Don’t Inadvertently Create COBRA Liability

As the COVID-19 crises continues, I am receiving more and more calls to assist businesses in downsizing, either through layoffs or significant reduction in hours.

There are so many moving parts in that process that it can be easy to lose sight of your obligations under COBRA, and that can lead to expensive mistakes. 

Both the Department of Labor and Internal Revenue Service have the authority to impose civil penalties if employers fail to provide compliant COBRA notices. The DOL can impose civil penalties up to $110 per day per person and the IRS can impose an excise tax of $100 a day per beneficiary and $200 a day per family, until employees receive an adequate notice.  

In addition, employers can face literally millions of dollars in damages in class action litigation. Just last week, a Fortune 500 company settled a class action lawsuit relating to deficient COBRA election notices for US$1.6 million dollars. More than two dozen class action COBRA notice lawsuits have been filed year to date, and we expect many more to be filed as the courts open up for business.  

You will notice that I refer to compliant, adequate and deficient notice. That is because merely providing notice is not enough; employers must provide the specific notice required in the Act.  

The COBRA notice requirements are fairly clear. An employer subject to COBRA is required to notify its group health plan administrator within 30 days after an employee suffers a qualifying event. Within 14 days of that notification, the plan administrator must notify the individual of his COBRA rights. If the employer is also the plan administrator and issues COBRA notices directly, the employer has 44 days to issue the COBRA notice.

COBRA election notices must be written in a manner calculated “to be understood by the average plan participant” and include: 

  • The name of the plan and the name, address, and telephone number of the plan’s COBRA administrator; (Several class action suits have been filed recently arguing that providing the general HR telephone number does not satisfy this element.)
  • Identification of the qualifying event;
  • Identification of the qualified beneficiaries (by name or by status);
  • An explanation of the qualified beneficiaries’ right to elect continuation coverage;
  • The date coverage will terminate (or has terminated) if continuation coverage is not elected;
  • How to elect continuation coverage;
  • What will happen if continuation coverage isn’t elected or is waived;
  • What continuation coverage is available, for how long, and (if applicable), how it can be extended for disability or second qualifying events;
  • How continuation coverage might terminate early;
  • Premium payment requirements, including due dates and grace periods;
  • A statement of the importance of keeping the plan administrator informed of any new addresses of qualified beneficiaries; and
  • A statement that the election notice does not fully describe COBRA or the plan and that more information is available from the plan administrator and in the summary plan description.

 Keep in mind that the use of a third-party administrator to issue COBRA notices does not mitigate an employer’s risk of noncompliance. You will be liable for the TPA’s failure. Ideally, employers should draft their agreements with their TPA’s to provide for indemnification of the employer for the TPA’s failure to comply with the current COBRA requirements.

If you act as your own plan administrator, the DOL has provided a model COBRA notice and considers use of the model notice to be good faith compliance with the general notice content requirements of COBRA.

As always, stay safe and don’t hesitate to call if you have any questions.

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