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
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
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.
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 www.cobrasolutions.com 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
http://www.cafeteriaplanmanager.com and click the "Calculate Your