Warning: Don't Ignore COBRA Rules
reprinted with permission from the Microsoft Small Business Center
By Joanna L. Krotz
Fair warning: This is not fun. It's exactly the part of running a business that entrepreneurs love to hate.
And that's undoubtedly why so many otherwise savvy business owners end up sidestepping COBRA regulations — a decision far from smart.
COBRA, of course, began as the Consolidated Omnibus Budget Reconciliation Act signed into law in 1985 by President Reagan. It requires employers to offer qualified individuals the option of continuing their group health plan coverage when they're about to lose it.
Contrary to the popular notion that COBRA was created to help workers, many experts point out that the law was designed, as it says, to "reconcile the budget." That is: To shift responsibility for health-care coverage from the government to employers. So this is about raising government revenue, not sustaining workers. That perspective might help you understand COBRA's annoying bureaucracy and layers.
As a result, COBRA compliance nowadays means staying current on a continually changing hydra-headed monster of updated laws, amendments and court rulings, some as recent as 2005. Plus, most states have passed baby or mini-COBRA laws that regulate the continuation of coverage in areas exempted or ignored by federal rules.
COBRA laws are so complex that even the courts don't always agree when judging infractions and lawsuits. Yet if you aren't careful and consistent about complying with the rules, the penalties can be costly.
Who and what qualifies
Generally, according to Gary Kushner, a benefits consultant in Kalamazoo, Mich., "employers of 20 or more employees must offer to continue health coverage to qualified plan participants who were covered on any given workday in the preceding six months." At the time of employment, employers must provide a written notice to employees of their rights, spelling out qualifications and other details. Letters must also be sent within a specified time frame after a "qualifying event," which includes:
- Layoff or termination, voluntary or involuntary
- Reduced hours — from full time to part time, for example
- A covered employee's death
- A covered spouse's divorce or legal separation
- An employee who becomes entitled to Medicare
- A change of status for a covered dependant — for instance, reaching an age no longer covered by the health plan
- Active military duty, when the employer doesn't continue coverage
- An employee who doesn't return to work from family or medical leave — assuming she or he was covered before leave began
- Bankruptcy, but only if coverage continues for all employees, which usually means a Chapter 11 reorganization rather than Chapter 7 liquidation In most cases, the employee pays 100% of the premiums, while employers are allowed to tack on 2% more to cover administration fees. Rules shift for disabled staff and some dependants. The length of coverage also varies, typically 18 months, but also up to 29 or 36 months, depending on circumstances.
In the penalty zone
It can become very expensive if you're caught doing the wrong thing. Regulatory penalties for COBRA are usually charged per violation, per person, per day for the entire period of noncompliance. I told you this wasn't fun.
For instance, if you don't properly inform qualified people about their rights to continued coverage, you can be fined $100 per day per individual and up to $200 a day with dependents. You might be forced to pay present and future medical expenses that would otherwise have been covered by insurance. One employer had to cough up $1 million in medical claims for twins born prematurely when COBRA coverage was accidentally cut off.
Violations may cause you to lose the federal income tax deduction for health-plan costs. So not only will you then foot the entire bill, but if any of your firm's highly-compensated employees are involved, they will probably have to declare the health-coverage costs as taxable income.
Or you could be on the hook for crippling legal fees and expenses. For example, Hartford Life and Accident Insurance Company and the Texas Municipal League once spent $600,000 fighting a $30,000 claim.
It really pays to be COBRA compliant.
Given the time demands and the mind-numbing details, most companies outsource their COBRA needs. Rates are affordable, typically between $1,000 and $2,000 a year for 50 or so employees. There are dozens of services such as Infinisource (formerly COBRA Compliance Systems) and FlexAmerica that will handle tracking, notification, billing, reporting and record keeping. To find a service you trust, quiz your human-resources manager, accountant, insurance broker or health-plan administrator, or try an online search.
Make sure you get ironclad references. Employers remain liable no matter what the service or plan administrator may or may not do.
There also are inexpensive COBRA administrative software programs that can walk you through the process should you really want to do it yourself. Just remember those state laws.Many programs only cover federal regulations.
Some COBRA myths
If you're one of the hundreds of business owners who don't pay attention to COBRA, start focusing. To get you going, here are a few of the most frequent misconceptions.
"I don't have to worry because COBRA only applies to companies with 20 or more employees." That's true for federal COBRA. But many states have passed laws designed to cover smaller companies, exactly because federal COBRA doesn't. Better check in with your state insurance office.
"I've beefed up the company health plan to offer more options, but that has nothing to do with former employees on COBRA." Yes, it does. Whatever you offer current employees and whenever you open the plan for enrollment or election changes, you must make the same offer to all COBRA-covered employees.
"The employee who quit told me that he didn't want COBRA coverage, so now I don't have to think about it anymore." Not so. He can change his mind at any time within the election period, usually 44 days.
"I don't have to offer COBRA because the employee was terminated for 'misconduct.'" Regulations exempt you from offering COBRA benefits to employees who leave for reasons of "gross misconduct." But the law does not define that term. Financial irregularities have met the bar for "gross misconduct" in past rulings, while incompetence, violations of confidence and resignations have not. Do you want to slug it out in court?
"I don't want to get stuck with the bills. The day he misses paying a premium, I'm cutting off coverage." A dangerous policy. Covered employees are permitted to pay premiums within 30 days of their due dates.
There are lots of other mistaken notions about what's permitted or forbidden under COBRA rules. There are also many variations, depending on the employee and your particular plan. The best way to make sure you become compliant — and stay complaint — is to begin the process. Now.
