Question:  How should an employer correct a failure to timely provide the COBRA election notice to qualified beneficiaries?

Compliance Team Response:

Background: Why Providing the COBRA Election Notice Matters

Employers that discover a failure to timely provide COBRA election notices will always want to correct that failure for two primary reasons:

• IRC §4980B Excise Tax: $100/$200 Per Day Late and IRS Form 8928 Reporting

This section of the tax code imposes an excise tax of $100 for each day the election notice is late.  The excise tax increases to $200 per day if there is more than one affected individual for that qualifying event (e.g., spouse, child).  Employers must self-report this excise tax liability on IRS Form 8928.

Employers avoid this excise tax and the associated reporting obligation on Form 8928 if a) the failure is due to reasonable cause and not due to willful neglect, and b) the failure is corrected during the 30-day period beginning on the date the failure was discovered (or, if earlier, the date the failure should have been discovered using reasonable diligence).  Accordingly, it is crucial that employers use reasonable diligence to discover errors, and then correct the failure within 30 days of discovery.

• Potential Lawsuit Liability: Self-Funding Covered Medical Expenses

Failure to provide the COBRA election notice also gives rise to a potential lawsuit from the affected qualified beneficiaries.  Qualified beneficiaries with medical expenses that would have been covered by COBRA could sue the employer for the amount the plan would have paid during the COBRA period (typically reduced by the amount of COBRA premium the qualified beneficiaries would have paid).

In these situations, it is unlikely that the insurance carrier (fully insured plan) or stop-loss provider (self-insured plan) would be willing to pay the plan benefits awarded.  Therefore, the employer would in most situations be responsible for fully self-funding the eligible expenses incurred by the qualified beneficiaries.  Needless to say, this could create the potential for very high-cost claim payments owed by the employer.

Step-By-Step Approach To Correcting Failure to Timely Provide COBRA Election Notice

• Step 1: Determine How Far Back the Error Occurred

The first step is to determine the date range for which the COBRA election notice failure applies.  This is important for coordinating each following step.

• Step 2: Contact Insurance Carrier (Fully Insured) or Stop-Loss Provider (Self-Insured)

The next step is to receive confirmation from the insurance carrier (fully insured plan) or stop-loss provider (self-insured plan) that they will provide COBRA coverage for the qualified beneficiaries at issue.  Insurance carriers and stop-loss providers generally include contractual provisions in their agreements with employers that limit their responsibility to provide COBRA to only situations where the proper COBRA election notice is timely provided.

The insurance carrier and stop-loss provider will in most cases agree to provide coverage for a qualified beneficiary where the COBRA election notice is late.  However, if there is a pattern of abuse or a situation where the failure stretches back for a long period, it is not uncommon for the insurance carrier or stop-loss provider to deny coverage.  The timing gap can create significant adverse selection issues that would affect the insurance carrier or stop-loss provider in these situations.

If the insurance carrier or stop-loss provider refuses to provide COBRA coverage, the employer is still responsible for providing the election notice.  However, the employer needs to be aware that if the qualified beneficiary elects COBRA and incurs covered expenses, the employer will be responsible for self-funding those claims.  In some situations, the employer’s benefits administration system or COBRA third-party administrator (TPA) is at fault for the failure.  If that’s the case, there may be contractual provisions in the agreement with the vendor obligating them to indemnify the employer for all or a portion of the expenses.

• Step 3: Determine When COBRA Coverage Will Be Effective

In nearly all situations other than removal of a spouse in anticipation of divorce or failure to pay the required premium during leave, COBRA provides continuous and seamless coverage retroactive to the date active coverage ended.  That will also be the case in most situations where the COBRA election notice is not timely provided.

However, in some situations where a long period has elapsed between the loss of active coverage and the subsequent corrected late COBRA election notice, it will make more sense to provide coverage beginning at or near the month in which the corrected notice is provided.  In these situations, generally the 18-month or 36-month COBRA maximum coverage period would begin as of the prospective start date of COBRA coverage (not the original loss of active coverage date).  Again, these are issues that employers must carefully coordinate with the insurance carrier or stop-loss provider for their approval.

