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You may be required to offer COBRA coverage if your business:

  • Offers group health plans to your employees, and
  • Has had 20 or more employees during at least half of the typical working days in the previous calendar year.

Although COBRA's purpose is straightforward, its administration can be complex and cumbersome. The legal requirements are so laden with details and deadlines that it's easy for an employer to unwittingly fall out of compliance. To avoid potentially costly mistakes, many companies outsource the task to experts, usually to a third-party administrator (TPA) of benefits programs.

In fact, COBRA administration is one of the most commonly outsourced HR functions. While outsourcing COBRA administration can be a boon to an overextended HR department, doing so doesn't necessarily relieve a company of the burden of legal compliance. If an outsourcing agreement for COBRA administration isn't set up correctly, you may not be buying as much legal protection as you might expect. What's more, if you aren't careful in selecting a vendor, you might create unwanted headaches for yourself down the road.

The Burden of COBRA

COBRA is designed to help former employees and their families maintain health insurance when they need it most - when they have lost access to employer-sponsored coverage as a result of certain "qualifying events." For example, leaving a company, whether voluntarily or involuntarily, is such an event for an employee as well as for the former employee's spouse and dependent children. Separation, divorce or the employee's death are qualifying events for a spouse and for dependents. When those events or others occur, employers are required to make an offer of continued coverage, for which the beneficiary usually must pay the full premium and an administrative fee.

The basic COBRA requirements for employers are to send notices to employees, former employees, and their spouses and children; to reinstate eligible individuals to one or more health plans; and to calculate and collect premiums. There's a lot of tracking involved, such as who's eligible and who's not, who has received which notices, when the notices were sent, whether premiums are paid accurately and on time, and so on.

Very simple mistakes can cost employers a lot of money - The most common COBRA violations include failing to send notices on time or at all, neglecting to list flexible spending accounts (considered a type of health plan) on notices, keeping inadequate records, and not offering participants the right to add or change health plans at open enrollment.

The Price Of Breaking the Rules

The rules for COBRA administration are enforced by two federal agencies. The U.S. Department of Labor (DOL) oversees the law's notification and disclosure provisions, while the Internal Revenue Service (IRS) deals with matters such as duration of coverage and who qualifies as a beneficiary. Both agencies can levy penalties for noncompliance - the IRS can collect $100 per day, the DOL $110 per day.

The government rarely prosecutes COBRA violations, however. The larger risk for employers is that they'll be sued by individual workers over mistakes in COBRA administration, which can lead to monetary judgments, attorneys' fees and court costs.

"COBRA is one of the most litigated areas of benefits," says Christine Keller, an attorney at the Groom Law Group in Washington, D.C. The law's health benefit carries an inherent risk of adverse selection, she says. Although COBRA coverage costs more than regular health insurance, she explains, "the people asking for it are the ones with a lot of medical expenses" and the ones most motivated to seek legal remedies if they feel COBRA has been denied unfairly.

Pluses for Employers

For many employers that sponsor self-insured and fully funded health plans, outsourcing COBRA administration is a matter of risk management, experts say a way to make sure the i's are dotted and the t's are crossed. It can also reduce certain costs.

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