Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions in 1986. The law was enacted to allow continuity of Health insurance coverage for qualified employees and their dependents if they lost coverage due to such events as termination, resignation, reduction in work hours, divorce, or death. Through COBRA, employees and their dependents have the right to continue coverage under a former employer’s group health plan for up to 18 months (36 months in the case of death, divorce, or Medicare entitlement of the former employee), so long as the employee pays the total cost for the coverage and up to a 2% administrative fee.
Although COBRA has worked well for employees, it has always presented employers with a number of difficulties. Maintaining detailed records, notifying eligible beneficiaries, and collecting premium payments make administration complicated and time-consuming. Employers make mistakes, and this can result in large fines, including:
- IRS excise taxes of $100 – $200 daily for each notice, up to 10% of the cost of the health plan, or $500,000 per year
- Department of Labor fines of $110 daily for each notice
In addition, an employer or plan administrator might have to pay medical expenses and litigation costs if a case goes to court.
The compliance issues and the cost involved in maintaining COBRA plans have led many companies to outsource this function. Some of the benefits of outsourcing include:
- Controlling Costs – HR personnel who are unsure of statutory requirements regarding eligibility will minimize risk exposure by providing COBRA benefits to employees who are not technically eligible. Third party administrators have the legal expertise to know which employees are truly eligible and which are not, which can mean a substantial savings in claim costs.
- Eliminating the need to train staff in plan administration – Not only will your HR staff need initial COBRA administration training, they will require ongoing training to keep up with all statutory, regulatory, and case law developments.
- More efficient use of HR staff’s time – Utilizing HR personnel for COBRA administration lessens their ability to make a more positive impact on the company’s overall operation, like recruiting good employees or arbitrating disputes between line/department managers and their staff.
- Equitable treatment for all qualified beneficiaries – Third party administrators aren’t swayed by emotion, or subject to potential conflicts of interest when they determine eligibility. They base their decisions exclusively on the statutory and regulatory requirements, which ensures fair treatment for all qualified beneficiaries.