House Leaders Want to Reduce COBRA Confusion

COBRA notices fail to inform retirees about penalty risks for not enrolling in Medicare

Stephen Miller, CEBS By Stephen Miller, CEBS January 24, 2020
elder man in hospital

Leaders in the U.S. House of Representatives have asked federal agencies to clear up the confusion caused when retirees don't understand the lifetime financial risks of not enrolling in Medicare because they're continuing to receive employer-sponsored coverage under COBRA, the Consolidated Omnibus Budget Reconciliation Act.

On Jan. 21, the Democratic chairmen and top-ranking Republican members of three committees—Ways and Means, Energy and Commerce, and Education and Labor—sent a letter to Department of Health and Human Services (HHS) Secretary Alex Azar and Department of Labor (DOL) Secretary Eugene Scalia asking about unexpected Medicare penalties and out-of-pocket expenses triggered when retirees over age 65 fail to sign up for Medicare while taking advantage of COBRA options.

The DOL's model COBRA notice and related notifications do not spell out the risks for retirees who are receiving COBRA coverage but do not enroll in Medicare when they become eligible, generally at age 65 or earlier for those with disabilities. Consequently, "many retirees are unexpectedly exposed to...penalties for late enrollment in Medicare," the chairmen and ranking members wrote. "Some of this risk would be eliminated if COBRA notices addressed the interaction with Medicare, and vice versa. Unfortunately, such information is not required under either Medicare or COBRA, and thus, transparency and clear information about the interaction between the two is lacking."

[SHRM members-only HR Q&A: How does an employee's entitlement to Medicare affect his or her right to continued health coverage under COBRA?]

The COBRA-to-Medicare Trap

COBRA grants up to 18 months of continued coverage to those enrolled in group health plans after employment ends, unless they're fired for gross misconduct. The federal law applies to plans covering 20 or more employees but most states require smaller employers to offer continuation coverage as well, sometimes with longer coverage extension periods. 

Employers can require former employees to pay all premiums for COBRA continuation coverage, plus an additional 2 percent for administrative costs, although some employers provide COBRA coverage at reduced or no cost.

Medicare-eligible employees won't face premium penalties if they choose not to enroll in Medicare until they stop working, as long as they can provide proof they had employer-sponsored coverage or coverage through their spouse's employer, and don't delay enrolling in Medicare once employment ends.

However, COBRA users who fail to sign up for Medicare Part B—physician and outpatient services coverage—within eight months of turning 65 can face penalties in the form of higher Medicare premiums for the rest of their lives.  

If people no longer working don't sign up for Part B when they're eligible to do so, whether or not they have COBRA continuation coverage, "their monthly premium for Part B may go up 10 percent for each full 12-month period that they delayed enrollment," said Kim Buckey, vice president of client services at Burlington, Mass.-based DirectPath, a benefits education, enrollment and health care transparency firm. 

While Medicare Part D—prescription drug coverage—is optional, it also has late-enrollment penalties but these operate differently. The cost for retirees who enroll late in Part D depends on how long they went without Part D or equivalent ("creditable") prescription drug coverage, which can include COBRA coverage. 

"If you keep COBRA drug coverage and it is creditable, you may delay enrolling in a Medicare Part D drug plan until your COBRA ends," according to the nonprofit Medicare Rights Center, which advises retirees to verify with their former employer that its COBRA drug coverage is "creditable."

Secondary Payer Issues

For former employees who are Medicare-enrolled when coverage begins under COBRA, Medicare is the primary payer of health claims, and their former employer's group health plan becomes a secondary payer under Medicare Secondary Payer rules.

That leads to another potential hazard for retirees: If group health plans that provide COBRA coverage discover that enrollees were eligible for but failed to enroll in Medicare, the "group health plans can re-evaluate any paid claims," the lawmakers wrote. "As a result, many retirees are unexpectedly exposed to out-of-pocket liability for any costs paid under COBRA benefits on or after [the] date of Medicare eligibility," which can amount to thousands of dollars.

Action Sought

The House members called on HHS and the DOL to develop:

  • A strategy to address how COBRA affects Medicare late-enrollment penalties and secondary payment rules for group health plans.
  • Informative and clear communications that can be shared with employees.

They also asked the agencies to provide information on:

  • The number of potentially affected workers or a description of the barriers to producing such data and what is being done to overcome them.
  • Existing legal and administrative authorities that the agencies can use to address the information gap and steps they can take under this authority, including updates to HHS and DOL websites describing Medicare eligibility/enrollment and COBRA benefits.
  • Any statutory language or other barriers that may prevent the agencies from taking immediate steps to improve the information available to affected individuals.

"If COBRA and Medicare notices address the programs' interactions, including the potential for financial liability, the number of Americans who are unaware of the steps they should take to avoid late-enrollment penalties, delayed benefits, and unexpected out-of-pocket costs would be reduced," the lawmakers wrote.

Medicare's interaction with health savings accounts is also complex and confusing for employees and missteps can lead to tax penalties, although that issue was not addressed by the House members.

Employers Can Step In

Employers can inform employees about penalties they would face if they take COBRA coverage and do not enroll in Medicare on time after they reach age 65, benefit advisors point out. However, "from the employer's point of view, this is a complicated topic, and they are not legally obligated to address it," said Erin Naumann, senior communications consultant with Segal Benz in New York City.

"Employers need to determine how far to go based on company culture and what employees expect from the employer," he explained.

At the same time, an alert from law firm Stinson advised, a "recent increase in litigation involving COBRA notice deficiencies is good reason for employers to start taking a closer look at notices." As they do so, they may consider providing supplemental information on COBRA and Medicare beyond what the DOL model notice requires.

The Social Security Administration and the U.S. Centers for Medicare & Medicaid Services (CMS) can provide information on how income from employment may affect Medicare premiums for those who are still working and specific actions Medicare-eligible employees may take when they reach age 65.

Proposed Legislation

In addition to the COBRA notification changes that House lawmakers are asking regulators to consider, legislation has been introduced to remedy the COBRA-to-Medicare transition trap.

For instance, the Medicare Enrollment Protection Act (H.R. 2564), co-sponsored by Reps. Kurt Schrader, D‑Ore., and Gus Bilirakis, R-Fla., would create a special Medicare enrollment period for people moving out of COBRA coverage and exempt them from Medicare Part B late-enrollment penalties.

Related SHRM Articles:

For Employees Approaching Retirement, Health Coverage Decisions Loom, SHRM Online, November 2019

Medicare-Eligible Employees Pose HR Challenges, SHRM Online, February 2019


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