10 Common COBRA Screw-Ups – And How You Can Avoid Them

By Timothy J. Stanton (Ogletree Deakins, Chicago) and Stephanie A. Smithey (Ogletree Deakins, Indianapolis)

It seemed like such a simple idea – let people continue their employer-provided health insurance when they lose a job or get divorced.  And, 22 years after Congress fell for the idea, you would think the benefits administration world would have COBRA down cold.  You would be wrong.  When it comes to COBRA administration, practice has definitely not made perfect.

Here are 10 mistakes that we have come across more often than we would care to remember, and some ideas to help you steer clear of them.

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It’s not just terminations

COBRA – formally, Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 – is certainly best known as the law that protects employees when they would otherwise lose health coverage following a termination of employment.  But termination of employment is not the only “qualifying event” that affects employees. 

Employer plans typically cover employees who work at least a certain number of hours a week. Thirty is a common number, other plans use a lower threshold and some cover part-time workers down to, say, 15 hours a week (though often at lower benefit levels).  If an employee whose regular hours fall below a set number would otherwise lose health coverage, that reduction in hours would be a “qualifying event” entitling the employee to elect to continue coverage.

This can be especially sensitive in industries where regular work hours fluctuate seasonally or otherwise.

What state laws?

Because COBRA applies broadly to employer-sponsored health plans (notable exceptions would be church plans and plans of small employers, generally meaning fewer than 20 employees), it is easy to overlook state continuation coverage laws.  Such laws would apply only to insured plans, and often they are irrelevant for large companies because the continuation coverage they require is less than what COBRA requires.

They cannot be ignored completely, however.  Some state health insurance continuation laws offer specific benefits that exceed the COBRA standards and could be critically important to individual participants in your health plans.  In Illinois, for example, a spouse who is 55 or older upon a divorce, or the employee retiring or dying, may have the right to continue coverage until Medicare eligibility.  In California, qualified beneficiaries may extend coverage further, after exhaustion of the federal COBRA continuation, to receive a total of 36 months of continued coverage.  Large companies that provide health benefits primarily through a self-insured plan may still offer HMO coverage in various states.  And COBRA administrators that serve self-insured plans may well disclaim responsibility for state continuation coverage.

Inattention to those state law requirements could leave an employer exposed to violations of the Employee Retirement Income Security Act (ERISA) or state continuation coverage laws, or both, unless the notices and other administrative tasks are coordinated with HMOs state-by-state.

We have to offer COBRA for that?!
 
COBRA coverage is best-known and most important in the context of traditional health plan coverage.  But the statute itself applies to “group health plans,” a term that extends well beyond standard self-insured medical and dental plans.  Health flexible spending accounts (FSAs) are group health plans, and have their own COBRA rules – which comes as a surprise to some employers and administrative service providers.

Beyond FSAs, vision plans are also health plans, as are many employee assistance and wellness or health improvement programs.  A health reimbursement arrangement (HRA) is a health plan that is subject to COBRA.  By contrast, a health savings account (at least one that is designed to be outside ERISA) is not a health plan subject to COBRA.

COBRA rights often may not be very meaningful in the context of non-traditional health plans.  How many terminated employees, for instance, actually would want to pay a premium charge to use a counseling service or weight loss program provided by a former employer?  Still, employers that do not make some accommodation for COBRA in these cases may some day regret that decision.

We didn’t send notices to the spouse?

One of the basic compliance obligations of an employer health plan is to provide notice to “qualified beneficiaries” when they experience a qualifying event such as a termination of employment, divorce or separation, or a dependent child failing to meet the plan definition of “dependent.”  Qualified beneficiaries, though, include spouses, and plans too often provide a single notice to an employee’s address even though the spouse no longer lives there.  Separate notices are required when the spouse lives at a different address and that fact is known based on most recent information available to the plan.

Failure to provide separate notice to the spouse in these cases means that a plan has not met its obligation to notify that specific qualified beneficiary of his or her rights. This carries potential penalties of $110 per day against the plan administrator.  Just as importantly, if that oversight were ever to end up before a court, the court likely would view the spouse as still having a 60-day period to elect COBRA coverage.

To prevent this sort of error, a plan administrator should track dependent and spouse information, coordinate it with data from other plans, and consider obligating an employee who receives a notice intended for an ex-spouse to notify the plan of his or her address.
 

We didn’t send notices – at all!

Failures to notify come in all sizes.  Not all are limited to a single spouse.  More than one large company has inadvertently failed to have its COBRA administrator issue qualifying event notices for routine terminations at a specific plant or division or in the event of a closing of such a plant or division.

This emphasizes the importance of internal controls as an outside COBRA administrator would likely have no way of flagging such problems.  Employers have few good options for correcting such widespread failures to notify and even those narrow quickly the later the mistakes are caught. 

We bollixed up Medicare coordination!

Those pesky Medicare Secondary Payer (MSP) rules have caused more than one plan administrator to scratch his or her head in confusion.   The MSP rules generally provide that Medicare will be secondary to any group health coverage provided pursuant to an employee’s or spouse’s current employment status.  So, what about COBRA? Generally, COBRA is not treated as group health coverage provided by virtue of current employment status.  This means that for a qualified beneficiary who is covered by Medicare due to age (65 or older) or disability, COBRA will pay secondary to Medicare. 

