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A Service of OnQue Technologies, Inc. |
Calculating the First Premium Payment Amount and
Due Date
Are you certain your calculations are accurate
and in compliance? |
November 1,
2004
By Scott Haines,
President
OnQue Technologies, Inc.
Santa Rosa,
CA |
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Scheduling the first COBRA
premium payment and due date—and making sense of the results—can be a
daunting task. The law and regulations are confusing at best, and
misunderstandings about the rules governing the process are commonplace. This
COBRA Tip discusses the critical issues that must be understood when tackling
this thorny administrative challenge:
- Is the 45-day first payment
period really a grace period?
- Is it necessary to account for
weekends and holidays when determining due dates?
- What is the best method for
determining how many monthly premiums are due with the first
payment?
- What are the premium payment
scheduling pitfalls and how can they be resolved?
Is the 45-Day Payment Period Really a Grace
Period?
The 45-day first premium payment period is often
referred to as the initial payment grace period. If this payment window is a
true grace period, then it follows that the monthly premiums included in the
first payment amount are actually due on earlier dates, and that the qualified
beneficiary is late, but forgiven, when payment is made after the due date but
before the grace period expires. However, such reasoning (and the message it
sends to the qualified beneficiary) is not supported by the regulations, which
expressly state that the qualified beneficiary cannot be required to make
payment prior to the end of the 45-day period for any period of COBRA
continuation coverage. If the first payment cannot be made due until the last
day of the 45-day period, is the payment window really a grace period? No; it
is simply the first payment due date, for which there is no grace
period.
The U. S. Department of Labor (DOL) model election
notice, which is included in the final rules published on May 26, 2004, lends
support to the "no initial grace period" argument and reflects the department's
mandate that COBRA notices "shall be written in a manner calculated to be
understood by the average plan participant". In that notice, the DOL does not
use the term initial payment, nor does the department identify the 45-day
payment window as a grace period:
If you elect continuation coverage, you do not
have to send any payment with the Election Form. However, you must make your
first payment for continuation coverage not later than 45 days after the date
of your election. (This is the date the Election Notice is post-marked, if
mailed.) If you do not make your first payment for continuation coverage in
full not later than 45 days after the date of your election, you will lose all
continuation coverage rights under the Plan.
In keeping with this plain-language approach and to
eliminate confusion regarding due dates and grace periods, we recommend using
the terms First Payment, First Payment Period and First
Payment Due Date when communicating with qualified
beneficiaries.
Is it necessary to account for weekends and
holidays when determining final due dates?
Technically, no, though it is wise
to do so when calculating the two dates that trigger termination of
continuation coverage due to non-payment—the first payment due date and
the monthly grace period end date.
Example Date Adjustment
Imagine that the first payment is
due on Sunday, September 5, 2004 (45 days after the July 22 election date).
Remembering that a mailed payment is considered received on the postmark date,
it is difficult to imagine how the qualified beneficiary can make timely
payment if the envelope is not postmarked by Saturday, September 4. To further
complicate matters, Monday, September 6 is a national holiday, which means that
a payment mailed on Sunday will not be postmarked until Tuesday, September 7.
Thus, to make the first payment due no later than September 5 effectively
shortens the 45-day payment period to 43 days. Yes, it is a fine point, but it
is often the fine points that cause problems for employers. Although the
regulations do not clearly mandate the adjustment of dates falling on weekends
or holidays, doing so will prevent your company from being at the center of an
ugly test case. The safest approach is to shift first payment and grace period
dates that fall on weekends forward to the first non-holiday
weekday.
What about adjustments to monthly premium due
dates?
The need to account for weekends and holidays when
setting monthly premium due dates is less clear, because there is no penalty
for making payment after that date, given payment is received on or before the
last day of the grace period. If a monthly premium due date falls on a Sunday,
the qualified beneficiary still has a minimum of 30 additional days to make
payment without penalty. Thus, there is no compelling need to adjust monthly
due dates.
What is the best method for determining how many
monthly premiums are due with the first payment?
The remainder of this tip deals
with the question of how to calculate the first payment amount and the problems
you are likely to encounter. The following table lists the key values used in
the example case:
| Qualified
Beneficiary: |
Jane
Doe |
| Qualifying Event: |
Voluntary Termination |
| Qualifying Event Date: |
May 28, 2004 |
| COBRA Start Date: |
June 1, 2004 |
| COBRA Election Date: |
July 22, 2004 |
| Calculated First Payment Due
Date: |
September 5, 2004 |
| Adjusted First Payment Due
Date: |
September 7, 2004 |
| Monthly Premium: |
$200 |
| Administration Fee: |
2% |
| Monthly Grace Period: |
30 days |
Two
Calculation Methods
Two methods are commonly used to calculate
the number of months to include in the first payment: The First Payment
Month Method and The Previous Payment Month Method.
Method
I: The First Payment Month
This popular method specifies that the first
payment must include all premiums that would normally be due from the COBRA
start date thru the month in which the payment is due.
