Cobra In order for planadministrators to protect themselves and the plan's assets, a realunderstanding of the COBRA-required qualifying event is needed.(Photo: Shutterstock)

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The Consolidated Omnibus Reconciliation Act (COBRA) requires employers to offer continuationcoverage to qualified beneficiaries who lose group health plancoverage as a result of certain events.

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For the most part, administration of COBRA continuation coveragecan appear relatively simple. For instance, administering COBRAcontinuation coverage for a terminated employee or a dependent thatreaches age 26 doesn't typically require additional considerations.Unfortunately, things are not always so cut and dry.

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Related: 10 mistakes to avoid in your employeehandbook

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As we all eventually learn, it is not the simple and practicaloccurrences that cause us headaches, but rather it's the atypicalsituations that ultimately lead to our need for Tylenol or Advil.This proves especially true when considering COBRA continuationcoverage and the major issues that can result when that coverage isnot properly administered by an employer who self-funds its owngroup health plan.

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Plan sponsors in the self-funded world play a dual role when itcomes to COBRA continuation coverage. Plan sponsors are subject tocertain notice requirements as the employer; and are subject tonotice and coverage requirements as the plan administrator.Regardless of the duties imposed by COBRA itself, a planadministrator also has a fiduciary obligation to prudently managethe plan's assets. Part of this obligation is to only pay forcovered claims for eligible individuals, as defined by theplan.

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Failing to properly offer or administer COBRA continuationcoverage can often lead to problems for plan administrators. A planadministrator may breach their fiduciary obligation, expose themselves topenalties under ERISA, and risk losing stop-loss reimbursements ifCOBRA is not properly administered.

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In order for plan administrators to protect themselves and theplan's assets, a real understanding of the COBRA-requiredqualifying event is needed.

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The conventional understanding of a COBRA qualifying event isthat if a listed event occurs, COBRA continuation coverage must beoffered. COBRA lists the following occurrences that could beconsidered qualifying events:

  • Voluntary or involuntary termination of the covered employee'semployment other than by reason of gross misconduct;
  • Reduction of hours of the covered employee's employment;Divorce or legal separation of the covered employee from theemployee's spouse;
  • Death of the covered employee;
  • A dependent child ceases to be a dependent under the generallyapplicable requirements of the plan;
  • A covered employee becomes entitled to benefits under Medicare;and
  • An employer's bankruptcy, but only with respect to healthcoverage for retirees and their families.

What plan administrators often overlook, is that in order forany of the above occurrences to be considered a qualifying eventunder COBRA, the occurrence must also cause a loss of plancoverage. The COBRA regulations state, "to lose coverage means tocease to be covered under the same terms and conditions as ineffect immediately before the qualifying event."

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In most cases, a plan will include language that accounts for aparticipant's loss of eligibility due to a qualifying event, buteven when a plan provides this language, the employer who sponsorsand administers the plan may either intentionally or inadvertentlypostpone the individual's loss of coverage thereby muddying thewaters as to when plan coverage becomes COBRA continuationcoverage.

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A deferred loss of coverage does not in and of itself causeissues in regards to COBRA continuation coverage. It is compliantand sometimes beneficial for a plan sponsor to defer anindividual's loss of coverage after a qualifying event. COBRAissues will ultimately arise when an employer makes decisions aboutan individual's eligibility for coverage without regard to theirduties as the plan administrator. For example, if an employee isterminated but then negotiates a severance agreement that includeshealth plan coverage, is that continued coverage considered COBRAcoverage or does the individual simply maintain their eligibilityon the plan, despite the plan's opposing language? Anotherpossibility is that a lack of internal communication following aqualifying event could cause a plan sponsor to inadvertently leavean otherwise ineligible individual on the plan until the error wasrealized.

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For self-funded plans that include eligibility languagerestricting coverage to full-time employees and their dependents,allowing an individual to maintain coverage on the plan despite aqualifying event may give rise to significant issues for theplan.

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Firstly, as mentioned previously, the employer is required toprovide notice to the plan when a qualifying event occurs. Further,the plan administrator is then required to offer COBRA continuationcoverage to the qualified beneficiary. When the employer is theplan sponsor, and playing the dual role, failing to provide therequired notices and offers of coverage could subject the plan topenalties under ERISA.

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Second, when the plan continues to pay claims for individualswho are no longer eligible for coverage, there is an argument to bemade that the plan administrator is not prudently managing theplan's assets. If a plan participant brought a cause of actionagainst the plan administrator for a breach of fiduciary duty, theplan could be at risk to pay significant damages as a result.

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Finally, stop-loss policies will typically contain language thatexcludes reimbursement for both claims that are not incurred byeligible participants (as defined by the plan) and claims incurredwhen COBRA continuation coverage is not offered in accordance withthe regulations. In instances where the employer eitherintentionally or inadvertently leaves an individual on the plandespite their loss of eligibility, stop-loss is highly unlikely toreimburse those claims.

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Another unfortunate consideration for plan administrators isthat in some situations the realization that the plan has continuedto pay for ineligible claims remedy comes too late the error. Theregulations require that in order to be eligible for continuationcoverage under COBRA, the qualified beneficiary must experience aqualifying event that causes a loss of coverage within the maximumbenefit period (generally 18 months). In the event that anindividual experienced a qualifying event, but continued to receivebenefits under the plan despite their ineligibility longer than themaximum benefit period, a qualifying event never occurred. In thatevent, the plan administrator has no recourse to protect itselffrom potential stop-loss reimbursement issues or the breach oftheir fiduciary duty.

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At the end of the day, employers must be diligent in theirapproach to administering COBRA coverage properly. In order toavoid the potential issues that occur when COBRA continuationcoverage is not administered properly, the plan sponsor shouldensure that the appropriate internal policies and processes are inplace. The plan sponsor should confirm that there are no gapsbetween its policies as an employer and its fiduciary duties as aplan administrator and also ensure that the proper procedure forcommunicating an individual's termination and the impact thattermination will have that individual's eligibility under theplan.

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Kevin Brady, Esq., is an attorneyat the Phia Group. As a member of the consulting team, Kevinworks on general consulting, plan document compliance, contract gapreviews, and general compliance issues.


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