Understand COBRA

When you become eligible for COBRA insurance, your employer is required to send you a notice informing you of your options. Not only are they required to send you notice, they’re required to send this notice to you through the mail and can’t just give it to you – that doesn’t count as notice. However, what happens if the package gets lost in the mail (possible)? What if they only say they’ve mailed it but haven’t actually mail it (not very likely)? What recourse do you have?

Well, according to this explanation, if your (former) company has a system in place for these notices and can show that they’ve sent one out, even if it never reached you, then they are probably off the hook.

If they can’t show that they have a system in place or some sort of proof they mailed it out, then they are in violation and while I’m not sure what that means for you, you can get some sort of resolution since they’ve violated the law.

Gross misconduct is not considered a qualifying event and thus if you are dismissed and lose your health benefits because of gross misconduct, you are not eligible for health coverage under COBRA (your employer is not required by law to extend health benefits to you). However, the COBRA legislation doesn’t specify what is considered gross misconduct and neither have court decisions. That being said, it will take a lot for an employer to dismiss someone for gross misconduct because they know that the former employee will likely challenge the dismissal in court, a process no company really enjoys going through.

Normally, if you fail to pay the premiums on a COBRA, your employer can terminate your health insurance coverage. The exception to this rule is commonly known as the “short payment rule” and that is when your payment is less than the full premiums but above a special limit. How short your payment can be is the lesser of $50 or 10% of your monthly health insurance premiums. Let take a look at some examples…

Example 1: Jack normally pays $400 per month for COBRA health insurance coverage but this month he’s a little short. If Jack pays $361, which puts him $39 short (less than 10%, which is $40), his employer may not terminate health insurance coverage. If Jack pays $359, which puts him $41 short, his employer can terminate his coverage.

Example 2: Steve normally pays $600 per month for COBRA health insurance coverage, but this month he can only pay $549, which is $51 short, so his employer can terminate his insurance. The 10% rule does not apply because 10% of $600 ($60) is more than $50, so they use $50 as the short payment amount.

With a short payment, the employer can:

1. Accept it as full payment.
2. Accept payment but notify the insured that they are short and give them 30 days to make up the difference.

Why would a company accept it as full payment when it’s clearly not? Because sometimes it costs more to go after someone for the payment than it does just to let it go.

At some point, your COBRA insurance will expire and your employer will no longer be required to carry you on their health insurance plan. At that point, you will have to being searching for a health insurance carrier and I have a few suggestions as to how to go about doing that.

Research whether any of the professional organizations you are a member of can offer any sort of health insurance benefits. While this is rare, I have heard of organizations offering health insurance and it could be a great way to security health benefits. If you can’t get it through any sort of organizations or associations, you may have to go it alone.

Going it alone is difficult, but there are some online tools available to help you in your search. Kanetix is an online insurance comparison shopping engine that will be able to help you compare your health insurance options (and auto, homeowners, etc). Through Kanetix, NetQuote will be able to give you a quote for insurance with a major medical plan (MMP), preferred provider organizations (PPO), and point of service (POS) insurers; as well as coverage for dental coverage, maternity coverage, prescription benefit, and vision care benefit.

COBRA requires that your company offer you health insurance through their plan, you simply foot the entire bill. However, as many dot-com casualties learned, if your company goes out of business then there is no health insurance plan for you to be a part of – COBRA can’t help you because there’s no plan for you to be a part of. So, what are you supposed to do?

Well, for starters, find out if your company outsourced your health benefits, as many smaller companies will do. If your company did, you’re in luck because technically that company offers your health benefits and COBRA will require that they offer you health benefits even though your “real” company has gone bankrupt. This comes really at no cost to them because you’re paying your way.

If that’s not the case, unfortunately you’ll have to begin researching health insurance programs…

A Summary Plan Description (SPD) is the package your employer is legally required to mail to you upon the qualifying event. In fact, if the employer doesn’t make a good faith effort to mail you the package, you can sue for damages! However, if the employer can show that it made an effort to mail the package, then you have no grounds on which to sue them. Below is an example of a court case in which a former employee attempted to sue her former employer because she never received a Summary Plan Description and how the employer, ENI Technology, acted despicably.

