Archive for the 'COBRA' Category

Is Your ERISA Plan Up-to-Date?

May 29th, 2008

The Employee Retirement Income Security Act was enacted in 1974.  Since then, more than 75 laws have been passed that affect employee benefit plans and the protections afforded them by ERISA.  Many of these subsequent laws have mandated extensive changes to benefit plans.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

  • National Defense Authorization Act (NDAA) – amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
  • Pension Protection Act of 2006 (PPA) –  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
  • American Jobs Creation Act of 2004 (AJCA) – provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
  • Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) – expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
  • Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
  • Health Insurance Portability and Accountability Act of 1996 (HIPAA) –  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
  • Older Workers Benefit Protection Act of 1990 (OWBPA) – allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
  • Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) –  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
  • Pregnancy Discrimination Act of 1978 (PDA) – requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

How Hard Can COBRA Bite?

May 15th, 2008

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) provides qualified individuals with the right to continue certain employee benefits under specific circumstances.  Generally, COBRA applies to all employers who had 20 or more employees (full and part time) for 50% of the preceding calendar year.

The IRS is authorized by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) to assess excise taxes for COBRA failures.  Under TAMRA, the IRS is given the ability to waive the excise taxes if it determines that the failure stems from reasonable cause rather than willful neglect on the part of the employer.  In making this determination, the IRS considers 4 factors:

  • Whether the program provides for proper training of individuals responsible for COBRA operational compliance.
  • Whether the program has written instructions detailing COBRA procedures.
  • Whether the program was designed based on competent professional advice and is updated regularly for changes in the law and/or employer’s situation.
  • Whether the program is monitored by an independent auditor.

If these factors are present and the violations are corrected within 30 days, the IRS can waive the excise taxes for the COBRA violations.  However, if the TAMRA factors are not present in a program, the IRS most likely will not waive any applicable excise taxes.  Any excise tax penalty imposed by the IRS is usually the responsibility of the employer.  Courts have found that outsourcing COBRA administration does not necessarily protect employers from liability under ERISA and related laws.

The excise taxes that the IRS may impose for COBRA non-compliance include $100 per day for each beneficiary affected, with a cap of $200 per day, per family if more than one qualified beneficiary is impacted.  The “non-compliance period” is measured from the date of failure to the earliest of (1) the date of correction or (2) the date 6 months after the last day of the otherwise applicable COBRA coverage period.  The maximum liability for any employer is the lesser of $500,000 or 10% of the total costs of providing group health coverage for the preceding year.

If an employer with 50 single employees violates COBRA requirements for all of its current employees, and the non-compliance period is for 1 calendar year, the IRS excise tax calculation would be:

# of affected employees X per day tax amount X # of days in non-compliance period = total excise tax

 which in this case would be:   50 X $100 X 365 = $1,825,000

As this amount exceeds the maximum liability, it should be capped at the lesser of $500,000 or 10% of the prior year’s total group health care costs.  But even with the maximum cap, the IRS penalties can be significant.

The IRS estimates that as many as 90% of all employers subject to COBRA have plans that do not comply with all COBRA requirements.  The IRS conducts audits of thousands of employee benefit plans each year, many of which include auditing for COBRA non-compliance.  Employers should work with their benefits counsel to ensure that their COBRA programs are designed and administered to comply with the TAMRA “factors” that allow for the waiver of IRS excise taxes if a non-compliance violation should occur.

Who Is Required to Provide COBRA Notice – the Employer, the Insurer or the Third-Party Administrator?

April 29th, 2008

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 provides rights for continuation of health coverage to workers and their qualified beneficiaries for specified periods of time when they lose health coverage under certain defined circumstances.  Administration of this far reaching legislation can be fraught with pitfalls for the unwary employer. 

One of the ways that employers try to manage the administrative burdens which COBRA imposes is to outsource administration to insurers or Third-Party Administrators (TPA).  Sometimes the division of duties between the parties is not always clear – to the parties themselves as well as to the employees.

Some of the notice requirements that must be met are:

  • A General Notice of Continuation Coverage – Under this requirement, among other things, notice is required to be provided to every new employee and his or her spouse. Notice must be given within 90 days after the date the individual first becomes eligible for coverage.
  • A Notice of Right to Elect Continuation of Coverage to Qualified Beneficiaries – This notice must be provided to a covered employee or qualified beneficiary within 14 days of notice of a qualifying event as defined under COBRA.
  • A Notice of Unavailability of Continuation Coverage – Under this requirement, notice must be provided within 14 days of notice of a qualifying event or a second qualifying event where a determination is made that the individual affected by the event is not eligible for the continuation requested. 
  • A Notice of Early Termination of Continuation Coverage – This notice must be provided as soon as practicable if the continuation coverage will terminate earlier than the period available under COBRA. The notice must specify the reason for the termination, the date the coverage will end and the rights the individual may have to elect other coverage.

Some states have additional requirements that must be met.  In general, the employer has the duty to provide the notice, but the regulations allow the responsibility to be outsourced.  When an employer does outsource administrative responsibilities, the employer then has a requirement to provide notice to the administrator within 30 days of qualifying events such as:

  • Termination of an employee,
  • A reduction in the work hours of an employee,
  • Death of an employee,
  • An employee becoming entitled to Medicare, or
  • Bankruptcy of the employer (to retired employees)

In a recent Nevada case, one of the issues the court considered was whether the TPA could escape liability for not notifying an insurer to continue an individual’s benefits after the individual made a timely notification under COBRA.  In Hecht v. Summerlin Life and Health Ins. Co., the TPA argued that they did not have a duty to notify the Insurer “because only employees, employers, beneficiaries, group health plans, administrators, and sponsors have notification responsibilities” under COBRA. 

The TPA argued that due they should therefore be dismissed from the case.  However, the court did not allow the dismissal, finding that there were sufficient allegations by the insurer that the TPA was an agent of the employer and could have had an obligation to provide the notice to the insurer.

While there is no final resolution of this case yet, employers, insurers and TPAs should continue to watch how this and other decisions evolve.  COBRA administration can be very labor-intensive for employers, so outsourcing the process can be very appealing.  If an employer chooses to outsource the administration of the COBRA process, the responsibilities of both the employer and the TPA/insurer need to be clearly defined. 

Generally, liability for COBRA compliance will fall on the employer as the plan sponsor, so the service contract should specifically address each party’s responsibilities for notification of continuation rights.  Additionally, employers should ensure that anyone to whom they delegate authority has appropriate procedures in place and that there are safeguards in place so that proper notice is provided.  Benefits counsel can assist employers in making certain that their contracts with benefits service providers clearly divide and define responsibilities for the employer’s maximum protection.

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