What are the most common COBRA mistakes made by employers?

Even though COBRA has been around since 1985, it’s still fairly easy for an employer to get tripped up by its extensive requirements. Whether an employer utilizes a third party to administer COBRA or it administers the requirements in-house, compliance is ultimately the employer’s responsibility.

As a reminder, COBRA applies to employers who average 20 or more employees in the previous calendar year. Governmental entities and churches are exempt.

So, what are the most common mistakes that we see employers make when it comes to COBRA?

COBRA Initial Notice

Most employers are familiar with the COBRA Election Notice that needs to be sent to participants who have lost eligibility under the plan. However, many are not in compliance with another COBRA notice requirement — the COBRA Initial Notice.

This notice informs newly enrolled employees and spouses of their rights under COBRA as it applies to their group health plan. It also details how they must notify the plan within 60 days of a divorce or child ceasing to be eligible under the terms of the plan.

The notice must be distributed to employees and spouses anytime they become newly enrolled in the plan. This includes all of the following scenarios:

  • After a newly hired employee enrolls
  • When a previously waived employee enrolls during open enrollment
  • Following an employee adding a new spouse upon marriage
  • After an employee enrolls him/herself and a spouse mid-year due to a qualifying event

Most employers remember to send the notice to newly hired employees upon enrollment but forget or are unaware of the requirement to send the notice following the other occurrences. Other employers distribute the notice in a manner that does not ensure that the spouse also receives it (such as via intranet or email).

It’s important to comply so that the employer may enforce the 60-day deadline when an employee provides late notice of a divorce. Consider an employee who notifies the plan of her divorce four months after a divorce. If the notice had been previously provided to the employee, the ex-spouse would not be offered COBRA because of the late notification. However, if the employer cannot prove that it ever sent the Initial Notice to the employee and spouse, then the plan may be required to provide COBRA to the ex-spouse regardless of when the plan was notified. Further, an insurer or stop-loss carrier can deny claims for the ex-spouse because of the employer’s non-compliance, which may leave the employer self-insuring the ex-spouse’s claims.

If an employer hasn’t been in full compliance with this requirement, it’s recommended that the employer send the Initial Notice to all currently enrolled employees and spouses to catch up. Then, the notice could be sent prospectively to all newly enrolled employees and spouses for ongoing compliance.

Health FSA and COBRA

Health FSAs are a COBRA-eligible benefit. However, COBRA is only offered for participants who have a health FSA balance upon losing eligibility for the plan (also called an underspent account). The applicable premium would be the employee’s regular monthly health FSA contribution plus the two percent administrative fee, if selected by the employer.

The health FSA may only be continued through COBRA through the end of the plan year. In other words, the participant isn’t given the opportunity to make a new election during open enrollment. There’s a limited exception to this rule. If the employer has adopted the rollover provision for the plan and the participant has funds remaining at the end of the plan year, the participant may continue participation into the new plan year in order to spend down the rollover funds. A premium would not be charged in Year 2, as the employee has already contributed the funds for the rollover amount.

Remember, an employee who has waived coverage in the employer’s group medical plan but enrolls in the health FSA should still receive a COBRA Initial Notice in regards to the health FSA.

Open Enrollment Rights

A qualified beneficiary who is continuing coverage of any benefit through COBRA has the same open enrollment rights as active eligible employees. For example, a COBRA beneficiary who is continuing coverage for self-only medical has the right to add employee plus family dental coverage during open enrollment if active employees have the same right.

These are just some of the common mistakes that NFP’s Benefits Compliance team regularly sees employers make. If you’d like additional information on any of these requirements or have other questions, please contact your advisor for assistance.