An often-overlooked area of employment law compliance is an employer’s obligation to offer continuation of health coverage to employees upon employment termination and certain other events. As discussed below, an employer’s failure to comply with COBRA can have significant financial consequences.
COBRA Legal Requirements
The Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) requires an employer to provide an employee with the option of electing continuing coverage under the same terms of the employer’s health plan after specified qualifying events. Generally, COBRA, and the
similar provisions of New Hampshire law require that group health plans provide a covered employee and his or her covered spouse and dependent children (“qualified beneficiaries”) with the opportunity to elect to continue health care (medical, dental and vision) coverage when coverage under the plan would otherwise end. There are numerous legal rules associated with COBRA and the following discussion is not intended to be all encompassing.
COBRA’s continuation is triggered by the occurrence of so-called “qualifying events” that trigger loss of coverage. Qualifying events include (i) termination of employment (for reasons other than gross misconduct) or reduction in hours of employment, (ii) divorce or legal separation, (iii) death of employee, (iv) employee enrollment in Medicare, or (v) loss of dependent child status under the plan.
An employer has no more than forty-four days to provide an election notice to qualified beneficiaries from the later of (i) the data of a qualifying event or (ii) the date of loss of coverage if the plan states that COBRA starts on coverage loss. Qualified beneficiaries then have up to 60 days to elect COBRA beginning from the date the election notice is provided or the date the qualified beneficiary would otherwise lose health coverage due to the qualifying event, whichever is later. Each qualified beneficiary has an independent right to elect continuation coverage. Given the high cost of health insurance and the fact qualified beneficiaries can be required to pay up to 102% of the employer’s premium amount, COBRA is not elected in all cases. COBRA coverage lasts for 18 or 36 months after the date of the qualifying event. The length of time for which continuation coverage must be made available depends on the type of qualifying event and whether multiple qualifying events occur.
An employer may terminate coverage earlier than the end of the maximum period for multiple reasons including (i) premiums are not paid in full on a timely basis, (ii) a qualified beneficiary begins coverage under another group health plan, (iii) a qualified beneficiary becomes entitled to Medicare benefits, or (iv) a qualified beneficiary engages in fraud or other conduct that would justify terminating coverage. If continuation coverage is terminated early, the qualified beneficiary must be provided with an early termination notice.
Common Problem Situations and Penalties for Noncompliance
It is common for employers to outsource COBRA compliance to third party service providers. However, the employer remains legally responsible should non-compliance occur. Sometimes miscommunication occurs between the parties managing employee status changes and the party responsible for issuing the notice of COBRA rights. Although COBRA is only elected infrequently, employers should still take steps to correct situations when they become aware that a notice was inadvertently not issued. Correction involves notification to the impacted employee and related qualified beneficiaries and informing them of the COBRA entitlement. There are multiple reasons to do this. Both the United States Department of Labor and the Internal Revenue Service can impose penalties of up to $110 per qualified beneficiary per day for COBRA noncompliance. The penalty period can be mitigated by providing the required notice as soon as the employer becomes aware of the violation. There is also exposure to litigation, as qualified beneficiaries have a private right of action under ERISA to obtain benefits. In cases where a required COBRA notice was not provided, courts have held employers liable for employees’ medical expenses and attorney’s fees.
Another potentially problematic situation involves an employee’s reduction of working hours so that he or she is no longer eligible for coverage. Technically, the reduction in hours should result in a transition to COBRA but employers are sometimes slow to make that transition. Upon an employee’s subsequent termination of employment, an insurance carrier would have grounds to question the duration of its obligation to provide 18 months of COBRA from termination of employment and could deny coverage. Depending on the situation, the employer could be held responsible for medical costs for the remainder of the eighteen-month period for which COBRA was offered to the qualified beneficiaries. A more problematic situation is when an employee is away from work on an extended unpaid leave. Employers are sometimes reluctant to terminate employees in this situation (and issue COBRA notices) for months with the hope that the employee will return to work. As discussed above, should the employee incur substantial medical claims beyond what would have been the expiration of the COBRA period, insurance carriers may deny the claim exposing the employer for claims incurred.
In summary, although the legal requirements associated with COBRA are not complicated, strict compliance is required by employers to avoid the imposition of fines and penalties along with the possibility of paying the cost of medical expenses incurred by qualified beneficiaries.