Offering group health insurance is a great way to attract and retain talent, but administration can pose challenges, especially when qualified beneficiaries lose coverage. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers are required to offer eligible individuals the opportunity to continue their medical coverage when it would otherwise be lost due to certain qualifying events, such as termination or divorce of a covered employee and/or spouse.
This law is complex and mistakes or violations can have serious consequences. To help safeguard their business, many employers outsource COBRA administration to a third-party administrator.
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What is COBRA?
COBRA provides a temporary extension of employer-sponsored group health coverage for employees and their family members (qualified beneficiaries) in certain situations when a qualified event causes loss of coverage. Employers generally must comply if they have 20 or more employees. However, that number can be difficult to define if the size of the workforce fluctuates throughout the year or if there are numerous part-time employees.
What’s involved with administering COBRA?
Whether a company has many qualifying events to contend with or only a few, understanding COBRA rules for employers and keeping track of the various requirements can be difficult. Those who are subject to the law must correctly manage the following:
- Required notices
- Election and payment deadlines
- Late and partial payments
- Different coverage periods
- Changes to plan options
- Address changes
- Terminations of coverage
Are there any COBRA compliance considerations with plan administration?
Problems can arise if COBRA health insurance is not offered to someone who is eligible to access coverage or if it is offered to someone who is not eligible. Such mistakes could have negative consequences, including penalties from either the Internal Revenue Service (IRS) or the U.S. Department of Labor (DOL). In addition, employers who administer COBRA incorrectly may be sued by employees and held responsible for paying individual health care claims for qualified beneficiaries, among other costs.
What are the fines for COBRA administration errors?
The IRS and DOL can levy fines and taxes for noncompliance with COBRA, including excise taxes of $100 per day for each qualified beneficiary impacted by a failure during a compliance period. Employers may also face penalties of up to $110 per day under the Employee Retirement Income Security Act (ERISA).
Can employers handle COBRA themselves?
The knowledge and expertise needed to properly administer COBRA requires extensive training, which is often disproportionate to the number of qualifying events. COBRA administration can also be stressful and time-consuming. Employers who experience high employee turnover or numerous qualifying events can be quickly overwhelmed by the amount of work required.
Due to the complexity of COBRA, the high risk of penalties and lawsuits, and the likely inefficient use of HR’s time and efforts, COBRA administration is a prime candidate for outsourcing.
What makes a good COBRA administrator?
Employers who choose to outsource COBRA administration may want to look for the following qualities in a third-party administrator:
- Compliance expertise
COBRA compliance depends on prompt adherence to federal guidelines and regulations regarding what needs to be done and when. To that end, third-party administrators should be well-respected for their expertise, follow written procedures and independently monitor COBRA regulations.
- Technological advancement
A good technological system will streamline the COBRA compliance process, electronically deliver the required notices and letters, and provide proof that all deadlines were met. In addition, the system should be secure and encrypted to protect information privacy.
- Competent customer support
Third-party administrators can help employers manage employee requests for continuation coverage and billing-related questions. High-quality customer service may also help reduce employee complaints about how COBRA is handled.
- Some legal accountability
Although third-party administrators will never be able to take on all legal risk associated with COBRA administration, they may state in their contract that they assume financial responsibility for their own mistakes. Of course, if employers fail to notify administrators when an employee is terminated or other qualifying events occur, they will be responsible for COBRA noncompliance.
Frequently asked questions about COBRA administration
How does COBRA insurance work? Find the answer to that question and more below:
What is COBRA insurance and how does it work?
COBRA requires employers who sponsor group health plans to offer continuation coverage to employees, spouses and dependent children when group health coverage would otherwise be lost due to certain specific events. The qualified beneficiaries may have to pay for COBRA coverage themselves, though plan sponsors sometimes provide it at reduced or no cost.
What does a COBRA administrator do?
Plan administrators must follow COBRA rules governing how and when continuation coverage must be offered and provided, how qualified beneficiaries may elect and pay for continuation coverage, and when continuation coverage may be terminated. They also must provide certain notices to plan participants at specific times.
Who is the plan administrator for COBRA?
COBRA administrators may be the employer who sponsored the group health insurance. However, due to the complexity of the law and the high risk of penalties and lawsuits, many employers outsource their administrative responsibilities to third-party providers.
Who has COBRA eligibility?
Qualifying events include, but are not limited to, the death of a covered employee, a termination or reduction in a covered employee’s hours for reasons other than gross misconduct, the divorce of a covered employee and spouse, and a child’s loss of dependent status under a plan.
Why is COBRA so expensive?
COBRA insurance costs can be expensive because most employers require plan participants to pay the full premium. However, the maximum amount charged to qualified beneficiaries generally cannot exceed 102% of the plan’s total cost of coverage for similarly situated individuals covered under the plan.
How long does COBRA coverage last?
COBRA requires continuation coverage to extend for a limited time period of 18 or 36 months from the date of the qualifying event. The maximum length of time for which continuation coverage must be made available depends on the type of qualifying event that gave rise to COBRA rights.
This article is intended to be general in nature. It should be used as a starting point in analyzing COBRA administration and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter, which is provided with the understanding that ADP is not rendering legal or tax advice or any other professional services. You should seek guidance from your personal business and legal advisor(s) if you need specific advice.