What is the appropriate correction when, due to an administrative error by the employer or COBRA vendor, a COBRA participant has been charged incorrect premium rates?

Generally, if the plan documents and COBRA election notices clearly provide that COBRA premiums will be 102% of the applicable premium, and if there has been a clear or mathematical error which results in an undercharge for COBRA coverage, it is likely permissible to correct the error on a prospective basis.

Specifically, the IRS COBRA regulations state that if a plan is charging less than the maximum permitted amount, it may increase its rates to that level. Thus, it’s widely understood that the employer is allowed to make the change to increase the premiums going forward. That said, there isn’t specific guidance as to how the employer should specifically engage in such a correction. The intent would be to put the COBRA participants and beneficiaries back in the position that they would’ve been had the employer not made the mistake.

If a COBRA participant has already elected COBRA under the presumption of the incorrect amount, the conservative position would be to renotify each COBRA participant who was incorrectly informed so that they are made aware of the correct premium amount. They would then charge the appropriate amount going forward.

As for correcting the undercharge retroactively, there is no explicit guidance on collecting a shortfall (that is, retroactive collection). The regulations do not appear to specifically allow or prohibit it. The employer could explain the mistake to each impacted COBRA participant and ask for the shortfall payment. But if the COBRA participant refused and the employer wanted to demand retroactive payment, they would not likely have statutory grounds to collect it. So, collecting shortfalls as a result of a mistake may be problematic, both in success as well as the administrative burden on either the employer or the COBRA vendor. Thus, if an employer wants to proceed in retroactive collection, they’d be best served by speaking with outside counsel for guidance.