It is certainly not easy to fulfill all compliance obligations and requirements placed on your organization. One area that can cause confusion is with the Consolidated Omnibus Budget Reconciliation Act (COBRA).
To review: COBRA is a law requiring employers with 20 or more employees in the previous calendar year that sponsor group health plans to offer a continuing coverage option to those who lose their benefits due to a qualifying event (such as termination, reduction in hours, etc.)
Here are the top mistakes employers make when it comes to COBRA compliance and how you can avoid them.
1. Overlooked open enrollment periods.
According to the IRS, COBRA coverage should be identical to the coverage provided to similarly situated active participants and beneficiaries under the plan. Generally, this means that qualified beneficiaries (QB) must be allowed to make an election for each group health plan under which they were covered immediately before the qualifying event.
For example, if an employer offers group medical, dental and vision plans but the QB was only enrolled in medical prior to their termination of employment, the employer need only offer COBRA continuation for the group medical plan.
While QBs generally need only be offered the coverage that they were enrolled in immediately prior to the qualifying event, at certain points during the plan year, a QB may elect different coverage. As mentioned previously, COBRA coverage should be identical to the coverage provided to similarly situated active participants and beneficiaries under the plan. Following this rule, certain rights and events that apply to active participants apply similarly to COBRA QBs.
For example, at open enrollment and any special enrollment period during the year, QBs may change plans or coverage levels or elect to participate in the newly offered plan.
Additionally, HIPAA special enrollment events apply to QBs the same as they would apply to similarly situated participants in the plan not covered by COBRA continuation. For example, QBs are permitted to add covered dependents if they experience certain events, such as the birth of a child, while they are enrolled in COBRA coverage.
Be sure to treat QBs similar to active participants under the plan who have not experienced a COBRA qualifying event. This includes providing all enrollment materials, Summary Plan Descriptions (SPD), Summary of Benefits and Coverage (SBC), and other documents and treating the QB like an active employee when it comes to your benefit open enrollment period, any special enrollment period, and HIPAA special enrollment events.
2. Retroactive premium increases.
Generally, COBRA coverage is available on a fully self-paid basis, including both the employer and employee portion for active participants plus an administrative fee. The applicable premium is established before the beginning of the plan year and is generally fixed throughout.
Each QB will be responsible for the applicable premium throughout the maximum coverage period, which is generally:
- 102% of the premium or,
- 150% of the premium if the QB is approved for a disability extension.
Improperly calculating or communicating the applicable premium can pose a problem for employers. Charging less than the applicable premium can result in an organization incurring large financial losses, or it may inadvertently cause a QB to terminate for non-payment of premiums.
If a plan sponsor is charging less than 102% (or 150% if applicable) of the maximum permitted premium, they can increase premiums prospectively to correct the error. The IRS COBRA regulations specifically allow plan sponsors to increase COBRA premium rates to the maximum permitted amount if the plan is charging less than this amount.
What should you do?
First, make sure to carefully calculate and communicate the applicable premium to QBs to avoid potential premium issues.
If the premium was not calculated or communicated correctly, be sure to prospectively notify QBs of any rate changes. If it is not administratively feasible to immediately notify QBs regarding a prospective premium increase, one strategy may to offer the QBs a “premium holiday” on the premium increase for a certain duration of time.
3. Misunderstood benefits.
Pre-tax accounts and supplemental benefits often cause confusion when it comes to determining whether they are subject to COBRA but it’s important that you understand how COBRA may apply to these additional benefits you may offer. Here’s a rundown.
Self-insured group health plans, including health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) are COBRA-qualified plans, but the rules get complicated.
Health FSAs have a limited COBRA obligation, meaning that continuation coverage only needs to be offered to participants who underspent their account as of their qualifying event date (i.e., were reimbursed less than their year-to-date contributions). Additionally, health FSA COBRA coverage only applies through the end of the FSA plan year. Our partners at FSA Store explain the rules further in a blog article titled “FSAs and COBRA: What to know about rules and eligibility.”
Many employers have integrated HRAs with their group health plan. HRAs are generally subject to COBRA and coverage must be offered following a qualifying event. For integrated HRAs, employers have flexibility when it comes to presenting the COBRA premium to the QB. An employer may adopt a bundled approach where the HRA premium would be added to the medical premium (this would result in the QB making their selection and electing both the HRA and medical option at the same time) or may adopt an unbundled approach where the QB can select the medical option or the HRA option independently of each other.
Other types of HRAs, including individual coverage HRAs (ICHRAs) and excepted benefit HRAs (EBHRAs), are also subject to COBRA, however, qualified small employer HRAs (QSEHRAs) are not subject.
Health savings accounts (HSAs) are individual accounts, not group health plans. As such, COBRA does not apply regardless of whether the employer makes contributions to employees’ accounts. Although the HSA itself is not subject to COBRA, a qualified high-deductible health plan (HDHPs) sponsored by the employer will be subject.
Lastly, a dependent care account is not considered a group health plan and thus, not subject to COBRA. Reminder: although this account is not subject to COBRA, terminated employees can spend down their account post-termination during the employer’s applicable run-out period (typically 90 days).
Employee Assistance Program & Other Wellness Programs
An Employee Assistance Program (EAP) can include any of a variety of employer-sponsored programs that seek to prevent or mitigate personal or family problems that could adversely affect an employee’s productivity. Additionally, wellness programs may offer a limited to broad scope of benefits to employees ranging from individualized medical advice to pamphlets and brochures encouraging healthy behaviors.
The trick to determining whether COBRA applies to either of these types of plans is whether the plan provides medical care. If it does, the plan will be subject to COBRA. In making this determination, employers may consider whether the plan provides health benefits or merely promotes good health. Additionally, employers sponsoring EAPs should consider whether medical benefits are provided at all, or if the plan is limited solely to financial or family matters.
Last, some employers provide on-site medical clinics as part of efforts to control medical costs and promote wellness. For example, an employer may sponsor a clinic for flu shots. Though they vary greatly among employers, if yours offers services beyond minor first aid during regular working hours, it could be subject to COBRA.
Look closely at any plans you offer and determine whether they provide medical care. If so, those plans would be subject to COBRA and would need to be offered to QBs experiencing a qualifying event.
Now that you’ve gotten a refresher on common mistakes to avoid, here are a few actionable questions to answer to ensure compliance.
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