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November 2016


Correcting Failures when Offering COBRA

We have received quite a few calls regarding what to do when errors are made with regards to COBRA notifications. The following article should help address how to handle notice failures.

When a COBRA administrator discovers a failure to offer COBRA coverage they should take immediate steps to correct the mistake to avoid such penalties as ERISA ($110 per day), IRS excise tax and lawsuits.

Code Section 4980B imposes an excise tax on failures unless an employer has not received an audit letter from the IRS and the failure is due to reasonable cause, as opposed to willful neglect, and remedied within 30 days after any person liable for the tax is aware of the failure to comply with COBRA. A COBRA failure is considered corrected when retroactively undone to the degree that any affected beneficiary is restored to the same financial position as the beneficiary would have been had the failure not taken place. The code requires that the qualified beneficiary is offered the election of the most favorable coverage with regards to the medical expenses incurred after the failure occurred. In this case, the term beneficiary also implies reference to the qualified beneficiary’s estate.

Keep in mind the employer is liable for all expenses incurred by the employee due to the employer’s failure to comply with COBRA. This means that according to IRS’s COBRA Examination User’s Guide it may involve determining whether the complaining individual had been “made whole.”

Judicial standards as reported in past decisions in terms of assessing retroactive corrections of COBRA failures offer valuable insight as to what constitutes proper correction of COBRA failures. Generally the corrections involve providing: 1) the benefits that should have been paid to a qualified beneficiary for already-incurred medical expenses, less applicable COBRA premiums; 2) coverage for remaining portion of the maximum coverage period; and 3) attorneys’ fees and interest.

As for implementing measures to correct failures there are no simple solutions that will work in every situation. However, the following options appear to satisfy the Code’s requirements that qualified beneficiaries are to be restored to the position they would have been in if COBRA coverage had been properly offered: In the event that a plan administrator has failed to offer COBRA coverage the notice should be provided. In the event the notice was inadequate it should be provided again – one possibility is to provide the notice again with open enrollment materials. If the qualified beneficiary is within the election period and it is discovered that the election notice was not sent, then the plan administrator should re-send the notice. However, if it is outside the election period and there is solid proof that the notice was sent to the last known address, then the plan administrator may decide not to provide a second notice. In regards to a notice of unavailability or termination notice, even though these notices basically inform the qualified beneficiaries that they will not have coverage, a new one should be provided if missed. Providing a notice could stop the penalty period from running.

When retroactive COBRA coverage is necessary, offer to pay all covered claims that have been charged to date, or if earlier, the expiration of the applicable maximum coverage period whether it be 18,29, or 36 months from the qualifying event. Keep in mind, however, that each qualified beneficiary should be given the choice to elect the period of retroactive COBRA coverage. For example, if the employee wants to end coverage prior to the expiration of the full period, the employer cannot demand payment for the full retroactive period. Also, ensure that all beneficiaries are clearly notified that this offer is for retroactive coverage only as it can easily be assumed that they are being offered prospective coverage.

If the COBRA election notice is very late or the maximum coverage period has already expired, you may consider offering some sort of prospective coverage. While this offer would seem to go beyond what COBRA requires, it may mitigate complaints that necessary medical attention was passed up due to lack of proper coverage being offered; it can be argued that retroactive coverage does nothing to make up for lost health care treatment.

As for collecting the initial payment premium, there are conflicting arguments - be careful about demanding one lump sum. There has been at least one case where the qualified beneficiary was still allowed to make monthly payments while the employer was required to provide the full retroactive coverage. On the other hand, there have been at least two court cases to permit the request for a lump sum although neither case directly considered the question. The Ninth Circuit has upheld a decision that required payment for retroactive premiums to be collected in a lump sum (Chaganti v. Ceridian Benefits Servs., Inc., 2006 WI. 3431753 (9th Cir. 2006). But it should also be noted that the 1999 final IRS COBRA regulations provide that plans may permit qualified beneficiaries to make payments at other intervals such as weekly, monthly, quarterly and semi-annually so it could be easy to assume this requirement would also hold true in the case where a COBRA notice was late due to the failure of a plan administrator. In one court case, the employer’s demand for a lump sum payment was upheld, however large statutory penalties were awarded to the qualified beneficiary.

