COBRA Non-Compliance: Potential Risks

Friday, April, 13 2012

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to provide employees and eligible covered dependents access to continuation of coverage following the loss or eligibility due to certain events. These events include, voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Eligible individuals may be required to pay 100% of the premium for coverage plus a 2% administrative charge. COBRA applies to group health plans sponsored by employers with 20 or more employees in the prior year. Depending on the exact reason for the loss of coverage and the covered member impacted, COBRA may be continued for up to 36 months.

COBRA contains numerous notification requirements for both the employer and covered individual.

1. The plan sponsor must provide notice of CORBA rights to covered individuals, at the time coverage commences. The plan’s SPD must also contain COBRA information.

2. As soon as the plan’s administrator learns of a qualifying event, it must notify each qualified beneficiary of their ability to continue coverage.

3. Qualified beneficiaries are allowed 60 days to elect continuation coverage.

4. Qualified beneficiaries have the responsibility to inform the plan of events which may impact their COBRA eligibility such as, divorce, legal separation, disability or a child losing dependent status under the plan.

5. Employers and plan sponsors must notify the plan’s administrator of the employee’s death, termination of employment or reduction in hours, or Medicare entitlement.

6. Qualified beneficiaries must notify plan’s administrator of changes marital status or changes addresses.

If employer notifications fail to occur within the prescribed time frames, the employer, plan sponsor, and plan administrator maybe subject to significant penalties. In addition, the plan may be required to allow the qualified beneficiaries to enroll, cover medical costs previously not paid, and/or otherwise make the qualified individual whole.

While COBRA is the responsibility of the Dept of Labor, the DOL and IRS do coordinate enforcement activities; thus there is exposure to penalties from both agencies for non-compliance. In fact the IRS recently issued new COBRA audit guidelines to its auditors designed to specifically uncover COBRA violations.

These guidelines include suggestions such as:

“To determine what procedures are in place, obtain the following information from the taxpayer:

• A copy of the health care continuation coverage procedures manual.

• Copies of standard health care continuation coverage form letters sent to the qualified beneficiaries.

• A copy of the taxpayer’s internal audit procedures for health care continuation coverage.

• Copies of all group health care plans (If necessary, reconcile the books to the amount of health care expense deduction claimed on the return to confirm that all plans are listed.).

• Details pertaining to any past or pending lawsuits filed against the taxpayer for failing to provide appropriate continuation coverage.”

Single and multi-employer plans could face excise tax penalties as high as $500,000, third party administrators such as insurance companies and TPA’s are exposed to excise tax penalties as high as $2,000,000. And this is just from the IRS.