Staying on top of health insurance regulations may feel like an uphill battle for brokers and their small business clients, but the costs and penalties for being out of compliance can be disastrous.
So what are some of the everyday compliance pitfalls to watch out for? This is the first in a series of articles that will explore common compliance challenges and how to avoid them.
Let’s begin with one of the more commonplace issues: Federal COBRA administration.
As many agents know, COBRA mandates that employers offering insurance must extend coverage to former employees and dependents following the loss of that coverage for up to 18 months. But COBRA requirements can be difficult to follow, and compliance mistakes can cost a broker and their client big money in statutory fines, excise tax penalties, civil lawsuits, regulatory audits and more.
Top errors
Unfortunately, when it comes to COBRA, it is very simple to misstep. Here are the five most common pitfalls to watch for:
1) Miscalculating employee counts: This may seem deceptively easy, but too often companies incorrectly count their employees. For example, COBRA rules count part-time as a “fraction of an employee” equal to the number of hours that employee works divided by full-time hours. An example would be two part-time employees working 20 hours getting counted as one full-time employee. Accurate counts are important especially for businesses in farming, construction, real estate, retail and other industries that often rely on part-time and seasonal workers. Brokers must help ensure counts are accurate, which includes making clients aware of the requirement and working closely with trusted tax advisers and/or compliance experts to assure alignment with mandates.
2) Types of plans subject to COBRA: The mindset that COBRA only applies to medical, dental and vision can be an expensive one, so change it. The regulation covers any plan maintained by an employer to provide healthcare benefits to employees. This means that certain wellness programs, flexible spending accounts, health retirement accounts, executive reimbursement plans and more also fall within COBRA. So make sure to review and address the full spectrum of the proffered benefits plans to assure compliance.
3) Failure to notify of qualifying events: The fines for notification failure are steep, and the potential exposure to costly legal claims from former employees even steeper. Liability can even exist if an individual is not harmed. Qualifying events, such as an employee termination, require specific notices with mandated content and specific timeframes. Agents who are unsure about details are wise to turn to COBRA experts to guide them through the notification process. This will protect them and their clients.
Despite uncertainty over reform efforts in Washington, advisers need to help clients prepare for next year now.
4) Employer notification requirements: Non-compliance with general notices is the No. 1 most frequent civil penalty with COBRA. For instance, a group health plan must provide a general notice describing COBRA rights to an employee and adult dependents covered under the plan within the first 90 days of coverage. It must be sent at the appropriate time — new employee becomes covered under a plan, employee adds dependents to plan upon marriage or open enrollment, etc. — and clearly spell out basic information about COBRA, as well as employer and employee/dependent responsibilities, rights and obligations. Additionally, general notices such as this must be archived. Not following procedures could put a plan out of compliance, result in significant penalties and might expose a business (and its consultants) to legal liabilities. Make certain to follow procedures, and then document, document, document.
5) Rate determination period: COBRA requires plan premiums to be set and then fixed for a 12-month period. This provides qualified beneficiaries with some assurance not only of the COBRA premium amount but also that it will not be subject to frequent fluctuations. However, this period can cause hardship for employers that have mid-year plans and/or a premium change occurs. If the premium goes up outside of the determination period, then the employer is on the hook to cover the increase. These costs can add up significantly, so make sure to be aware of them.
Remember to be vigilant and focused when it comes to COBRA directives and obligations, and turn to trusted compliance advisers and experts when needed. Because even an unintentional error can cost an employer a bundle, and a broker their client.
Next time, the focus will be on pitfalls to avoid around ERISA plan documentation. Stay tuned.
