If you're an employer or benefits administrator, navigating COBRA (aka the Consolidated Omnibus Budget Reconciliation Act of 1985), probably isn't how you spend most of your day. But that doesn't mean you should put COBRA on the back burner.

Why?

The fines associated with COBRA noncompliance are no joke. Hopefully, you never have to endure a COBRA audit from the IRS, but it is also important to know what's at stake. This article will break down what financial penalties currently look like, and offer some tips to stay COBRA compliant, so employers can steer clear and up their compliance game. (Remember: Always consult legal counsel for advice and information concerning individual situations before making any decisions.)

Noncompliance cost #1: The IRS excise tax

If the IRS finds an employer to be out of compliance with COBRA regulations, the minimum they can charge is $2,500 for each beneficiary who is affected by the compliance violation, OR $100 for every day the employer was not compliant, whichever is a greater cost to the employer. If the IRS determines that the violation is on a large scale, the employer can be fined up to $15,000. While this doesn't necessarily ease the pain, there are limits as to how much the IRS can fine: either 10 percent of the employer's health plan costs in the previous year, or $500,000—whichever is the lesser of the two.

And here's the silver lining: If the IRS determines the violation was accidental, employers may be granted a 30-day grace period to course correct and avoid fines.

Noncompliance cost #2: ERISA penalties

The Employee Retirement Income Security Act (ERISA) sets the standards for voluntary health and retirement plans and protects the interests of employees who hold those plans. For instance, ERISA requires plans to provide participants with information about features and funding and establish a grievance and repeals process. This law also ensures that plan funds are protected and participants receive benefits they are entitled to, even if a company goes bankrupt.

ERISA is administered by the U.S. Department of Labor. That means this federal department can also fine employers who aren't in compliance with ERISA law—up to $110 per day, per violation.

Noncompliance cost #3: Civil penalties

As if the penalties from the IRS and Department of Labor aren't enough to worry about, you can't rule out the potential for private civil action in either state or federal court. There have been numerous cases in which a participant was entitled to monetary damages due to errors in the compliance process. Here are a couple of examples:

In Amin vs. Flagstone Hospitality Management: An employee sued its former employer for multiple grounds based on his termination. The employee claimed that the employer omitted a single word from the mailing address on his COBRA notification.

In this case, the employee was entitled to relief, as the courts ruled that the employer did not have a completely accurate mailing address because the word "North" on the street name was missing (yes, that's all that was missing). In addition, the mailing book that the employer kept to track COBRA mailings did not include a ZIP Code.

This case resulted in over $130,000 in damages to the employee.

In Misna vs. Unitel: An employee resigned, and several days afterward, the employer terminated employment during the notice period, claiming gross misconduct. The employer did not provide COBRA documentation to the former employee, and the spouse of this former employee incurred some significant medical expenses in this timeframe.

The courts determined the following:

The termination was voluntary as the letter of resignation was turned in prior to the last day worked, and that this was not a gross misconduct situation.
The qualifying event occurred on the last day worked, and the ex-employee and family were eligible for COBRA.
The award for this case was over $130,000 and included over 6 years of daily fines for COBRA notification violation, totaling over $45,000.

The good news? COBRA fines are avoidable

Looking at the potential COBRA penalties can be a little intimidating, but the good news is that these fines can be avoided with a little diligence and know-how. Here are a few things to keep in mind when it comes to COBRA compliance:

Have the proper documentation on hand for each beneficiary, including, but not limited to, name and address, qualifying event date, type of COBRA coverage received, copies of COBRA notices, and a copy of the employer's letter to the insurance company plan administrator notifying them of a qualifying life event.
Make sure you have a documented process in accordance with COBRA requirements, and be consistent in following it.
Remember to send notices to all qualifying beneficiaries, including a spouse and children. If the beneficiaries don't ALL live under one roof, you must notify beneficiaries at each address.
Don't forget that many states have "mini-COBRA" state laws to consider, on top of the federal regulations. Consult your state insurance regulatory office or Department of Labor to get accurate information on your state's COBRA laws.

When in doubt, remember that a third-party administrator can handle the notices, the processing, the payments, and keep track of all COBRA regulations, so you have peace of mind.

Jaclyn Cooksey is the managing editor at ConnectYourCare, an industry leader in tax-advantaged benefits and COBRA administration.

Disclaimer: ConnectYourCare does not provide tax or legal advice. This information is not intended and should not be taken as tax or legal advice. Any tax or legal information in this notice is merely a summary of ConnectYourCare's understanding and interpretation of some of the current tax regulations and is not exhaustive. You should consult your tax advisor or legal counsel for advice and information concerning your particular situation before making any decisions.

Instant Insights /

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