In parts one, two, and three of our COBRA articles, we’ve broken down what COBRA is, who’s eligible for it, what notices are necessary, how to elect coverage, and what benefits employees can access through COBRA. Today, we will examine how employees pay for continuation coverage and what your business will have to pay if you don’t comply with COBRA.
Paying for COBRA Continuation Coverage
Group health plans can require qualified beneficiaries to pay for COBRA coverage. But plans can also choose to provide continuation coverage at reduced or no cost. The maximum amount charged to eligible beneficiaries cannot exceed 102 percent of the cost to the plan for similarly situated individuals covered under the plan who haven’t incurred a qualifying event.
When calculating premiums for continuation coverage, a plan can include costs paid by both employee and employer, plus an additional 2 percent for administrative expenses. Additionally, for qualified beneficiaries receiving the 11-month disability extension, plans can increase premiums for those additional months to 150 percent of the plan’s total cost of coverage.
Plans may increase COBRA premiums for qualified beneficiaries if the cost to the plan increases. But, in general, plans must fix premiums before each 12-month premium cycle. The plan must allow qualified beneficiaries to pay the required premiums on a monthly basis if they ask to do so and may allow payments at other intervals (for example, weekly or quarterly). The COBRA election notice should describe all necessary information about COBRA premiums when they’re due, and the consequences of payment and nonpayment.
Plans cannot require qualified beneficiaries to pay a premium when they make the COBRA election. Similarly, plans must provide at least 45 days after the election for making an initial premium payment. If a qualified beneficiary fails to make any payment before the end of the initial 45-day period, the plan can terminate the qualified beneficiary’s COBRA rights. The plan should establish due dates for any premiums for subsequent periods of coverage, but it must provide a minimum 30-day grace period for each payment.
Plans can terminate continuation coverage if full payment isn’t received before the end of a grace period. If the amount of a payment made to the plan is correct but isn’t significantly less than the amount due, the plan must notify the qualified beneficiary of the deficiency and grant a reasonable period (30 days is considered reasonable) to pay the difference. The plan isn’t obligated to send monthly premium notices but must provide a notice of early termination if it terminates continuation coverage early due to failure to make a timely payment.
Employer Penalties for Violating COBRA
There are multiple potential penalties for employers who fail to comply with COBRA.
IRS Excise Tax Penalties
The IRS is authorized to assess an excised tax penalty for an employer’s failure to follow COBRA guidelines. Employers get a 30-day grace period to correct a violation that was due to negligence or was accidental. If the IRS does levy an excise tax on the employer, the minimum is the greater of $2,500 for each beneficiary affected by the rule violation or $100 per day during the employer’s period of non-compliance.
In certain circumstances, in which the IRS determines the violation wasn’t minimal, employers may be subject to a penalty of up to $15,000. The IRS regulations also set a cap for the maximum excise tax an employer can pay in one year. This cap is the lesser of 10 percent of the employer health plan costs in the previous year, or $500,000.
The Department of Labor (DOL) can also levy penalties for COBRA violations. COBRA falls under the DOL’s jurisdiction, as they administer the Employee Retirement Income Security Act (ERISA). It’s important to note the DOL only has jurisdiction over COBRA notification and disclosure provisions. The DOL has established a per diem penalty for employers failing to comply with COBRA notification and disclosure rules. ERISA penalties accrue at $110 per day, per violation.
In addition to these government-issued penalties, an employee may bring a private civil action for violations of COBRA in either state or federal court. If an employee or beneficiary is successful against an employer in court, he/she can obtain a variety of monetary damages including:
- Medical expenses
- Monetary awards, and
- Attorney’s fees
Additionally, a court can award a beneficiary injunctive relief, which means the court can order the employer to do or stop doing something that’s injuring the beneficiary.
How do You Avoid COBRA Penalties?
Here are the seven most common COBRA administration errors according to the Society for Human Resource Management (SHRM).
- Not realizing a group health plan is subject to COBRA.
- Failing to offer COBRA when required.
- Complying with only federal law and ignoring any applicable state COBRA (mini-COBRA).
- Failing to provide required notices (or sending them late) to the employee and other qualified beneficiaries.
- Treating employees on COBRA differently from similarly situated employees who aren’t on COBRA.
- Charging an incorrect COBRA premium.
- Misunderstanding how an employee’s entitlement to Medicare affects COBRA coverage.
You should now understand paying for COBRA continuation coverage and how your organization could pay itself, for failure to comply with the law. Make sure to return to these four COBRA-related articles when questions about the act pop up. And, if you need extra help with this law, contact our compliance expert, Roxy Kolev, today!