In today’s economy, health care brokers are taking a hard look at how much time they devote to benefits administration services that don’t produce much revenue or enhance their role as consultants.
For many brokers, COBRA-the Consolidated Omnibus Budget Reconciliation Act-is at the top of that list of services. With its many technical rules and notice requirements, COBRA has never been an easy benefit to manage. But it has become even more complex due to a series of wide-ranging legislative and regulatory changes over the past few years.
New Rules, New Headaches
At many companies, short staffed human resource departments-thinned out by recession-induced layoffs-struggle to cope with the new rules that enable eligible individuals to pay only 35 percent of their COBRA health care premiums during specified time periods. Subsequent laws have extended these time periods.
In addition, the impact of the recently enacted health care reform law upon COBRA has yet to be fully assessed, but the requirement that employers offer health coverage to employees’ dependents up to age 26 will also apply to those on COBRA. And there is a possibility that Congress may continue to extend the COBRA subsidy period or make other amendments.
COBRA-like state laws offering continuation of health coverage are another moving target that few brokers or employers are equipped to monitor.
COBRA Basics
Under COBRA, employers with 20 or more employees who provide group health coverage are generally required to offer that coverage upon the occurrence of certain events to current, former and retired employees and their spouses and dependent children.
In practice, the law enables employees to continue receiving health coverage at group rates for up to 18 months when they are terminated, or their hours are reduced to a level below that required for benefits eligibility. Until the recent changes to COBRA, terminated employees typically were responsible for paying the entire premium. The employee’s spouse and dependent children may also receive extended coverage, which could run up to 36 months upon the occurrence of certain events.
State continuation laws often vary from COBRA. For example, some cover companies with as few as two workers. And some are more generous than COBRA with respect to qualifying events such as disability, divorce or death.
Additionally, certain types of account-based health benefits such as flexible spending accounts and health reimbursement arrangements are subject to COBRA.
Not Part of the Job Description
The recent changes to COBRA-some of which took effect immediately-caused many brokers’ phones to ring off the hook with questions from confused clients.
For example, the Department of Defense Appropriations Act (2010 DOD Act) changed the length of the subsidy period from nine to 15 months on December 19, 2009, the date it was enacted. Brokers and their clients scrambled to determine which qualified beneficiaries could re-enroll in COBRA and pay the applicable premiums. They also had to figure out who needed to be notified of the extension and by when.
Consider this complex, but not atypical, situation faced by a broker and his client:
When Susan’s weekly hours were reduced from 40 to 20 hours last February, she was no longer eligible for health benefits. Her benefits officially terminated as of February 28 under her company’s plan. Her employer determined that this was a “COBRA-qualifying event,” so she was mailed a notice of COBRA eligibility and she began paying premiums to continue coverage for up to 18 months starting March 1.
Susan then got a new full-time job in April, two months into her 18-month timeline. So, under the 2010 DOD Act, the 15-month period in which she had to pay only 35 percent of the premium started on May 1 and will end on August 31, 2011.
Susan’s situation consumed several hours of the broker’s time in reviewing the IRS regulations and identifying when the time frames began and when to mail the notice.
Minimize Hassles
Employers who try the do-it-yourself approach not only find themselves dedicating valuable resources to fielding ongoing queries from befuddled employees, they also face potential fines from government agencies for mishandling COBRA administration.
The Internal Revenue Service can assess employers up to $100 per day per qualified beneficiary involved and the U.S. Labor Department may impose up to $110 per day per participant in statutory penalties for every day they are late in giving mandated notices explaining COBRA rights to covered employees and their families. Thus, an employer who is two months late in giving COBRA election notices to eight qualified beneficiaries could be hit with more than $100,000 in penalties.
Failure to comply with the law can be very costly. Accordingly, when it comes down to broker dealer registration, broker deal registration is required to ensure that all business-related matters are carried out in accordance with the law at all times. For example, suppose the human resources department sends the COBRA packet (the explanation of benefits and application form) a month late to a recently laid off employee. He elects COBRA coverage and then suffers a disabling injury, leading to multiple surgeries and hospital bills totaling nearly $1 million. When the carrier discovers the error, it declines to pay the claim, since the policy excludes coverage for claims not in full compliance with COBRA. That means the employer will be responsible for paying the claim.
Ask the Right Questions
All this adds up to an inescapable conclusion: Brokers should consider recommending a third-party COBRA administrator to their clients, particularly those that don’t have a dedicated employee who manages COBRA and state continuation laws.
Suggesting the engagement of a third party can help brokers strengthen client relationships and reinforce their roles as strategic benefits consultants. If brokers recommend a third party, however, they must conduct thorough due diligence to make sure the third-party COBRA administrator is experienced and competent.
Questions to ask an administrator include:
• Can I see your compliance action plan?
• What was your process for ensuring compliance with the new regulations?
• Did you meet the various deadlines mandated by the regulations?
• Did you send out required re-notification letters as required by the regulations?
• How many letters did you send?
• Can I see a summary of the letters’ contents?
• Do you handle both COBRA and state continuation laws (if the client is seeking state continuation services)?
For many employers and brokers alike, managing COBRA has reached the point of no return. As the president of an agency that had three employees solely dedicated to serving the COBRA needs of a one-thousand life group recently told us, “We have to get rid of this burden.”
Brokers can greatly enhance their value by recommending to their clients an experienced third-party COBRA administrator with a strong track record.
This communication is not intended as legal or tax advice. Please contact a competent legal or tax professional for personal advice on eligibility, tax treatment and restrictions. Federal and state regulations are subject to change. The information and comments expressed herein reflect the personal views of the author, and may not necessarily represent the views of OptumHealth Financial Services.
