Compliance with the complex rules regarding COBRA coverage can be difficult and mistakes can be costly. Penalties for non-compliance can include IRS excise taxes and ERISA statutory fines. See below for some of the most common mistakes benefit administrators make when it comes to COBRA:
1. Bad Timing
In the context of COBRA, paying attention to the timing of providing coverage can be crucial for reducing exposure to COBRA costs and being compliant with the rules. The duration of COBRA coverage is controlled by the COBRA statute. Complying with these rules by providing the length of coverage required is important. At the same time, many plan sponsors want to minimize the likelihood of being responsible for large claims by COBRA QBs by only providing the minimum duration of coverage.
The period of COBRA coverage offered to QBs is known as the “maximum coverage period.” The length of the maximum coverage period depends on the type of qualifying event that has occurred. The maximum coverage period is 18 months for a termination of employment or reduction in hours and 36 months for all other qualifying events. There are situations where the maximum coverage period can be extended or terminated early.
2. No Documentation
No matter how good your COBRA compliance track record is, you can still run into trouble if you can’t prove it. Adequate documentation is important because it brings together all other elements of COBRA administration and compliance. Having thorough and accurate records will help streamline administration and support the plan in the event of a claim.
There are many different areas where documentation can help avoid COBRA compliance issues. For example, a plan’s COBRA notice information and procedures can be documented in the SPD and notice documents themselves, as well as the plan document if necessary. A plan administrator should also keep records of notices sent to and received from participants and QBs. Keeping track of payments received from QBs and made to insurers, as well as the deadlines for payments, will also assist in the proper administration of COBRA coverage.
3. Charging too Much (or not enough)
A health plan may charge COBRA QBs for the cost of providing COBRA coverage. It may require QBs to pay up to 102% of the “applicable premium” for the plan. In the case of a disability extension, it may charge up to 150% of the applicable premium for certain QBs. The applicable premium is the cost to the plan of providing coverage. For insured plans, the applicable premium is usually equal to the insurance premium paid to the insurance carrier. However, the calculation can be more difficult for self-funded plans and can be determined using past costs or an actuarial estimate of future costs. The applicable premium is the total cost to the plan for providing coverage, so it includes both employer- and employee-paid portions and can also include the administrative cost of providing COBRA coverage.
The plan must calculate the COBRA applicable premium in advance for a 12-month “determination period.” The plan can choose any 12-month period to be the determination period, but it must remain consistent every year. The COBRA premium may be changed for a new determination period if the applicable premium changes and there are certain limited situations where the COBRA premium may be changed during the determination period (for example, if the QB changes coverage to another benefit package with a higher applicable premium).
The plan administrator should use caution in calculating the COBRA premium as well as in communicating that premium to QBs. Fixing mistakes that result in over- or undercharging QBs for COBRA premiums can be administratively burdensome and raise COBRA compliance issues.