Premium Payment Shortfalls

Perhaps the most common recurring administrative challenge comes from the fact that often the amount paid by the qualified beneficiary does not match up with the amount owed. The following true story illustrates this challenge:

A qualified beneficiary accidentally writes his check for $0.02 (two cents) less than the required premium amount for a given month. Although there were attempts by the COBRA Administrator to notify the qualified beneficiary of the shortfall, he does not realize his error, therefore does not pay the two-cent shortfall before the end of the applicable grace period. So in “strict compliance” with the law, the Cobra Administrator cancels his COBRA coverage leaving him unable to receive lifesaving care for his illness.

According to COBRA law, qualified beneficiaries must pay their premiums in full and on time. If not, as a general rule, the plan administrator has the right to terminate the COBRA coverage; however, COBRA regulations include a stipulation that applies when the shortfall is by an amount that is “not significant.” To be deemed “not significant” the amount of the shortfall must be no greater that the lesser of: a) $50 or b) 10% of the required COBRA premium.

In the event the shortfall is determined to be “not significant,” the plan administrator has two options:

1. Consider the payment as “paid in full.”
2. Notify the qualified beneficiary of the deficiency and extend to him or her a reasonable time period to make up the shortfall. A safe harbor for this extension, according to regulations, is considered to be 30 days.

In most cases the plan administrator will opt to provide a premium shortfall notice and extend a 30-day grace period to the qualified beneficiary. It is rare to see a plan accept the shortfall as payment in full as this would set a bad precedent, not to mention the fact that making a determination as to what constitutes a significant amount or not is a complicated task. As a plan administrator it is important to think through these issues in order to implement a compliant COBRA premium payment system. The following steps may be helpful in handling COBRA Premium payments:

1. Review all COBRA notices, letters and premium payment coupons (if any) making sure they clearly convey all COBRA deadlines and premium amounts. Emphasize that COBRA coverage will be terminated if the payment policy is not strictly adhered to, and once the coverage is terminated, it cannot be reinstated. If partial payments are a recurring issue then administrators may want to amend their summary plan descriptions and plan documents to include similar language. So in the event that a qualified beneficiary’s coverage is terminated for insufficient premiums, the documentation will support the administrator’s actions.
2. Sending COBRA notices and letters regarding insufficient payment via certified mail or similar means may be an option in order to get the beneficiary’s attention and to serve as a receipt. Many times the qualified beneficiary argues that they were willing to pay the shortfall but were never notified. This procedure may help deflect such a claim.
3. An additional phone call or e-mail by the administrator to the qualified beneficiary may be prudent in order to convey the urgency of the situation. This may not be possible with large groups, but it may be help with smaller plans. In any case, always keep a log of phone calls for documentation.
4. A one-time forgiveness policy may make sense for those qualified beneficiaries that have a history of making COBRA premium payments on time and in full. However, if for example an underpayment is waived, then the administrator must make it clear no further shortfalls will be forgiven.
   ERISA fiduciary requirements for plans that are subject to ERISA need to be considered. Under these rules, plan fiduciaries need to act in the best interest of participants and beneficiaries, including qualified beneficiaries. For example, will there be a procedure in place where special consideration is required such as a clearly mistaken payment after months of correct payments?

Court Applies Mailbox Rule

An interesting ruling was handed down in the case of Burden v. City of Opa Locka, 2012 WL 4764592 (S.D. Fla., Oct. 7, 2012) regarding its COBRA notice obligation. In this instance, the court applied COBRA’s “mailbox rule” to the employer’s termination letter which made mention of the qualified beneficiary’s right to elect COBRA coverage.

In this case, Tara Lazier, a police officer in the Internal Affairs Department for the Opa Locka Police Department, allowed unauthorized access to a fellow employee within prohibited areas. Upon opening an investigation against her, Ms. Lazier, was given a leave of absence in early June, 2011 under the Family and Medical Leave Act citing “work related stress and anxiety.” During this leave, she allegedly engaged in inflammatory dialogue against her employer during a television interview when she criticized the OLPD’s handling of her situation. Consequently, Lazier was terminated effective Aug. 22, 2011 while still on FLMA leave. Allegedly, on August, 25, 2011, the termination letter was sent to her from the city manager also indicating that her health care benefits would end on August, 31, 2011; however, COBRA coverage could extend her benefits.

Even though a separate and specific COBRA notice was not sent, a federal district court still dismissed Ms. Lazier’s COBRA notice claim by allowing this alternate form of communication to serve as a valid COBRA notice. Although Ms. Lazier claimed the city manager failed to comply with COBRA’s notice requirements, the court determined that because this substitute notification was mailed via first class mail to the beneficiary’s last known address in a timely manner, this was sufficient. Effectively, this meant the “mailbox rule” was applied to the termination letter. In other cases the courts have ruled that a plan administrator’s notification obligation has been satisfied as soon as the notice has been sent in good faith via certified or first class mail to the recipient’s last known address. So even in this case, when Ms. Lazier argued she never received any correspondence regarding her COBRA coverage options, the fact that a print out from the US Postal Service showing the termination letter was processed on Aug 27, 2011 and went unclaimed, was proof enough for the court to rule in the employer’s favor.

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