The provisions of the federal COBRA law provide a valuable benefit to employees.
The COBRA acronym is shorthand for the Consolidated Omnibus Budget Reconciliation Act of 1985. It requires employers of 20 or more employees who provide healthcare benefits to offer the option of continuing this coverage to individuals who would otherwise lose their benefits due to termination of employment. If employees are leaving a company, whether voluntarily or for other reasons, they can opt to stay in the company’s health plan for a limited time under this law.
For employees, COBRA is a huge plus. But it’s not the same for human resource professionals. With COBRA coverage, an employer can face many potential risks, liabilities, and claims issues.
The administration of COBRA can be very difficult. Our country’s healthcare system is perpetually changing, especially in light of COVID-19. Many employers find it close to impossible to manage it all and adhere to the compliance laws of COBRA.
That is why so many companies opt to outsource COBRA continuation of health coverage. Using a third-party administrator (TPA) to make sure that a former employee has access to COBRA not only helps to ensure that this individual will receive coverage, but it gives the employer peace of mind so they can focus on running their business.
The benefits of outsourcing COBRA far outweigh the penalties of the burdensome amounts of administrative work COBRA entails, and the cost of fines for non-compliance.
New for 2020: COBRA Deadlines Extended Due to COVID-19
The Department of Labor (DOL) Employee Benefits Security Administration (EBSA) issued a COVID-19 relief rule which extends the time periods in which individuals can submit claims for coverage, elect and pay for COBRA continuation coverage, enroll in group health plan coverage, and file appeals for benefit determinations. The extensions are known as the “Outbreak Period” which is defined as the period beginning March 1, 2020 and ending 60 days after the date on which the federal government declares the COVID-19 National Emergency has ended. The rule specifies that the Outbreak Period may not be longer than one year. See more details about the ruling and FAQs here.
Liability for Non-Compliance
IRS Excise Tax – The excise tax penalty is $100 per day for each qualified beneficiary ($200 per day if more than one family member is affected). The minimum tax levied by the IRS for noncompliance discovered after a notice of examination is $2,500. The maximum tax for “unintentional failures” is the lesser of 10 percent of the amount paid during the preceding tax year by the employer for group health plans, or $500,000, according to Cambridge Insurance Advisors.
The report by Cambridge Life also states that there are other penalties as well:
DOL ERISA Penalties — An employer is liable up to an additional $110 per day for each qualified beneficiary separate from any other judgments, damages, or attorney fees imposed by the courts against the employer. It should be noted that an award of statutory penalties is discretionary and can be assessed regardless of whether a qualified beneficiary was actually injured or prejudiced. Any fiduciary can also be held personally liable for non-compliance under ERISA.
The Benefits of Outsourcing COBRA
Many of our clients have made the decision to outsource COBRA administration based on the following 7 factors:
- Risk MitigationIf an employer fails to provide an employee with access to COBRA, or cannot prove that they provided such access, there is no limit to the cost of medical care for which the employer could be found liable.This means you could be on the hook for expensive medical claims well into the future. This is on top of any other governmental fines and excise taxes imposed, which will grow per employee each day. If you outsource COBRA to an experienced administrator, you get the infrastructure, tracking, and controls to protect your business from costly legal challenges.
- Administrative Burden and Costs are LessenedThe main reason you may want to outsource COBRA is to alleviate the administrative burden on your human resources team and to reduce costs. Creating and managing your own system and using your personnel are expensive.An experienced administrator will handle the responsibility, the infrastructure, and tracking and controls for COBRA for you. You will be spared having to create a tracking system for COBRA within your company and making sure that nothing falls through the cracks. You will also save labor costs and free your employees to be able to devote time to their core activities.
- Difficult Personnel Issues Handled by Third PartyWhen an employee leaves your company, whether voluntarily or after being terminated, some awkward and often emotional issues can follow. You can reduce the chance of having these difficult personnel issues emerge when your COBRA administration is handled by a third party. Employers have also had to face the challenge of keeping a very sick person on the plan, which most HR people would want to do, yet this decision can be financially catastrophic for a firm.If you give one person an exception, legally, you have to give other employees the same exception. If you don’t, you could later be sued.COBRA outlines the minimum plans your company must provide, but you can voluntarily offer more. You must treat everyone in the same way to avoid liability.
Is your HR manager going to have the discipline and will to handle that emotional phone call from a COBRA participant who cannot afford the premium, but their child has a heart condition? Will your manager have the ability to take the employee off the plan if your company is no longer legally required to offer continuation coverage?
