours
• Job transition
• An employee retires before qualifying for Medicare
• A covered spouse is legally separated or divorced from the employee
• A dependent child turns 26 years of age
• The business experiences bankruptcy

COBRA applies to private-sector employers as well as state and local governments.

Those not required to offer COBRA continuation coverage include:

• Plans sponsored by the federal government
• Plans sponsored by churches and certain church-related organizations
• Employees who weren't eligible for group coverage before they were terminated
• Employees who opted not to participate in the plan
• Small businesses with fewer than 20 employees

"Qualified beneficiaries," or those who qualify for COBRA continuation coverage, are those who were covered by the employer's group health plan on the day before the qualifying event happened, as well as their spouse, former spouse, or dependent children even if the former employee does not sign up for COBRA coverage. This includes children born to or placed for adoption with a covered employee during a period of continuation coverage. Agents, independent contractors, and directors participating in an employer's group health plan can also be qualified beneficiaries.

The continuation of healthcare coverage under COBRA for qualified individuals should be (generally) the same as it was during employment, and coverage starts the day employer-sponsored benefits end. Services covered include inpatient and outpatient hospital care, physician care, surgery and other major medical benefits, prescription drugs, and dental and vision care. COBRA does not cover plans that provide only life insurance or disability benefits.

COBRA continuation coverage runs from the qualifying event date for a limited period of at least 18 or 36 months. The length of time depends on the type of qualifying event, such as:

• Qualified beneficiaries are entitled to 18 months of COBRA coverage when the qualifying event is a termination or reduction in hours of employment.
• When the qualifying event is a termination or reduction of hours, and the employee became entitled to Medicare less than 18 months before the qualifying event, continuation coverage for the employee's spouse and dependents can last until 36 months after the employee becomes entitled to Medicare.
• Qualified beneficiaries must be provided 36 months of continuation coverage for all other qualifying events. A plan can provide longer periods of coverage beyond these maximum periods required by law.

What is an employer’s responsibility for COBRA?

There are COBRA rules for employers that must be followed to meet federal law requirements, so it pays to know what you’re required to do and when. Failure to comply could result in expensive fines and possible litigation.

According to COBRA, qualifying employers must adhere to several COBRA notification requirements. These include:

• Summary Plan Description
  An employer's group health plan's Summary Plan Description (SPD) must describe employees' COBRA rights. The SPD is a written document that outlines the plan's benefits, participants' and beneficiaries' rights, and operation. ERISA requires group health plans to provide employees with an SPD within 90 days of enrolling in the plan.
  
• COBRA General Notice
  Group health plans must provide a general notice describing COBRA rights to each employee and spouse within the first 90 days of coverage. It should include information about the name of the plan and contact information, a general description of the continuation coverage provided under the plan, and an explanation of any notices employees must give the plan to protect their COBRA rights.
  
• Qualifying Event Notice
  When an employee experiences a qualifying event, the group health plan must be notified within 30 days of the event. The type of qualifying event determines who provides that notice. The employer must notify the plan when the qualifying event is an employee's termination or reduction in hours of employment, death of the covered employee, an employee becomes entitled to Medicare, or the employer's bankruptcy (private sector). The employee must notify the plan within 30 days of a divorce, legal separation or a child's loss of "dependent" status under the plan. Notification procedures should be described in the general notice and the plan's SPD.
  
• COBRA Election Notice
  Within 14 days of receiving notice of a qualifying event, the plan must give the qualified beneficiaries an election notice, which describes their rights to continuation coverage and how to make an election. The election notice should provide the name of the plan's COBRA administrator and instructions on how to contact them for more information.
  
• COBRA Notice of Unavailability of Continuation Coverage
  If a group plan determines that an employee or family member does not qualify for continuation coverage or an extension of continuation coverage, a notice of unavailability of continuation coverage must be provided within 14 days with an explanation for denying the request.
  
• COBRA Notice of Early Termination of Continuation Coverage
  Continuation coverage is generally available for a maximum period - 18, 29, or 36 months. However, for several reasons, a group health plan can stop continuation coverage earlier. When this happens, the plan must give the qualified beneficiary a notice of early termination as soon as possible after the decision is made, and it must describe the date coverage will end, the reason for termination, and any rights the qualified beneficiary may have under the plan or applicable law to elect alternative group or individual coverage.

Employers must also help manage the COBRA continuation coverage procedures.

As an employer, you are required to show that you have established procedures that ensure compliance with the COBRA law, including:

• Written policies or procedures that outline how you notify new employees and dependents of their COBRA rights and how you notify employees and dependents when a COBRA qualifying event occurs.
• Evidence that the written policies are followed.

During open enrollment, employers must send employees a COBRA election notice and enrollment forms within 45 days of a qualifying event. That triggers a 60-day special open enrollment period for the employee to elect for – or not – COBRA continuation coverage.

An employee's continuation coverage period starts immediately after they make their first premium payment and is retroactive. Your business may be involved with the premium payment process and keeping pace with the completion – or extension – of COBRA coverage for employees.

Finally, it is your business's responsibility to comply with any post-COBRA mandates required by the state(s) in which your employees work.

Failure to comply with COBRA requirements can result in the following employer penalties, according to COBRAInsurance.com:

• The IRS can assess $100 excise tax per day of noncompliance per person or $200 per day per family.
• If during an audit the IRS determines that the issue has not been addressed, it can assess a $2,500 fine per beneficiary or $100 excise tax per day of noncompliance per person or $200 per day per family.
• If the violation is determined to be "more than trivial" by the IRS, the company could face up to a $15,000 fine. NOTE: A company cannot be charged a fine of more than $500,000 annually or 10% of the past year's total healthcare costs.
• The U.S. Department of Labor (DOL) can assess ERISA fines of up to $110 per qualified beneficiary daily for noncompliance.
• Employees and beneficiaries have the right to sue to cover the medical expenses that would have taken place when the COBRA coverage should have been offered. The court can charge the employer attorney’s fees if the employee's party wins the case.

