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A Service of OnQue Technologies, Inc. |
| 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:
- If the disability
extension goes into effect, a higher administrative fee may be
assessed;
- If a plan has been
charging less than the maximum allowable premium amount, an increase in the
premium to the maximum amount is permitted;
- 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:
- The initial premium must be made within 45 days of
the date of the COBRA election; and
- 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.
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| 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.
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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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