How many
monthly premiums are included in Jane's first payment when using this
method? Four. Because COBRA coverage begins on June 1 and the first payment
is due on September 7, the payment must include the monthly premiums for June
through September. Using this method, the first four entries in our example
premium payment schedule would look like this:
| Payment # |
Due Date |
Grace Period Ends |
Amount Due |
Months Included |
| 1 |
9/7/2004 |
No Grace
Period |
$816.00 |
4 |
| 2 |
10/1/2004 |
10/31/2004 |
$204.00 |
1 |
| 3 |
11/1/2004 |
12/1/2004 |
$204.00 |
1 |
| 4 |
12/1/2004 |
12/31/2004 |
$204.00 |
1 |
What's
wrong with this picture? At a glance, this payment schedule looks
just fine. But there is a potential problem hidden in the numbers: by including
the September premium in the first payment, which must be paid by September 7,
we are effectively shortening the September grace period to 7 days. This is
arguably a denial of the qualified beneficiary's right to a minimum 30-day
grace period for the September payment.
Method II: The Previous Payment
Month
The Previous Payment Month calculation includes all
premiums that would normally be due from the COBRA start date thru the month
previous to the month in which the payment is due.
How many monthly
premiums are included in Jane's first payment when using this method?
Three. The first payment covers the monthly premiums for June through August.
The first payment due date is September 7, while the September premium must be
paid no later than October 1. Using this method to calculate the first payment
amount, the first four entries in our premium payment schedule will look like
this:
| Payment # |
Due Date |
Grace Period Ends |
Amount Due |
Months Included |
| 1 |
9/7/2004 |
No Grace
Period |
$612.00 |
3 |
| 2 |
9/1/2004 |
10/1/2004 |
$204.00 |
1 |
| 3 |
10/1/2004 |
10/31/2004 |
$204.00 |
1 |
| 4 |
11/1/2004 |
12/1/2004 |
$204.00 |
1 |
The results of this calculation are in
keeping with both the letter of the regulations and the spirit of the
law—no grace period has been compromised and the initial burden on the
qualified beneficiary is minimized.
What are the pitfalls?
Depending
on when the election date falls and the length of the monthly grace period,
scheduling oddities can occur that are difficult to explain to the qualified
beneficiary. For example, assume the COBRA start date is July 1, the election
date is August 16 and the grace period is 30 days. The previous payment month
method tells us that the first payment must cover the July and August premiums
and will be due on September 30. No problem there. However, because the
September payment grace period ends on October 1, three monthly premiums will
be due during a two day period (two included in the first payment plus the
subsequent monthly payment). If you have ever attempted to explain this
situation to a qualified beneficiary who is already suffering from premium
shock, then you understand the depth of the problem.
How can this
happen? The problem is not in the method of calculation; it is in the law.
How close the first two payments are depends on the date of the election and
the length of the monthly grace period. The closer the election is to the
middle of the month, the closer the first payment due date is to the end of the
following month. How much time separates the first payment due date from the
last day of the subsequent monthly grace period depends on the length of the
grace period.
What can be done to fix this problem? Not much,
unless you are willing to move to a longer monthly grace period, which will
smooth the payment schedule to some degree (a rather radical move of very
limited benefit). And you cannot do anything about the election date's role in
the payment "bunching" problem, because any attempt to restrict elections to
convenient dates would not go over well with the IRS and the
courts.
Conclusion
Calculating the first
payment amount and due date is risky business. To be in compliance with the
law—and to stay out of court—keep the following points in mind:
- Qualified beneficiaries cannot
be required to make payment prior to the end of the 45-day period for
any period of COBRA continuation coverage.
- There is no first payment grace
period; the last day of the 45-day period is the final due
date.
- You are not required to account
for weekends and holidays when calculating due dates, but making such
adjustments to the first payment due date and monthly grace period end dates is
a safe and fair-minded practice.
- The Previous Payment Month
calculation is preferred, because it does not compromise the qualified
beneficiary's right to a minimum 30-day grace period.
- There is no clean solution to
the problem that arises when the first payment due date and the last day of the
subsequent payment grace period are close or coincide.
As always, apply your COBRA administration policies
consistently among all qualified beneficiaries. |
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| How
COBRA OnQue Handles These Issues |
- Final payment due dates are
automatically adjusted when the date falls on a weekend or a national
holiday.
- The Previous Payment Month
Method is used to calculate the First Premium Payment.
- The Confirmation of COBRA
Election Notice, which is automatically generated, clearly communicates all
payment and deadline information to the qualified
beneficiary.
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| Related COBRA Tips |
|
Are You Handling
Partial COBRA Premium Payments Correctly? |
|
COBRA Billing: Is It
Required? |
|
COBRA Premiums: Do You Know the
Rules? |
|
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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Copyright © 2004
OnQue Technologies, Inc. All Rights Reserved. |
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