It seemed like a great idea this spring when the federal government issued guidance providing relief from certain benefits deadlines—including those related to COBRA continuation coverage—due to the disruption caused by the COVID-19 national emergency. Then, it was assumed the emergency would end by June.
However, it is mid-November, and there is no clear end date in sight. Now that we are 9 months into the national emergency, and it is 6 months since the federal guidance, it is fair to ask whether this undefined open-ended period is a good idea.
On May 4, 2020, the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) issued a joint notice that provided relief for plan participants, qualified beneficiaries, and plan administrators from a number of applicable deadlines, including the various COBRA deadlines for providing COBRA notices, making COBRA elections, and paying COBRA applicable premiums.
The purpose of this relief was to help all the various constituencies deal with the consequences of COVID-19 in the workplace. In short, according to the notice, the period from March 1, 2020, until 60 days after the announced end of the national emergency “or such other date announced” by the government is disregarded in determining whether any of the applicable COBRA events are timely.
At the time, most businesses were closed (or closing) or operating through remote working arrangements, and it was hard to conduct business as usual. Also, qualified beneficiaries and potential qualified beneficiaries who were impacted by COVID-19 might have had difficulty making sure their elections and/or premium payments could be paid on time.
Interestingly, the IRS/DOL announcement gave some examples of how the COBRA relief provisions would work, and in those examples, the government assumed that the national emergency period would end on June 29, 2020. At the time, perhaps that might have been a possibility. However, now that several months have passed and the national emergency still exists, the consequences of the undefined open-ended period are apparent.
Lack of Deadlines Results in Less Compliance
The argument in favor of the relief is based on the need to protect the benefits of participants and beneficiaries in all employee benefit plans in the country. Given the challenges of closed businesses, remote working, and other business interruptions caused by the pandemic, there is a concern about individuals encountering problems in exercising their statutorily protected rights.
On the other hand, COBRA administration is heavily dependent on notices, elections, and premium payments being administered in a timely fashion. COBRA’s penalty structure works only if there is a time by which a plan administrator must act. If there is no deadline, penalties do not apply, and compliance falls by the wayside.
There is an old saying: “If it were not for the last minute, nothing would ever get done.” Deadlines serve a useful purpose because they force all who are impacted to act or make a decision. Once the deadlines become suggested time limits, the administrative mechanism breaks down, and it is hard to ensure compliance.
Here’s a simple example. My editor told me that the deadline for this column was the 16th. Because that is the deadline, I’m busy on a Sunday afternoon (the 13th) trying to put my thoughts down on paper. Had my editor said, “Get me the column whenever you can,” I might have been more inclined to do a lot of other things, and you would have nothing to read right now.
That is how we all work.
When it comes to COBRA compliance, though, the consequences of an undefined open-ended delay can be costly. Studies show that a relatively small percentage of eligible qualified beneficiaries actually elect COBRA coverage. However, those who do tend to be older and less healthy than active workers.
For example, a July 9, 2020, study published by the Employee Benefits Research Institute (EBRI) found that the average COBRA beneficiary is approximately 50 years old, while full-time employees are 42.6 years old on average.
Moreover, COBRA beneficiaries are more likely to have certain health conditions like chronic obstructive pulmonary disease (COPD), diabetes, cancer, high blood pressure, and other conditions. In 2018, when EBRI looked at those with employee-only coverage, full-time employees used an average of $6,724 in healthcare services. COBRA beneficiaries used an average of $18,752, a nearly 300% difference.
One of the contributing factors to these results is adverse selection. When employees lose their jobs, for example, they do not immediately have to declare their intentions as to whether they want to continue coverage. Before the IRS/DOL relief, they had a period of at least 105 days (60-day election period plus 45-day premium payment period) and maybe even longer (depending on how long it takes to notify them of their rights) during which they could wait to see if they incurred significant expenses before deciding whether to retroactively elect COBRA coverage.
Given the cost of COBRA coverage when premiums are unsubsidized, it is logical to assume that only those who have incurred or expect to incur significant medical expenses will elect and pay for coverage. Admittedly, some COBRA beneficiaries elect COBRA coverage for a short period in between jobs—for example, to make sure they have coverage “just in case” they get sick. But there tend not to be a significant number of these elections—at least not enough to offset the significantly greater costs incurred by COBRA beneficiaries who really need coverage for their expenses.
Another study, by the American Benefits Council in June 2020, reported that over 40% of surveyed employers expressed concerns about the extensions in terms of significant administrative and cost issues for employers, as well as issues (like confusion) for plan participants.
Is There A Better Way?
From a public policy perspective, it is also hard to see how open-ended COBRA notice, election, and premium payment periods are a good thing. Yes, relief in emergency conditions is needed. However, when the result is an open-ended period for providing notices, for example, the relief can end up masking what would have been COBRA violations for failure to notify qualified beneficiaries when it actually might have been possible to do so. It is not clear that this open-ended period furthers the goal of overall legal compliance.
With the benefit of hindsight, it is worth considering another possible approach. For example, another way to balance the need for relief with the need for structure would have been to double all the applicable time periods. Perhaps the guidance could have also added another option for adversely affected qualified beneficiaries to request an additional 30 days on top of that if they request relief in a timely fashion.
There is no “magic” behind the doubling of periods and adding an option for another 30 days. It could just as easily be some other fixed period. The point is that by keeping some deadline structure in place, the interests of all parties could be protected, and compliance could be measured.
For now, though, COBRA administration is in a suggested time limit mode by which nothing is late and nothing is on time. There could be COBRA elections made if individuals really do need the coverage. However, there is no rush for qualified beneficiaries to make up their minds. The adverse selection window is wide open, and potential costs are mounting. It is worth considering whether there is a better way forward.
Paul M. Hamburger is co-chair of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center and head of the Washington, D.C., office of law firm Proskauer Rose LLP. He is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force. Hamburger has more than 35 years of experience in advising employers and administrators and is the author of numerous articles and publications on COBRA and other employee benefits issues affecting pension and welfare plans. Hamburger is contributing editor of Mandated Health Benefits—the COBRA Guide and managing author of The New Health Care Reform Law: What Employers Need to Know (A Q&A Guide), 5th Edition.