These are just examples of the tough decisions your HR department can face. An experienced administrator can handle this for you and will follow strict rules so that there is an audit trail. They ensure everyone is treated the same, and by being an objective third party, they will minimize any conflicts or difficulties.
- Timetables Tracked and ScheduledTiming is everything in COBRA administration. COBRA plans are the most expensive benefits for your company. Former employees have 60 days to decide whether or not they want COBRA coverage and an extra 45 days to pay the premium.The sooner they receive their COBRA coverage letter in the mail, the sooner the election period begins; and the earlier it starts, the faster it ends, and all your requirements will have been fulfilled.If you decide to outsource COBRA to a third party like Ameriflex, the COBRA coverage letter will be mailed the day after the employee’s data is received. This starts the 60-day period as quickly as possible, every time, saving your company money.
- Provide the Right Coverage Information ElectronicallyA good COBRA administrator can handle the requirements of communicating eligibility and enrollment data to health plans with the same level of care. They can also ensure sure there is an electronic audit trail. Be cautious, though — many administrators do this manually, increasing the chances of human error and potential risks.If an insurer doesn’t want to cover an employee’s bypass operation, it’s easy for the insurer to claim that they were never told that employee elected COBRA and that your company never put them back on the plan.This is a common occurrence. What Ameriflex does is send COBRA eligibility to health insurance carriers via a secure fax or email in an HIPAA compliant way. Yes, believe it or not, insurance companies still prefer to receive it this way. This also provides an electronic audit trail, with either an electronic fax confirmation or an electronic confirmation that the email hit the recipient’s server.
- Interactions with Insurance Companies and AttorneysIf a former employee is making an expensive insurance claim and states that he or she has COBRA Continuation rights, the first thing the insurer will do is to ensure that all COBRA procedures were followed. If there is any question, the insurer will deny the claim, which means that your company – the employer—is on the hook for the amount until the insurer has had a chance to audit it.By the same token, if a former employee is suing your business, the attorneys will often add a COBRA claim to the suit to make the action more expensive to try, in the effort to force the employer to settle. It only takes an allegation by the employee that “access to COBRA coverage wasn’t provided,” that could make the firm liable for fines and taxes from federal regulators.If you want to avoid this kind of difficulty, you should consider outsourcing COBRA.
- Peace of Mind for HR EmployeesBest of all, outsourcing COBRA administration gives your human resources team peace of mind. The administrator will handle everything for you and follow strict procedures so that there is a paper trail showing auditors and attorneys that all the laws were followed. They will ensure that all employees were treated equally. You won’t have to put your human resources employees in a position where they are forced to remove an employee from COBRA coverage. Your business will also avoid potential legal consequences of non-compliance.
Avoid Costly Lawsuits
Recently class action lawsuits associated with COBRA have been filed with large settlements awarded to the plaintiffs. These plaintiffs have successfully established that their employers had systemic failures to comply with COBRA notice requirements.
Research into COBRA claims revealed the following case of Slipchenko, et. al. v. Brunel et al.
Brunel Energy, Inc. (Brunel) is a Houston-based company that places technical specialists with clients in the oil and gas industry that need staffing for short-term projects.
To do so, Brunel enters into a short-term employment contract with a specialist, and, when the client project is finished, terminates the specialist’s employment. If Brunel hires the specialist to work on another project for the same or a different Brunel client, the specialist and Brunel enter into a new employment contract.
In 2011, a former Brunel employee who participated in the Brunel Group Health Plan (Plan) brought a class action lawsuit alleging COBRA violations; other former employees later joined the lawsuit as named plaintiffs.
This group claimed, on behalf of themselves and similarly situated individuals, that Brunel failed to provide an initial notice when they first became plan participants or an election notice when it terminated their employment. In 2013, the court certified the class action.
Damages would fit within the class action framework, the court determined, because they depend on Brunel’s conduct and intent toward all class members — and not particular individuals. In the same opinion, the court also ruled in favor of two named plaintiffs’ initial notice claims and one named plaintiff’s election notice claim. Following this decision, the parties entered settlement negotiations that resulted in Brunel agreeing to pay $375,000 to the class members along with $625,000 in attorneys’ fees to resolve the dispute.
Because proceeding as a class action significantly increases an employer’s potential liability, class action certification typically plays a key role in an employer’s willingness to settle claims — as well as the amount the company is willing to pay to put an end to the litigation.
Why would you want to put your company at risk for such huge penalties and lawsuits? It’s time to put your employees first and make sure that their COBRA coverage is handled well. If you’re considering outsourcing COBRA, Ameriflex can help. To learn more about Ameriflex’s COBRA solution, contact our team today.