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You cannot reduce or eliminate health coverage in anticipation of a qualifying event. If you do so, the qualified beneficiary may be entitled to the benefit that would otherwise be lost. An across-the-board reduction or elimination of benefits may be seen as being done in anticipation of a qualifying event.
In that situation, the law may require you to make coverage available when there is a qualifying event. Carefully document your reasons for reducing or eliminating health coverage benefits.1
You cannot withhold anything to which a qualified beneficiary is otherwise entitled (for example, wages or vacation pay) to compel payment for COBRA coverage or to coerce the qualified beneficiary to give up rights to COBRA coverage.2
You may face penalties of $100 per day ($200 per day if more than one qualified beneficiary is affected) for each day’s failure to comply with COBRA during the noncompliance period. The noncompliance period runs from the date the failure to comply with COBRA first occurs and ends either when the failure is corrected or six months after the last day of the qualified beneficiary’s COBRA coverage.3
The overall limit on penalties for failures “which are due to reasonable cause and not to willful neglect” is $500,000; or if less, 10 percent of the amount an employer paid or incurred during the preceding taxable year for group health care plans.4 Under ERISA, nongovernmental plan administrators face penalties of up to $110 per day for failure to provide notice of a qualifying event to a qualified beneficiary.5
The procedure for correcting failures to offer COBRA coverage contains no simple solutions. The IRS appears to suggest that if a failure to offer COBRA coverage occurs, the solution is to provide qualified beneficiaries with sufficient coverage to put them on the footing they would have had if COBRA coverage was offered promptly. Consult experienced benefits counsel when faced with the situation of trying to correct any COBRA compliance errors.
1. Treas. Reg. sec. 54.4980B-4, Q&A-4
2. Treas. Reg. sec. 54.4980B-6, Q&A-5
3. IRS Code sec. 4980B(b)2
4. IRS Code sec. 4980B(c)4(a)
5. ERISA sec. 502(c)(7)