In the case of conversion coverage that might have been elected if not for the failure to offer, consider offering conversion coverage beginning with the expiration of COBRA coverage if permitted by insurance carrier. Also be careful not to limit claims filing deadlines for expenses incurred before the correction. And in the case of a qualified beneficiary becoming covered by another group health plan, according to one court case, it concluded that the plan should still offer COBRA coverage as a curative matter even if this means the opportunity for dual coverage. Until the plan administrator corrects the election notice failure, the fact that the qualified beneficiary has become covered under another plan, does not relieve the obligation to offer COBRA coverage.

In any event, it is probably not wise to use standard election notices and forms in the case of a correction, especially one that is very late. It would be best to customize written notices for the specific situation to avoid confusion and future litigation. Ultimately, if a qualified beneficiary refuses the appropriate offer for retroactive coverage they lose any claim for COBRA.
For those Insured or Self –Insured plans with Stop-loss Insurance the employer needs to work with the insurer to make sure they will provide the coverage that is being offered. Also, an employer that is held liable for violating COBRA, should investigate whether this could be covered under its liability policy, and the decision to correct the failure should be made in accordance with the liability policy’s notice provisions and guidance.

In the case of withdrawing offers of COBRA coverage the plan administrator should look at the strengths of their position based on a review of COBRA documents such as the election notice, the initial notice, the SPD, the plan document, the plan’s insurance contract and any other pertinent communication documents. Looking at past practices will also be critical as this alone can determine the obligations even when the law does not. And lastly, look at the facts. Were specific representations made to the claimant? Should the claimant have understood the coverage was mistakenly offered? Were there any misrepresentations by the claimant in order to gain coverage? It is advisable to seek counsel to make certain the legality of the decision to withdraw coverage retroactively is substantiated.

Is Your Cafeteria Plan Ready for 2017?

Most employers have been receiving large rate increases over the last several years from their insurance providers because medical trend is over 15%. In many cases, the employer is forced to pass on the increase to employees. A good way to minimize rate increases is to start a Cafeteria Plan. A Cafeteria Plan allows employees to pay for their portion of premiums on a pre-tax basis. This lowers their taxable base, therefore decreasing federal, FICA and most state's taxes. Most employees (depending on their tax bracket) will see that a Cafeteria Plan saves them 20% to 35% of their cost of premiums. Not only does the employee save money but the employer sees a reduction in their FICA and other payroll taxes.

In addition to paying for premiums on a pre-tax basis, employees may set up Flexible Spending Accounts (FSAs) to pay for items not covered by an insurance plan (i.e. deductibles, copays, coinsurance, over the counter medication, etc.) and even Dependent Care expenses. It is a win-win situation; both the employer and employee save money in taxes.

COBRA Solutions offers Cafeteria Plan Manager software program that assists employers with the administration of a Cafeteria Plan. Please visit our website at for further information and a free 60-day no obligation demonstration version of Cafeteria Plan Manager. It is an outstanding software program that will pay for itself in the first few months, and the savings will continue for years. To see what your firm may save by implementing a Cafeteria Plan, visit our site at  and click the "Calculate Your Savings" link.


In this Issue:

Correcting Failures when Offering COBRA

Is Your Cafeteria Plan Ready for 2017?

See Also:

COBRA Solutions
Cafeteria Plan Manager
Employee Database Manager
COBRA Administration Manager
U.S. Department of Labor
COBRA and the Trade Act of 2002
COBRA and Medicare Entitlement

Technical Information
The current version of COBRA Administration Manager (CAM) is 16.3.8.
For information on changes to CAM and technical assistance on updating the software, please review the links below.
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