According to Edelson Lechtzin LLP, the most common COBRA violations include:

• Failure to adhere to employee notification requirements.
• Failure to recognize a qualifying event or offer open enrollment.
• Noncompliance with Medicare requirements.
• Improper extension of COBRA time periods.
• Poorly worded notices that do not comply with DOL standards.
• Failure to collect COBRA premiums.
• Overpayment of insurance invoices.

3 Key Steps to Reduce COBRA Noncompliance and Ensure Successful COBRA Implementation

Most businesses that offer health insurance must also provide COBRA continuation coverage. Here are three steps to implement in your workplace that will help ensure compliance with federal and state laws:

Step 1: Find Out If Your Business Is Required to Offer COBRA Benefits

Your business must comply with federal COBRA regulations if you meet the following requirements:

• You are a private-sector company or a state or local government agency.
• You employed at least 20 employees for over 50% of typical business days in the previous calendar year.
• You sponsor a group health plan. Examples of health plans that may be subject to COBRA continued coverage include medical, dental, vision, and prescription-drug plans, health and flexible savings and reimbursement accounts (HSAs and FSAs), and alcohol- and drug-treatment programs. Examples of health plans that may NOT be subject to COBRA include accidental death and dismemberment plans, long- and short-term disability plans, and group-term life insurance programs.

Even if you don't fall under federal COBRA requirements, your business may still be required to provide continuing healthcare coverage to eligible employees. That may surprise smaller business owners who are exempt from the federal COBRA law and who may, depending on the state they do business in, have responsibilities under "mini-COBRA" legislation.

"These laws … fill in COBRA's gaps, particularly for small employers offering fully insured group health plans as well as fully-insured large-employer group health plans (often referred to as "post-COBRA" laws), where coverage is required beyond COBRA's normal time frames," states Mercer's "Beyond COBRA: state laws add complexity to continuation coverage."

Check If You Fall Under Mini-COBRA (State) Laws

Mini-COBRA laws vary from state to state with different election windows, notice requirements, and coverage eligibility categories, and some states have no continuation coverage at all.

The primary variations include:

• Some states have mini-COBRA laws that only apply to employers not subject to COBRA under federal law (i.e., employers with fewer than 20 employees).
• Some states have mini-COBRA laws that apply to employers that are not subject to COBRA under federal law, and the mini-COBRA law extends the maximum duration of coverage required under federal law for certain plans.
• Some states, including Alabama, Alaska, Idaho, Indiana, Michigan, Montana, and Nevada, have no mini-COBRA laws, and therefore there is no continuation of coverage rights under state law.

At last count, more than 40 states have stepped in to fill in the gap by adopting "mini-COBRA" legislation that expands the coverage requirement to businesses with as few as two full-time employees.

"Keeping up with the different requirements by state can easily become confusing and overwhelming," says G&A Partners Benefits Compliance Specialist Marci Freeman. "In Minnesota, for example, employees who experience a qualifying event can continue their life insurance policies through state continuation. Even if they are part of a large group with health plans that fall under federal COBRA, it is important that they are also given the option to continue life insurance. Failure to do so may result in hefty fines."

State continuation laws are based on the state in which their plans are domiciled. Freeman says this is important for companies with employees in multiple states. For example, if an employee lives in Nevada, which offers no state continuation benefits but has health benefits that are Arizona-based, that employee is still eligible for 18 months of medical, dental, and vision coverage according to Arizona state law.

Contact a team of HR compliance experts, like those at G&A Partners, to determine if federal or state COBRA requirements apply to your company. Your state department of insurance can also advise you about applicable mini-COBRA laws.

Step 2: Inform All Employees About Their COBRA Rights

If your business is required to offer healthcare continuation under federal law, all participants in your group health plan are entitled to COBRA coverage.

You are legally required to inform your employees and their families about their COBRA rights in the following ways:

• Outline your employees' COBRA rights in your healthcare plan's Summary Plan Description (SPD), which explains the features and options included in your employee benefits plan. ERISA requires that each participant be provided with an SPD copy within 90 days of joining the program.
• Provide each employee and spouse a general notice describing COBRA rights within their first 90 days of healthcare plan coverage. The Society for Human Resource Management (SHRM) recommends sending a letter by first-class mail to each covered employee's home address with the employee's name and the spouse's name or "and family" as applicable.

Many mini-COBRA laws also require that you notify your employees of their COBRA rights.

Step 3: Coordinate Employees' COBRA Coverage After Qualifying Events

If your company falls under federal COBRA purview, you must extend health insurance coverage to employees after a "qualifying event" causes them to lose coverage. COBRA continuation coverage is effective for 18 or 36 months, depending on the qualifying event.

With that said, there are two primary ways that COBRA continuation coverage can be extended, according to the Department of Labor:

• Disability: If any qualified beneficiary is disabled and meets specific requirements, they are entitled to an 11-month extension of the maximum period of continuation coverage (for a total maximum period of 29 months of continuation coverage). The Social Security Administration (SSA) must determine that the disabled qualified beneficiary is disabled before the 60th day of continuation coverage and that the disability continues during the rest of the 18-month period of continuation coverage.
• Second Qualifying Event: Those granted an 18-month maximum period of continuation coverage may be entitled to an 18-month extension (for a total of 36 months of continuation coverage) if they experience a second qualifying event that would have caused them to lose coverage under the plan in the absence of the first qualifying event.