Health insurance is considered a crucial benefit of permanent employment in the United States. Although not all employers are required to provide insurance to their employees, it is a significant incentive for attracting and retaining employees. However, there are situations when employees lose their coverage, and organizations are required to offer temporary continuation of health benefits. Many organizations unintentionally fail to comply with these regulations because they are unaware of how COBRA laws work.
Here’s an explanation of how COBRA mandates function and why working with a benefits outsourcing firm can save money on compliance with these challenging regulations.
What is COBRA?
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act. Enacted during the Reagan era, this federal law serves as a safety net for individuals and families who lose their employer-sponsored health coverage, providing them with temporary health insurance while they seek alternative coverage.
COBRA regulations apply to employers that offer health insurance to employees and employ more than 20 people. If a qualifying event occurs, eligible employees or their families must be offered a six-month continuation of their health benefits. COBRA coverage is available for 6-18 months, depending on the circumstances, or as much as 36 months in the case of dependent children on their parents’ plans who lose their status.
While employers must extend COBRA benefits when these events arise, employers are no longer responsible for their share of the premiums. The employee pays 100% of the premium; it is not a free benefit. If the employee cannot afford the premiums or finds new coverage elsewhere, declining their COBRA coverage as a result, they have 60 days to notify the employer of their decision.
When Must Organizations Extend COBRA Benefits?
Even if the employee does not accept the offer of COBRA benefits, they still must be offered in the first place if a qualifying event occurs.
Five qualifying events mandate employers to provide COBRA benefits:
Termination
If an employee is laid off, or even fired due to poor performance, COBRA benefits must be offered. The only exception is if the employee was fired due to gross misconduct.
Reduction of Work Hours
If an employee’s hours are cut to the point they are no longer considered full-time and thus eligible for employer-sponsored coverage, they must be notified of their loss of eligibility and have COBRA benefits extended to them.
Employee Death
If a covered employee dies, their spouse and dependents must be notified of their COBRA eligibility.
Divorce and Legal Separation
If a covered employee divorces or legally separates from their spouse, the spouse needs to be notified of their COBRA eligibility if they were on their ex’s insurance.
Loss of Dependent Child Status
If an employee’s child is covered by their insurance, the child will lose eligibility when they are no longer considered a dependent or when they reach the age of 27 under the Affordable Care Act. In such a case, COBRA benefits must be offered to the child, who is now ineligible to be on the employee’s plan.
Consequences of COBRA Noncompliance
Because COBRA coverage can be very cost-prohibitive, especially if that employee is now a former employee, many employees decline it and go on a spouse’s plan or find more inexpensive options in the marketplace. Subsequently, this causes employers subject to the COBRA mandate not to extend the offer even though it’s the law.
Small employers that go from 20 to 21 employees also frequently do not realize they are now subject to this mandate, and their noncompliance is based on a lack of awareness rather than willful disregard of the law.
Whether your noncompliance with COBRA regulations is willful or accidental, there may be steep financial and legal consequences. They include:
- Federal Department of Labor penalties: Under ERISA (Employee Retirement Income Security Act of 1974), the federal DOL can hold employers liable for $110 per day per plan participant if COBRA notices are not furnished. Fiduciaries can also be held personally liable for COBRA non-compliance.
- IRS excise tax penalties: Employers who do not furnish COBRA eligibility notices will owe the IRS $100 per day for each COBRA-eligible plan participant. This penalty increases to $200 if more than one family member is affected. The minimum excise tax penalty after an IRS examination is $2,500. Even if the noncompliance isn’t intentional, the IRS charges a penalty that is the lesser of $500,000 or 10% of the employer’s group health plan premiums for the last year.
- Individual legal penalties: If a covered employee lacks other options for health insurance and suffers as a result of lacking COBRA coverage because they were supposed to receive a notice and never did, they can sue for negligence.
- Class action lawsuits: Several federal laws factor in COBRA compliance. These include ERISA, the ADA (Americans with Disabilities Act), and the Public Health Service Act (PHSA), plus state laws regarding COBRA eligibility. Failure to provide COBRA coverage can result in massive damages in a class action lawsuit, in addition to interest and paying the plaintiffs’ attorney fees.
How Benefits Outsourcing Can Help with COBRA Compliance
COBRA compliance can be daunting to navigate. Several laws affect COBRA regulations, and employers with fewer than 25 employees may be unsure if they are subject to these mandates. When working with managed benefit services, COBRA compliance is simplified by consummate professionals who stay current on COBRA requirements so employers can focus their energy and resources elsewhere.
A benefits outsourcing firm like ASAP Payroll can determine whether your organization is subject to COBRA mandates and, if so, furnish COBRA notices to the affected plan participants when qualifying events occur. ASAP Payroll’s COBRA compliance services are dedicated to simplifying employee benefits administration and ensuring that all mandated notices are sent.
Contact ASAP Payroll to find out how our managed benefit services can help your organization stay compliant with COBRA regulations.
