The Vita Blog June 2023

In the lull between Open Enrollment and next year’s plan renewals, it is reasonable to look at some compliance issues, specifically COBRA notice procedures. A recent court case found an employer’s COBRA notice mailing procedures to be insufficient. This created significant liability for the employer.

This case also provides useful reminders for all employers regarding COBRA notice requirements. Give it a read and think about whether your procedures would stand the test. Or if you are pressed for time, jump to the Lesson at the end of the article.
 

COBRA Notification Requirements

COBRA law requires employers to provide a formal notification of COBRA election rights notice to Qualified Beneficiaries. When a qualifying event occurs (such as termination of employment), the following employer notice responsibilities are triggered. There are also specific time thresholds that must be met for notifications.

*When the employer and Plan Administrator are the same entity, both day allocations are allowed (44 days total).
 

Proof of Notice

The courts generally recognize that a “good faith” effort to send an election notice to an employee satisfies an employer’s COBRA notice requirements. However, the burden of proof lies with employers to demonstrate that this good faith effort was made. 

Over the course of decades of lawsuits, two general methods of notification have emerged as satisfactory for meeting an employer’s COBRA notification obligation:

1. By documenting the sending of required notices via first-class mail.
2. By a plan administrator adopting standard procedures for generating and mailing COBRA notices and maintaining evidence that the procedures are consistently followed for a specific individual.

As an example of the standardized procedure method, if mail merge letters are the standard procedure, documentation would need to be maintained of the Excel spreadsheet that fed the mail merge process. Upon challenge, the specific individual’s information would need to be identified in the mail merge file.
 

Facts of the Jewel Case

An Illinois federal district court concluded that an employer failed to show it made a good faith effort to provide a COBRA election notice to a terminated employee. (Link to Earl v. Jewel Food Stores, Inc. case.)

In this case, the employee was terminated for violating the employer’s attendance policy. The employer asserted that it mailed a COBRA election notice to the employee. However, the employee did not receive the notice. 

Both the employer and employee agreed that the employee’s termination of employment was a COBRA qualifying event, and that the employee did not receive a COBRA notice from the employer. Thus, the question before the court was whether the employer made a good-faith effort to provide a COBRA election notice to the employee.
 

The Ruling

To show its good faith efforts, the employer-provided:

1. The COBRA notice itself, which was addressed to the employee’s home address, and
2. A Certificate of Mailing which was an internal document stating that a “Qualifying Event Letter” may have been sent to the employee at his last known address.

Based on this evidence, the court determined that the employer had failed to show that it made a good faith effort to provide the employee with a COBRA election notice. According to the court, the employer provided no evidence of:

1. Sending the COBRA notice by certified or first-class mail
2. Documentation of the employer’s standard procedures for generating or mailing COBRA notices
3. Documentation of whether the employer’s COBRA mailing procedures were followed for this employee.

The court also rejected the employer’s argument that even if the employee had received the COBRA notice, he did not need COBRA and could not have afforded to pay for COBRA coverage.
 

The Lesson

The takeaway from this lawsuit is the importance of maintaining both defined procedures and procedural integrity relative to required COBRA notifications. Look at your procedures and confirm the following:

If Handled Internally: What is your process for sending notifications?  How well is the process documented? Could you produce documentation showing that you followed the process for a specific Qualified Beneficiary?

If Outsourced to COBRA Administrator: What is your process for providing data on Qualifying Events (or Initial Notices) to your COBRA administrator? Does your administrator have a documented process for mailing notifications?  Could your administrator produce documentation showing they followed the process for a specific Qualified Beneficiary? 
 

Vita’s COBRA Administration Process

The Vita COBRA administration process checks all the required boxes in terms of following a defined process and retaining documentation on the notification sent for each Qualified Beneficiary. 

The Patient-Centered Outcomes Research Institute (PCORI) is an independent, non-profit research organization created to help patients and providers make better-informed healthcare decisions. The organization commissions research within the framework of creating actionable, evidence-based medicine.

PCORI was created as part of the Affordable Care Act and is funded by a fee that was also included in the legislation. The fee is paid by all health plans, including fully insured health plans, self-funded health plans, and account-based plans.
 

PCORI Counting Rules

1. Per Human, Not Per Employee: Counting for PCORI fees is based on the number of covered persons (not just covered employees). As such, each employee and each dependent must be counted for PCORI fee payment purposes.
2. Exception for Account-Based Plans: The one exception is for the calculation of PCORI fees for account-based plans (such as HRA plans), which are counted on a per-employee basis even if dependent expenses are eligible for reimbursement under an account-based plan. This includes plans such as HRAs. 
3. Exception for More Than One Self-Funded Plan: There is also a special rule that PCORI fees are only payable for one self-funded plan, even if an employer has more than one self-funded plan and even if an individual may be covered under more than one self-funded plan.

Who Pays the Fee?

For fully insured plans, the insurance carriers pay the fee on behalf of employers. The actual fee is baked into the fully insured premium. 

For self-funded plans, plan sponsors/employers are required to pay the fee directly.
 

2023 PCORI Rate

The updated PCORI rate for 2023 filings is $3.00 per covered life. This applies to plans with policy years ending on or after October 1, 2022.
 

PCORI Reporting

PCORI Fees are paid on the Q2 IRS Form 720. Currently, Form 720 still lists the 2022 rate under Row 133 of the form. However, we expect that the form will be updated in the next few weeks. The Q2 Form 720 is due on July 31, 2023 (one month after the last day of the quarter). 
 

Complex Counting Example

The following is an example of an employer with 500 employees. Employees have a choice between a self-funded health plan and a Kaiser HMO plan. In addition, the employer provides a non-integrated medical travel HRA plan that covers all employees.
 

In this example, PCORI fees would be due as follows: 

• Employer pays PCORI fees for the 1,000 humans on the self-funded health plan
• Kaiser pays the PCORI fee for the 250 humans on the Kaiser plan
• Employer also pays PCORI fees for the 100 “extra” employees that are covered under the self-funded HRA plan (but who are covered under the fully insured Kaiser plan and for whom Kaiser paid the PCORI fee because the employer did not pay a PCORI fee under a self-funded plan). The employer owes a PCORI fee for these 100 employees (but not their dependents because of the special rule for account-based plans.

As an aside, if there were not a Kaiser plan in place, only one PCORI fee would be due for the 1,000 humans on the self-funded medical plan. In the above example, the 500 employees covered by the medical travel HRA plan would be a "gimme" because that would be a second self-funded plan.