COBRA can be complicated: What to watch for
It's not the simple and practical occurrences that cause us headaches, but rather it’s the atypical situations.
The Consolidated Omnibus Reconciliation Act (COBRA) requires employers to offer continuation coverage to qualified beneficiaries who lose group health plan coverage as a result of certain events.
For the most part, administration of COBRA continuation coverage can appear relatively simple. For instance, administering COBRA continuation coverage for a terminated employee or a dependent that reaches age 26 doesn’t typically require additional considerations. Unfortunately, things are not always so cut and dry.
Related: 10 mistakes to avoid in your employee handbook
As we all eventually learn, it is not the simple and practical occurrences that cause us headaches, but rather it’s the atypical situations that ultimately lead to our need for Tylenol or Advil. This proves especially true when considering COBRA continuation coverage and the major issues that can result when that coverage is not properly administered by an employer who self-funds its own group health plan.
Plan sponsors in the self-funded world play a dual role when it comes to COBRA continuation coverage. Plan sponsors are subject to certain notice requirements as the employer; and are subject to notice and coverage requirements as the plan administrator. Regardless of the duties imposed by COBRA itself, a plan administrator also has a fiduciary obligation to prudently manage the plan’s assets. Part of this obligation is to only pay for covered claims for eligible individuals, as defined by the plan.
Failing to properly offer or administer COBRA continuation coverage can often lead to problems for plan administrators. A plan administrator may breach their fiduciary obligation, expose themselves to penalties under ERISA, and risk losing stop-loss reimbursements if COBRA is not properly administered.
In order for plan administrators to protect themselves and the plan’s assets, a real understanding of the COBRA-required qualifying event is needed.
The conventional understanding of a COBRA qualifying event is that if a listed event occurs, COBRA continuation coverage must be offered. COBRA lists the following occurrences that could be considered qualifying events:
- Voluntary or involuntary termination of the covered employee’s employment other than by reason of gross misconduct;
- Reduction of hours of the covered employee’s employment; Divorce or legal separation of the covered employee from the employee’s spouse;
- Death of the covered employee;
- A dependent child ceases to be a dependent under the generally applicable requirements of the plan;
- A covered employee becomes entitled to benefits under Medicare; and
- An employer’s bankruptcy, but only with respect to health coverage for retirees and their families.
What plan administrators often overlook, is that in order for any of the above occurrences to be considered a qualifying event under COBRA, the occurrence must also cause a loss of plan coverage. The COBRA regulations state, “to lose coverage means to cease to be covered under the same terms and conditions as in effect immediately before the qualifying event.”
In most cases, a plan will include language that accounts for a participant’s loss of eligibility due to a qualifying event, but even when a plan provides this language, the employer who sponsors and administers the plan may either intentionally or inadvertently postpone the individual’s loss of coverage thereby muddying the waters as to when plan coverage becomes COBRA continuation coverage.
A deferred loss of coverage does not in and of itself cause issues in regards to COBRA continuation coverage. It is compliant and sometimes beneficial for a plan sponsor to defer an individual’s loss of coverage after a qualifying event. COBRA issues will ultimately arise when an employer makes decisions about an individual’s eligibility for coverage without regard to their duties as the plan administrator. For example, if an employee is terminated but then negotiates a severance agreement that includes health plan coverage, is that continued coverage considered COBRA coverage or does the individual simply maintain their eligibility on the plan, despite the plan’s opposing language? Another possibility is that a lack of internal communication following a qualifying event could cause a plan sponsor to inadvertently leave an otherwise ineligible individual on the plan until the error was realized.
For self-funded plans that include eligibility language restricting coverage to full-time employees and their dependents, allowing an individual to maintain coverage on the plan despite a qualifying event may give rise to significant issues for the plan.
Firstly, as mentioned previously, the employer is required to provide notice to the plan when a qualifying event occurs. Further, the plan administrator is then required to offer COBRA continuation coverage to the qualified beneficiary. When the employer is the plan sponsor, and playing the dual role, failing to provide the required notices and offers of coverage could subject the plan to penalties under ERISA.
Second, when the plan continues to pay claims for individuals who are no longer eligible for coverage, there is an argument to be made that the plan administrator is not prudently managing the plan’s assets. If a plan participant brought a cause of action against the plan administrator for a breach of fiduciary duty, the plan could be at risk to pay significant damages as a result.
Finally, stop-loss policies will typically contain language that excludes reimbursement for both claims that are not incurred by eligible participants (as defined by the plan) and claims incurred when COBRA continuation coverage is not offered in accordance with the regulations. In instances where the employer either intentionally or inadvertently leaves an individual on the plan despite their loss of eligibility, stop-loss is highly unlikely to reimburse those claims.
Another unfortunate consideration for plan administrators is that in some situations the realization that the plan has continued to pay for ineligible claims remedy comes too late the error. The regulations require that in order to be eligible for continuation coverage under COBRA, the qualified beneficiary must experience a qualifying event that causes a loss of coverage within the maximum benefit period (generally 18 months). In the event that an individual experienced a qualifying event, but continued to receive benefits under the plan despite their ineligibility longer than the maximum benefit period, a qualifying event never occurred. In that event, the plan administrator has no recourse to protect itself from potential stop-loss reimbursement issues or the breach of their fiduciary duty.
At the end of the day, employers must be diligent in their approach to administering COBRA coverage properly. In order to avoid the potential issues that occur when COBRA continuation coverage is not administered properly, the plan sponsor should ensure that the appropriate internal policies and processes are in place. The plan sponsor should confirm that there are no gaps between its policies as an employer and its fiduciary duties as a plan administrator and also ensure that the proper procedure for communicating an individual’s termination and the impact that termination will have that individual’s eligibility under the plan.
Kevin Brady, Esq., is an attorney at the Phia Group. As a member of the consulting team, Kevin works on general consulting, plan document compliance, contract gap reviews, and general compliance issues.
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