Once a timely COBRA election and initial premium payment have been made, many employer-sponsored group health plans automatically terminate COBRA coverage if any premium payment is not received by the end of the applicable 30-day COBRA premium payment grace period. If a plan receives a slightly reduced premium payment (a payment that is slightly less than the amount due) and does not receive the rest of the premium by the thirty day grace period following the payment due date, can the plan automatically terminate a qualified beneficiary’s COBRA coverage?
Unfortunately, the answer to this question is no. Coverage cannot be terminated until the plan takes further steps to allow the qualified beneficiary to make up the shortfall. In general, plans are permitted to terminate COBRA coverage for a qualified beneficiary whose premium payment is not made on a timely basis, and plans may treat significant premium underpayments the same as nonpayment—i.e., the plan may terminate COBRA coverage if full payment is not received by the end of the applicable grace period.
However, the IRS COBRA regulations contain special rules for any premium payment that constitutes an “insignificant shortfall.” A shortfall is deemed “insignificant” if it is less than or equal to the lesser of:
- $50; or,
- 10% of the amount of the premium that the plan requires to be paid.
For such shortfalls, COBRA coverage may not be terminated automatically; rather, the plan must notify the qualified beneficiary of the shortfall and give him or her a reasonable period of time in which to make up the difference before COBRA coverage is terminated. A period of 30 days after the shortfall notice is considered a “reasonable period,” although less than 30 days may be reasonable in some circumstances.
This means that, for a required premium of $490, a qualified beneficiary could underpay by as much as $49 and must still be given notice and time (conservatively, 30 days) to make up the shortfall. Alternatively, the plan could simply choose to accept the underpayment as full payment. A plan’s shortfall procedures should be incorporated into its written COBRA procedures, and a notice form should be prepared for use when an insignificant shortfall occurs. Plan administrators may wish to send a shortfall notice immediately when a partial payment is received, rather than waiting until the end of the premium payment grace period. Sending the shortfall notice sooner rather than later will start the 30-day shortfall repayment period running earlier.
In general, terminating COBRA for non-payment or for short payment requires strict adherence to COBRA’s rules. If your group health plan uses a COBRA administrator, the administrator should handle these issues. However, employers that self-administer COBRA should ensure they are familiar with all the COBRA rules.