• Step 4: Determine How to Address Retroactive Period of Coverage (Where Applicable)

The general rule for COBRA qualified beneficiaries is they have 45 days from the date of their COBRA election to make the first premium payment retroactive to the loss of active coverage.  However, where the COBRA election notice is not timely provided, this can place an unreasonable cost on the qualified beneficiary to pay a large lump sum premium for the extended duration of retroactive coverage.  (This applies only where COBRA coverage will be retroactive, which is usually the case per Step 3.)

Employers have a number of options for how to address this issue.  The first would be for the employer to simply cover the COBRA premium cost for the retroactive period of coverage.  Another would be for the employer to provide an extended grace period to the qualified beneficiary (i.e., longer than 45 days).  Employers might also create a payment plan that permits the qualified beneficiary to spread the cost over a longer timeframe.

• Step 5: Coordinate Distribution of COBRA Election Notice with TPA

The vast majority of employers rely on a COBRA TPA to provide initial and election notices.  The employer will want to work with the COBRA TPA to ensure that they distribute the COBRA election notice to the affected qualified beneficiaries within 30 days of the discovery of the failure (or, if earlier, the date the failure should have been discovered using reasonable diligence) to avoid the §4980B excise tax and Form 8928 reporting described above.

In this situation, the COBRA election notice should address the issues surrounding the late provision.  The notice form should describe when coverage would be effective if elected, the duration of the maximum coverage period, if/how the qualified beneficiary is required to pay the premium for the retroactive period, and any other concerns unique to the special circumstances.

Note: In situations where the cause of the employer’s failure to timely provide the COBRA election notice was that the employer inadvertently continued active coverage, see here for full details on how to address: https://theabdteam.com/blog/terminated-employees-not-terminated-coverage/

Regulations

IRC §4980B(b)(1):

(b) Amount of tax.(1) In general.

The amount of the tax imposed by subsection (a) on any failure with respect to a qualified beneficiary shall be $100 for each day in the noncompliance period with respect to such failure.

IRC §4980B(c)(3)(B):

(B)  Special rule where more than 1 qualified beneficiary. If there is more than 1 qualified beneficiary with respect to the same qualifying event, the maximum amount of tax imposed by subsection (a) on all failures on any day during the noncompliance period with respect to such qualified beneficiaries shall be $200.

IRS Form 8928 Instructions:

https://www.irs.gov/pub/irs-pdf/i8928.pdf

Line 21. No tax is due for any failure under Part II, Section A, if it is established to the satisfaction of the Secretary of the Treasury that no one liable for the tax knew, or exercising reasonable diligence would have known, that the failure occurred. Additionally, no tax is due if the failure under Part II, Section A, was due to reasonable cause and not due to willful neglect and the failure was corrected during the 30-day period beginning on the first date anyone liable for the tax knew, or exercising reasonable diligence would have known, that the failure existed.

For this purpose, a failure is treated as corrected if the failure is retroactively undone to the extent possible and the person to whom the failure relates is placed in a financial position which is as good as such person would have been in had the failure not occurred.

Shade v. Panhandle Motor Serv. Corp., 91 F.3d 133 (4th Cir. July 11, 1996):

A fiduciary that breaches the fiduciary duties owed a plan participant is personally liable “to make good to such plan any losses to the plan resulting from each such breach, . . . and shall be subject to such other equitable or remedial relief as the court may deem appropriate.” 29 U.S.C. § 1109(a) (1988). The district court found that, in this case, the appropriate remedy was to restore Stephens to the position he would have occupied but for Panhandle’s breach of its fiduciary duty. See Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985). Accordingly, the court ordered Panhandle to reimburse Stephens for all medical expenses incurred between March 1991 (the date on which his Blue Cross coverage terminated) and April 1993 (the date Stephens became eligible for Medicare benefits). Stephens’ documentation revealed that he incurred $ 124,542.89 in medical expenses between March 1991 and April 1993. The district court subtracted from that total $ 1,734.72 in insurance premiums that Stephens would have had to pay Panhandle’s group health plan during that time. Accordingly, the district court properly ordered Panhandle to reimburse Stephens for medical expenses in the amount of $122,808.17.