The health provisions of COBRA, the Consolidated Omnibus Budget Reconciliation Act, require most group health plans to offer continuation coverage to beneficiaries who would otherwise lose coverage due to specific “life events,” such as divorce or job termination. Beneficiaries can include covered employees, former employees, spouses, former spouses, and dependent children.
COBRA generally applies to employers that had at least 20 full-time equivalent employees on more than 50 percent of typical business days in the previous calendar year. COBRA also applies to plans sponsored by state and local governments, but not to plans sponsored by the federal government or by churches and certain church-related organizations.
Anyone who does not qualify for Medicare can now buy individual coverage regardless of pre-existing health conditions, thanks to the Affordable Care Act. Despite the availability of individual coverage, the Affordable Care Act specifically protects COBRA rights.
When an eligible individual elects to continue group coverage through COBRA, the employer or plan sponsor can require beneficiaries to pay the full cost of coverage, plus 2 percent for administrative expenses. Although COBRA coverage is often more expensive than individual plans on the insurance exchanges, people might opt to elect COBRA coverage when their employer-sponsored coverage ends for several reasons.
First, employer-sponsored plans frequently provide broader coverage and cover more services than an exchange plan. When doing an apples-to-apples comparison, the employer-sponsored plan might be a better value.
Second, exchange plans often have limited provider networks. A person who wants to use his/her existing providers might opt to stay on an employer-sponsored plan. And finally, people undergoing treatment when their coverage terminates might opt to stay on their existing plan to ensure continuity of coverage.
COBRA Beneficiaries Cost You
All these factors make COBRA beneficiaries the type of people who cost more to insure. And that’s not good for your bottom line.
That extra 2 percent you get for administering COBRA plans doesn’t go far. One third-party administrator estimated that a staff person handling COBRA administration in-house spends at least one hour per month per COBRA beneficiary.
The more beneficiaries on your plan, the more likely a mistake is to occur, which can lead to fines and even lawsuits. Group plans must provide beneficiaries with a specific set of notices regarding their rights to COBRA continuation coverage when they have a “qualifying event.” If you have a fully insured plan, your insurer may handle these notices. However, if you fail to notify the insurer of the qualifying event, you could be liable for fines of up to $110 per day.
In addition, failure to comply with COBRA recordkeeping and reporting requirements can lead to IRS plan audits and fines of $100 per day, per participant. Failure to comply can also lead to civil lawsuits by former covered employees or qualified dependents who lack insurance coverage because they failed to receive proper notices or were wrongly denied their rights under COBRA.
What to Look for in a COBRA Audit
An eligibility audit can help you weed out individuals who no longer qualify for coverage. COBRA coverage generally lasts a maximum of 18 months for employment termination or reduction of hours of work. If the covered employee becomes disabled while on COBRA, that individual and covered dependents may qualify for an additional 11 months of COBRA continuation coverage if certain requirements are met. A covered employee’s spouse who would lose coverage due to a divorce may elect continuation coverage under the plan for a maximum of 36 months.
Employers or their plan administrators can require COBRA beneficiaries to provide proof of eligibility. This might include copies of a marriage certificate, birth certificate or adoption final decree or affidavits of dependency, along with a copy of the top half of the first page of the employee’s Form 1040 tax return, showing the spouse’s or dependent’s name. In the case of disability, the plan administrator can require certification from the insured’s physician. For beneficiaries qualifying for SSDI (Social Security Disability Insurance), the COBRA administrator must get a copy of the Notice of Award letter from Social Security within 60 days of the award.