Earlier this year, the COBRA notice, election and premium payment deadlines were extended from March 1 until 60 days after the end of the ongoing COVID-19 national emergency. This extension has imposed an unfamiliar administrative burden, and the potential for significant coverage cost increases, on employers that sponsor group health plans. If they have not already done so, plan sponsors should start planning now for the tricky administrative issues that will arise during and after the outbreak period, keeping in mind that litigation over the adequacy of COBRA notices is on the rise.
Extension of COBRA Deadlines
The COBRA deadline extension was authorized by the CARES Act and announced by the Department of Labor’s Employee Benefits Security Administration (“EBSA”) and the Internal Revenue Service (“IRS”). Under the extension, group health plans must disregard the period from March 1, 2020 until 60 days after the end of the COVID-19 national emergency (which the Trump Administration has repeatedly extended) in determining the 60-day election period for COBRA continuation coverage, the deadlines for making COBRA premium payments, and the deadlines by which individuals must notify a plan of a disqualifying event (such as divorce or end of dependent status) or disability determination. Plans may disregard this same period in determining the deadline for sending COBRA election notices. The maximum length of benefit plan deadline extensions authorized by the CARES Act is one year. Therefore, the COBRA deadline extension is currently scheduled to end on February 28, 2021 (in the absence of an unexpectedly early end to the COVID-19 national emergency period). However, the EBSA and IRS may announce an earlier end date or, if Congress lengthens the authorized extension period, a later end date.
Administrative Burden on Plan Sponsors
The COBRA deadline extension has placed a significant administrative burden on employers that sponsor group health plans (and their third-party administrators), as normal notice and premium payment procedures have been disrupted and agency guidance regarding the extension is vague. For instance, the IRS and EBSA have not addressed whether administrators should correct previously sent COBRA election notices. The fact that COBRA election notices are not required until the end of the extension period suggests that interim corrections are not required. However, while the usual statutory penalties for COBRA violations should not apply, failing to notify COBRA qualified beneficiaries of their rights may increase the likelihood of a breach of fiduciary duty claim.
IRS and EBSA guidance also failed to specify how plans should handle participants who were enrolled in COBRA coverage but stopped paying premiums after March 1. The guidance suggests, but does not clearly state, that plans may suspend coverage and reinstate it retroactively if the premiums are paid (rather than continuing coverage and attempting to recoup the premiums).
Before the end of the extension period, plan sponsors and third-party administrators will need to decide:
How individual deadlines should be calculated. The extension rules allow plans to count any days in election or premium payment periods that elapsed before March 1, 2020 in determining the time remaining after the outbreak period ends, but that approach will be complicated to administer, especially if the outbreak period end dates are different for different parts of the country. Administrators may decide that it makes more sense to restart all election and premium payment periods after the end of the extension period.
Whether to send special communications about the extension. So far, agency guidance does not require plans to send corrected election notices or other special communications to individuals affected by the deadline extension. However, once the end date of the extension period is more certain, administrators may wish to send such notices to avoid potential breach of fiduciary duty claims. Specifically, administrators should consider (i) sending a corrected initial election notice (listing the new deadlines) to individuals who received a notice listing the regular deadlines later than January 1, 2020 and (ii) notifying individuals who elected to enroll in COBRA coverage but failed to begin paying, or stopped paying, premiums after March 1 that they are eligible for retroactive coverage if they make the missed premium payments.
Cost of the Extension
The adverse selection risk inherent in the COBRA coverage election rules, which under normal circumstances permit qualified beneficiaries to obtain up to 105 days of retroactive coverage, is well known. The deadline extensions have significantly increased this risk, as COBRA qualified beneficiaries may now obtain many months of retroactive coverage. Plan sponsors should expect that the people who choose to enroll in retroactive COBRA coverage will generally have high medical expenses, and that the number of people who enroll may increase as medical providers encourage patients with unpaid medical bills to elect COBRA coverage. As a result, plan sponsors should plan for a spike in costs. Of course, many COBRA qualified beneficiaries will enroll in subsidized exchange coverage or other employer coverage instead, making the impact of the deadline extensions hard to predict.
Before the end of the extension period, sponsors of self-insured plans should review the terms of their stop-loss policies and plan for potential disputes over long-term retroactive COBRA coverage. Presumably, insured plan sponsors have already determined whether their contract with the insurer requires that they continue to pay premiums on behalf of former participants who will have the right to elect COBRA after the extension period ends or requires the insurer to hold potential claims pending a late COBRA election. Plan sponsors should also consider whether the deadline extensions may complicate their efforts to comply with state continuation coverage requirements. In New York and other states that tack on additional periods of continuation coverage, participants may become entitled to such additional periods of coverage before it is clear that their federal COBRA coverage period has run out.
Next Steps
After eight months, the implications (and complications) of the COBRA deadline extension are significant. Even though the end date is still uncertain, employers should attempt to prepare now for the administrative challenges and coverage costs and disputes that will follow the end of the outbreak period. If possible, they should also take the opportunity to confirm that their standard COBRA notices are compliant. The stakes are high: under ERISA, statutory penalties for deficient COBRA notices can be $110 per person per day, and the excise tax for COBRA noncompliance can be as high as $100 per person (or $200 per family) per day. Furthermore, litigation over COBRA coverage is a threat to employers of all sizes. An unusually high number of class actions alleging deficient COBRA notices have been filed so far in 2020, suggesting that COBRA notices may be emerging as a popular target for plaintiff’s lawyers. Employers that use third-party COBRA administrators are not safe from this threat: administrators can make mistakes, and the employer (as plan sponsor) is ultimately responsible for COBRA compliance.