COBRA Help

ABOUT COBRA

Background

The law we call COBRA, which provides continuation coverage requirements applicable to group health plans, actually was a component of the massive Consolidated Omnibus Budget Reconciliation Act of 1985. COBRA became law when it was signed by President Reagan on April 7, 1986.

On June 15, 1987, the IRS issued Proposed Regulations under COBRA which filled in some of the gaps in the statute, interpreted the statutory provisions, and imposed additional administrative obligations on employers.

Certain changes to COBRA have been made through amendments contained in The Tax Reform Act of 1986 ("TRA"), as did the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), the Revenue Reconciliation Act of 1989 ("REVRA"), the Omnibus Budget Reconciliation Act of 1990 ("OBRA"), the Small Business Job Protection Act of 1996 ("SBJPA"), and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The IRS issued a revised and updated set of Proposed Regulations on January 7, 1998.

On February 2, 1999, the IRS issued the Final Regulations based upon the Proposed Regulations interpreting the COBRA continuation coverage requirements published in June 1987 and January 1998. The Final Regulations reflect statutory amendments to COBRA mentioned above and are effective as of January 1, 2000. A new set of Proposed Regulations addressing aditional issues and to fill in the gaps reserved in the Final Regulations under COBRA were also published on February 2, 1999.

Purpose of COBRA

Notwithstanding COBRA's appearance as a law designed to protect the interests of individuals, many commentators believe that COBRA's primary purpose was to shift to employer health plans the costs of health care for thousands of individuals who, before COBRA, would have received health care coverage only, if at all, through government-funded entitlement programs.

In other words, COBRA can be characterized as an integral component of the "budget reconciliation" law of which it was a part. We believe that if employers keep in mind this "revenue raising" goal of COBRA, they will be better able to understand COBRA's overall scheme and be better able to administer COBRA's detailed requirements in a consistent manner designed to help protect the employers' interests.

About COBRA Administration

Employers should recognize that COBRA is legislation primarily directed at employers. Thus, employers, and not their insurers or third party administrators, are primarily liable for COBRA violations. Therefore, even though an employer may have outside help with its COBRA administration, it is critical for the employer to review its COBRA administrative systems regularly to ensure that either the employer, one of its service providers, or its insurer is handling COBRA properly.

Furthermore, employers should coordinate all written COBRA materials to provide clear, concise, and consistent COBRA-related information and to provide proper documentation on behalf of the employer.

In reviewing their COBRA administrative systems and the COBRA provisions of their various written materials, employers should keep in mind that COBRA administration is more than just taking care of those people "on COBRA"; it is a total process of notifying, tracking, and documenting all facets of compliance with this highly complex law. If sued or audited by the regulators, an employer must be able to prove that it has properly complied with COBRA's rules.

All employers, including those with only a few COBRA Qualifying Events a year, should not be lulled into a false sense of security just because they have not had any COBRA problems. Many employers are surprised when they are sued for non-compliance with COBRA, often not even realizing they were out of compliance.

An employer's exposure for a failure or failures to comply with COBRA's requirements can be significant. For instance, an employer's failure to send proper Initial COBRA Notices to spouses resulted in a 1995 court case claiming $100 million dollars in damages. (The Initial COBRA Notice tells employees and spouses of their COBRA rights if they experience a Qualifying Event sometime in the future.)

COBRA administration should not be treated lightly. Employers of all sizes should constantly train and update their COBRA personnel as part of an ongoing process designed to manage COBRA, its attendant costs, and the potential of a government audit or a law suit.

Cost to Employers

COBRA's costs should not be measured only in terms of the administrative costs incurred by employers because of COBRA's requirements (e.g., postage, salaries, general overhead, etc.). The greater cost is attributable to the health care claims of COBRA continuees and the cost of health care benefits that are continued only because of improper COBRA administration.

Statistics show that claims of COBRA continuees typically average 150% higher than the claims of active employees, even though a COBRA continuee can only be charged 102% of the applicable, total plan premium. In other words, employers and their active employees generally bear the brunt of the higher health care costs attributable to COBRA continuees.