April 21, 2021

COBRA Compliance and Its Importance for Businesses

It goes without saying that health coverage is one of the key benefits that employers can provide for their staff members. Employers that invest in group health plans give their employees an opportunity to take care of their fundamental medical needs, so that they can better focus on their work. As a result, employer-sponsored health insurance plans benefit not only employees, but also employers and society as a whole.

The major part of employer-sponsored group health plans must comply with the Employee Retirement Income Security Act (ERISA), a Federal law that establishes standards to guard employee benefits. One of the protections covered by ERISA is the right to COBRA continuation coverage. In this article, we’re explaining what actually COBRA is, some basic rules that apply to group health plans, and give answers to the most common questions concerning COBRA compliance.

What Exactly Is COBRA?

COBRA, an acronym for the Consolidated Omnibus Budget Reconciliation Act, is a health insurance program that enables eligible employees and their dependents to use the continued benefits of health insurance coverage when an employee loses their job or experiences a reduction in hours. 

Who is required to provide COBRA coverage?

For employers with 20 or more employees it’s mandatory to provide COBRA coverage. Health insurance coverage from COBRA extends for a period of 18 or 36 months, depending upon the case.

Who is eligible for COBRA continued coverage?

In a nutshell, eligibility for COBRA means being qualified to obtain continued benefits from your employer’s health insurance plan as a result of certain circumstances. Generally, if an employee was formerly enrolled in health insurance coverage in a company for at least one day, the employee is eligible for continued coverage. These individuals are referred to as qualified beneficiaries. Not to mention, this can apply to staff members who left their job either voluntarily or involuntarily. Again, if a company has the equivalent of 20 or more employees, they are legally required to offer their employees COBRA coverage.

In addition, employees aren’t the only ones who are eligible for COBRA coverage: a covered employee’s spouse as well as dependent children may also qualify for it.

Also, in some cases retired employees may be considered as qualified beneficiaries. It’s important that an employer carefully reviews and understands these rules when considering whether someone should be provided with continued COBRA coverage.

Termination of COBRA coverage

In most cases, continued COBRA coverage terminates at the closure of the maximum coverage period. That is why employers need to thoroughly keep track of the duration of this period to make sure coverage is terminated at the right time.

Still, COBRA coverage may be terminated for other reasons. One of them is the failure of a qualified beneficiary to make timely premium payments. Also, it can happen when an employer stops offering group health plans to any employee, or if the qualified beneficiary becomes covered under a different group health plan.

What is a qualifying event?

As we have already mentioned, it is mandatory to offer COBRA continuation coverage only under certain circumstances, which are referred to as qualifying events.In short, a qualifying event is an event as the result of which an individual loses group health coverage. These are qualifying events for a covered worker if they cause him/her to lose coverage:

  1. termination of the employment for any reason except for the so-called gross misconduct;
  2. decrease in the working hours.

Next, here are qualifying events for a covered employee’s family members (a spouse and dependent children) if they cause them to lose coverage:

  1. termination of the employment for any reason except for gross misconduct;
  2. decrease in the covered employee’s working hours;
  3. the covered employee becomes eligible for Medicare;
  4. divorce/legal separation;
  5. finally, death of the covered individual.

Also, keep in mind one more qualifying event: a dependent child is entitled to COBRA coverage when he or she loses the dependent child status.

What if I am not COBRA compliant?

If you are found to be out of compliance with COBRA regulations, you’ll be charged a fine. Actually, there is a couple of ways where employers can be in non-compliance with COBRA laws. For instance, you could have the equivalent of 20 employees but avoid incurring extra expenses by not providing COBRA plan coverage to employees. Or you could offer benefits, but fail to notify the eligible employee of it. Also, employers can be considered non-compliant when they terminate an employee’s benefits early or don’t provide benefits to an individual who leaves employment with the organization.

What are COBRA non-compliance fines?

COBRA non compliance penalties fall into two categories: tax penalties and statutory penalties. Most commonly, COBRA fines appear in the form of excise tax penalties. The standard amount for these fines is $100 per qualified beneficiary for each day of non-compliance. Statutory penalties occur due to ERISA (Employee Retirement Income Security Act) infractions. In such cases, the COBRA fines can reach up to $110 per day. The minimum tax deducted in these cases is typically $2,500, however, it’s often a lot more than that.Importantly, employers have to bear in mind that COBRA penalties can go beyond the mentioned amounts. For example, lawsuits can greatly affect the cost of not complying with the COBRA regulations. If involved in a lawsuit, employers should anticipate steep attorney fees. Unless an employer provides a COBRA notice to a qualified beneficiary, and the individual in question gets injured, it’s very likely that the employer will be responsible for the injured party’s medical bills and attorney fees.

COBRA Compliance checklist for Employers

As we have already mentioned, failure to give notice to qualified beneficiaries by the required deadlines is one of the major reasons why employers might get into trouble, as it usually results in penalties. In the following section, we’re explaining cobra compliance policy and procedure.

COBRA compliance checklist

These are COBRA notices employers are demanded to provide employees with.

  1. COBRA General Notice. Employers have to give covered employees as well as their spouses (if applicable) a written notice of their COBRA rights throughout 90 days of being covered under health plans.
  2. COBRA Election Notice. In case an employee experiences a qualifying event that makes them lose coverage, the employer is obliged to provide each qualified beneficiary with a notice describing their rights to continue the coverage as well as how to elect COBRA coverage throughout 44 days of the qualifying event.
  3. Notice of Unavailability. In case when an employee gives a notice of a qualifying event, but in fact is not eligible to get COBRA coverage, the plan administrator has to provide this person with a notice saying why coverage is not available. The deadline for this notice is the same as for the election notice.
  4. Employer’s Notice of Qualifying Event. When a certain qualifying event occurs, the employer is required to notify the plan administrator within 14 days of the event or loss of coverage, depending on which one is later, unless the employer is the plan administrator.

The Department of Labor offers model COBRA notices. Employers can use these models and modify COBRA notices according to their unique cases.Keep in mind that individual states may have COBRA-like laws concerning the continuation of benefits. What is important, some of them cover small employers as well, so you risk non-compliance with state regulations even if you are exempt from federal law. In fact, the laws differ from state to state, so to avoid issues, you can contact your state labor agency or your attorney. Make sure to inquire about the following:

  1. which employers are subject to the regulations;
  2. which employees are eligible to continue benefits;
  3. which health plans are covered;
  4. what are qualifying events;
  5. which notifications you have to give;
  6. how long coverage continuation can last;
  7. in which instances coverage can be terminated.
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