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COBRA Tips

A Service of OnQue Technologies, Inc.
See how easy COBRA administration can be...
 
COBRA Premiums: Do You Know the Rules?
April 13, 2004
Santa Rosa, CA
The Internal Revenue Service (IRS) dictates how you must handle payments for COBRA continuation coverage. Here are five of the most important COBRA payment issues:
  • When is a change in premium amounts permitted?
  • How often may premiums be paid?
  • How are premium amounts calculated?
  • How should payments that are less than the full amount due be handled? and
  • When are payments considered late?
Recently, a customer raised an interesting question about a change in COBRA premiums, which prompted us to revisit the relevant legal issues. This COBRA Tip explains the federal rules that apply to COBRA premium payments in general. But first, our customer's question:
"We changed carriers effective April 1. We have current COBRA election notices out offering the old coverage at the old premiums. The 60-day election period has another month to run. Do we have to send new election notices offering the new coverage at the new premiums? Would we have to allow an additional 60 days in which to elect COBRA?"
When is a change in premium amounts permitted? Final IRS COBRA regulations require that the amounts of the premiums for COBRA continuation coverage must be fixed in advance for each 12-month determination period. The rule forbids an increase in the premium during that period except for three specific situations:
  1. If the disability extension goes into effect, a higher administrative fee may be assessed;
  2. If a plan has been charging less than the maximum allowable premium amount, an increase in the premium to the maximum amount is permitted;
  3. If a qualified beneficiary chooses more expensive coverage at times when it is permitted to change coverage, as in open enrollment periods, the premium may be increased accordingly.
However, COBRA regulations are silent as to what the employer is required to do if it changes carriers or coverage options, and the premium amounts increase during a qualified beneficiary's 60-day election period. In such a situation, we do not recommend sending corrected COBRA notices that contain the new coverage options and premium amounts. To do so may cause confusion as to the proper time period in which the qualified beneficiary must elect coverage, especially if the first election notice, based on the old coverage options and premium amounts, crosses in the mail with the new election notice.

We suggested to our customer that he immediately send a letter to all qualified beneficiaries who are still in their 60-day election period, but who have not yet elected COBRA, informing them of the change in the plan's carrier, the effective date of the change, the coverage options offered, and the amount of the COBRA premium for the new coverage. Current COBRA qualified beneficiaries, as well as those who have not yet elected coverage, must be given the same coverage options under the new carrier that active employees have. And all must be notified of the changes in benefits under the new carrier and the applicable premium amounts.

Now, some general rules about COBRA premiums:

How often may premiums be paid?
Under COBRA rules, premiums are not required to be paid on a monthly basis. But the rules do guarantee to qualified beneficiaries the right to do so. Plans may institute payment schedules at other intervals, such as weekly, quarterly, or semimonthly, but beneficiaries are entitled to request - and be granted - a monthly payment schedule.

Is COBRA billing required?
The COBRA election notice provides written notification of the COBRA premium amount (usually the amount due per month) and the day of the month on which it is due. Many employers are surprised to learn that there is no law that requires plans to also provide periodic billing statements for the payment of COBRA premiums. According to the Department of Labor (DOL), beneficiaries are required to pay their premiums on time, even if they do not receive regular billing statements. Some employers, however, choose to take on the extra administrative burden of billing COBRA recipients and will send statements or provide payment coupons at the start of the COBRA coverage period.

Note: If a change in the amount of the COBRA premium does occur, as when a beneficiary qualifies for social security disability, plans are required to inform beneficiaries in writing of that change. This obligation is in force even though the plan does not send regular billing statements.

How are premium amounts calculated?
Plans may charge COBRA beneficiaries the same amount for the cost of coverage that active employees are charged. Usually, the COBRA premium amount includes the portion of the premium paid by the employee and the portion, if any, paid by the employer, plus a two percent administration fee. In the language of the IRS and the DOL, "the maximum allowable premium amount is 102 percent of the applicable premium." The administration fee may be increased up to fifty percent (or 150 percent of the applicable premium) in the case of a Social Security disability extension.

How are payments that are less than the full amount due handled?
A beneficiary's COBRA coverage may be terminated for failure to pay the full amount of the premium, but if the underpayment is "insignificant" under the rules, coverage may not be automatically canceled. The 2001 final IRS regulations specify that a shortfall of no more than $50 or 10 percent of the amount of the premium, whichever is less, will be considered "insignificant." When such an underpayment is received, a plan may choose to treat the payment as payment in full. But if the plan chooses not to accept the payment, the beneficiary must be notified that the payment was less than the full amount due and that he or she will be permitted to submit the additional amount within a reasonable time. The IRS considers an additional 30 days as a reasonable period in which to pay the shortfall.

When are payments late?
COBRA rules provide two grace periods for the timely payment of premiums:
  1. The initial premium must be made within 45 days of the date of the COBRA election; and
  2. All subsequent COBRA premiums must be paid within 30 days after the due date. This is the minimum required grace period, but plans may allow for a longer grace period.
Note: COBRA rules expressly state that payment is considered made on the date on which it is sent to the plan. In most cases, the postmark will determine if the payment was made within the grace period.

Summary: When COBRA premiums are not made by the last day of the applicable grace period, coverage may be terminated retroactively to the last date for which payments were received. In the case of the initial premium, COBRA coverage will be forfeited for failure to pay the premium within the 45-day period. Currently, there is no requirement that employers or plans notify beneficiaries that coverage is being canceled due to nonpayment or late payment of premiums. However, the 2003 proposed IRS regulations would, if passed, require plan administrators to provide a written notice when coverage terminates before the end of the maximum coverage period. This notice would contain the reason for the termination of coverage and the date on which coverage ends.

How COBRA OnQue Handles These Issues:
  • Election notices inform beneficiaries of the amount of premiums and the dates on which payments are due;
  • A notice is generated in the event of a change in the amount of the premium;
  • A notice is generated when coverage terminates before the end of the maximum coverage period; and,
  • In the case of an insignificant shortfall, COBRA OnQue generates the Partial Premium Received notification, which informs the qualified beneficiary of the amount due and the grace period end date.
This information is provided by OnQue Technologies, Inc. for educational purposes only and does not constitute legal advice. If legal advice or other professional assistance is required, the services of a competent professional should be sought.
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OnQue Technologies, Inc.
 
As seen in Health Insurance Underwriter Magazine
HIU Magazine, April 2004
 
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