There is an exception for Medicare due to end stage renal disease.  In those cases, COBRA will pay primary for the first 30 months, then secondary after that.  

Terminating COBRA for someone on Medicare also can be tricky. If the qualified beneficiary first becomes covered by Medicare after the COBRA election, then you may terminate COBRA early.  By contrast, if he or she was already on Medicare at the time of the COBRA election, then COBRA coverage may not be terminated early due to Medicare.

We bollixed up FMLA coordination, too!

When an employee goes on a protected leave under the Family and Medical Leave Act (FMLA), the employee has the right to the same health benefits as active employees have during the FMLA leave.  Upon return from leave, the employee has the right to be reinstated to that active coverage, regardless of whether the employee chose to continue that coverage during the FMLA leave. 

In most FMLA leave situations, COBRA never enters the picture.  The continued coverage during the FMLA leave is not COBRA coverage.  Instead, the employee on leave is treated as though actively employed. 

Instead, the COBRA qualifying event occurs upon the loss of coverage.  This loss will be triggered by the earlier of the expiration of the FMLA leave if the employee does not return to work or the employee’s notification to the employer (prior to the date the leave expires) that the employee does not intend to return to work. 

A COBRA event may also occur if the employee’s position is eliminated as part of a reduction in force and the employee would not have been transferred to another position.  Finally, an employee’s failure to pay for continued coverage during an FMLA leave will trigger COBRA if it causes a loss of coverage. 

It is not uncommon for plans to include additional continuations of coverage for non-FMLA leaves or continuations that extend beyond the duration of an FMLA leave, often to coincide with the employer’s short-term disability period.   Remember that if the employee does not lose coverage under the terms of the plan, there is no COBRA event.  Plans that provide those extra continuations of coverage will want to clearly state whether the continuation is intended to run concurrently with COBRA or to provide extra continuation in addition to COBRA.  An employer that intends to be more generous than COBRA provides will want to be sure that the stop loss carrier or any insurance provider has agreed to insure such coverage.

What about the retirees – actually, what about their dependents?
 
Retirees, as well as their dependents, are qualified COBRA beneficiaries if they lose coverage at the time of retirement.  But if the retiree goes onto a retiree medical plan that ends upon the retiree’s Medicare eligibility, the retiree will not have a COBRA qualifying event when that coverage ends – because the loss of coverage is not due to a reduction in hours, termination of employment, or other COBRA event.  So, when is the retiree’s COBRA qualifying event?  It occurs at retirement if the retiree loses coverage in the active employee plan at that time.  When that happens, the retiree should be given a choice between COBRA coverage (continuing the active plan) and the retiree medical coverage.
 
Moving an employee to retiree medical coverage is not the end of the COBRA story for your retirees’ family members, however.  The retiree’s spouse and any dependents that are covered by the retiree medical plan may still have a COBRA qualifying event.  If the retiree dies or becomes Medicare eligible and that causes a loss of coverage for the spouse or dependent, the other qualified beneficiaries should be offered COBRA.  If the retiree and spouse divorce, or have a legal separation, the spouse will also have a qualifying event. 
 

Overlooking post-employment continuation issues – for the boss.

Senior executives are often able, as part of their employment agreements, to negotiate post-termination continuation arrangements more favorable than the standard 18 months of COBRA coverage. Providing these benefits through a self-insured plan has long raised numerous nondiscrimination and other issues. 

Unless employers handle this issue properly, it also raises thorny tax problems under the nonqualified deferred compensation rules of Code Section 409A, which will take full effect on January 1, 2009.  Running afoul of these rules could cost executives dearly – the cost of improper coverage would be treated as taxable income (even before the executive terminated and received the benefit of the coverage) and an additional 20% penalty tax and interest would be applied as well. 

Fortunately for employers, the 409A regulations provide relatively straightforward fixes that employers can incorporate into employment agreements to ensure that continuation coverage beyond the standard COBRA period does not trigger tax problems for senior executives.

COBRA for domestic partners? What about civil unions? Same sex spouses?

By its terms, COBRA applies to “spouses” and “dependent children” of covered employees. Under the well-known federal Defense of Marriage Act, “spouse” under federal law excludes anyone except an opposite-sex spouse – such as same-sex spouses, domestic partners, and members of civil unions. No law requires employer-provided health plans, at least self-insured ones, to extend health benefits to these other non-spouses, but for a variety of reasons many employers have done so.  Many employers have also designed their group health plans to provide COBRA benefits to non-spouses.

It is easy to overlook the details involved in providing continuation coverage in these situations.  Domestic partners obviously don’t divorce the way legal spouses do, so what exactly will constitute the end of a partnership that would trigger a COBRA election?  (This is less difficult in jurisdictions where individuals can put themselves on – or take themselves off – domestic partner registries.)  Similarly, how, if at all, will the plan enforce the deadline for such an employee to notify the plan administrator of the termination of a partnership?  When the plan does provide COBRA to the non-spouse, will the employer treat it as taxable income to the employee?

Employers need to provide these details in summary plan descriptions (SPDs) or COBRA notices if non-spouses will have continuation coverage rights.  Even if they will not, SPDs and COBRA notices should be clear on that point.   As with other coverage that is more generous than the law requires, employers will want to be sure that their insurance carriers have agreed to insure this coverage.

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To discuss these common COBRA problems or other employer benefit issues, contact a member of our Employee Benefits and Executive Compensation Practice Group. 

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