In Sunderlin v. First Reliance Standard and ENI Technology (U.S. District Court, Western District of New York, Dkt. No. 00-CV-6253, November 4, 2002), Terry Sun sued ENI Technology on the grounds that ENI denied her disability benefits and that ENI failed to provide a Summary Plan Description in a timely manner.

Sunderlin had made numerous requests for an SPD but they were ignored for seemingly frivolous reasons. ENI responded to the first request by sending her a letter stating that the person she addressed the request to no longer worked there. Her second request was met with a copy of the disability insurance policy and subsequent requests were useless. ENI claimed that the insurance policy they mailed was the SPD.

The ruling of the court was that ERISA required that a plan administrator send a copy of the latest Summary Plan Description upon request and it must be accurate and comprehensive, explaining the rights and obligations of participants under the employer’s plan. And it has to be written in plain enough English so that the average participant can understand it!

The court, in reviewing the policy, decided the policy that ENI provided wasn’t an SPD because it failed to contain the name of the plan, the name or address of the administrator, or even explain the denial of claims procedure. It was obtuse, confusing, and even contained incorrect information. Ultimately, the court assessed a fine of $15 per day for 1165 days for a total award of $17,475 – even adding that ENI acted in bad faith throughout litigation.

COBRA technically applies to health plans and a health plan is subject to the COBRA rules if the employer employs twenty or more employees on more than fifty percent of its business days, counting both full-time and part-time employees. Part-time employees count as fractions of an employee based on their hours as a percent of a full work week, forty hours. If the health plan is subject to COBRA rules, your employer is required by law to notify you of their responsibility to provide COBRA in the event of a qualify event.

Now, If your employer no longer offers health coverage of any kind (say, because of bankruptcy) then they are not required to offer health coverage under COBRA (since it applies to the health plan, not the employer).

For example, if John is one of thirty employees working for Company A and he loses his job (a qualifying event) because Company A goes out business, then he is not eligible for health coverage under COBRA because that health coverage no longer exists. The fact that the employer must offer insurance under COBRA to John because he lost coverage because of a qualifying event is irrelevant because Company A no longer exists.

Qualifying events are those events that would cause someone to lose health coverage and the type of qualify event will define who the qualified beneficiaries are and how long the health plan will have to offer coverage. If one of those events occurs below (such as reduction of hours) doesn’t result in the loss of health coverage, then technically it’s not a qualifying event (but at that point the distinction wouldn’t matter because the employee wouldn’t need COBRA since he or she would still be covered by his or her employer’s health plan).

As an employee, there are two types of qualifying events where COBRA would apply:

1. Termination (of employment) for any reason except gross misconduct.
2. Reduction in work hours.

As the spouse of an employee, there are five types of qualifying events where COBRA would apply:

1. Termination of the covered employee’s employment for any reason except gross misconduct.
2. Reduction work hours by the covered employee.
3. Covered employee becoming covered by Medicare.
4. Divoce or legal separation.
5. Death of covered employee.

As the dependent children of an employee, there is only one qualify event where COBRA would apply:

1. Loss of dependent child status.

If your employer offered a flexible spending account then under COBRA you would be allowed to continue the FSA until the end of its period. So, if let’s say your FSA accounts ran from January to December and you left your job in March, a COBRA would allow you to continue requesting reimbursements until December of this year. You would not be able to elect FSA coverage after December though, so next year you’d be without a FSA.

The biggest thing to remember about paying for a COBRA is that all payments are made on an after-tax basis. Whereas you paid for your health benefits pre-tax before, they are now after-tax, which can make the increases even bigger. Another important thing to remember about payments for a COBRA are that the rules are strict and unyielding. A bill will be sent monthly and premium payments are due at the first of the month with no notices of delinquency if you miss a payment. If full payment is not postmarked within 30 days after the due date of the current month, the COBRA coverage will be terminated. They won’t call, they won’t write, they just end the coverage. It is very important that you follow up, either with a telephone call or through a web interface (if available), each payment because the rules are so unforgiving.

If you fall on financial hardship, which is often the case with any of the qualifying events, it is acceptable for a third party to make COBRA payments though the payment rules are still in effect. Also, in some states, the state itself may subsidize COBRA premiums for individuals under a certain income level.

Here are the other guidelines:

1. Include the social security number of the insured on the check.
2. Make it out to your plan administrator, not your former employer.
3. Review the package sent by your administrator, this will include additional guidelines.