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DOL Issues Revised COBRA Notices to Help Retirees Avoid Medicare Mistakes

Retiring workers ages 65 and older who elect COBRA risk higher Medicare premiums

May 5, 2020 | Stephen Miller, CEBS

A nurse is talking to an older man on a couch.

The U.S. Department of Labor (DOL) has added language to COBRA model notices to inform retirees of the financial risks of postponing enrollment in Medicare because they've elected to receive employer-sponsored coverage under COBRA.

The DOL issued the revised COBRA model notices on May 1, along with new COBRA Frequently Asked Questions, to better inform retirees about how electing COBRA coverage could lead to higher lifetime Medicare premium costs.

COBRA administrators can use the new Model COBRA Continuation Coverage General Notice and the Model COBRA Continuation Coverage Election Notice to notify plan participants and beneficiaries of their rights to continued health care coverage.

According to the DOL, the new notices and FAQs:

Explain that there may be advantages to enrolling in Medicare before, or instead of, electing COBRA.

Highlight that if an individual is eligible for both COBRA and Medicare, electing COBRA coverage may affect enrollment into Medicare as well as certain out-of-pocket costs.

"The information we're providing today will help Medicare-eligible Americans make key decisions regarding their health care coverage," said U.S. Secretary of Labor Eugene Scalia.

"Employers are not required to follow the model notices, so there is no specific 'effective date' for implementing the changes," attorneys at Littler explained. "Employers that follow the model notices, however, will be deemed to have complied with COBRA's notice requirements."

They added, "there is very little reason not to use the model notice or something very substantially similar to it."

[SHRM members-only HR Q&A: What notices must be provided to qualified beneficiaries under COBRA?]

Avoiding the COBRA/Medicare Trap

Some are questioning whether the new notices and guidance adequately warn retirees about the life-long financial risks of failing to timely enroll in Medicare once employment ends.

These risks to retirees are often difficult for employees to understand. For instance, 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 who are 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."

House Members Requested Action

On Jan. 21, 2020, the Democratic chairmen and top-ranking Republican members of three House committees—Ways and Means, Energy and Commerce, and Education and Labor—sent a letter to Scalia and to Department of Health and Human Services Secretary Alex Azar, stating that the DOL's existing model COBRA notice and related notifications did 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."

The lawmakers also pointed out in their letter another risk for retirees. If employer-sponsored 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 [their] date of Medicare eligibility," which can amount to thousands of dollars.

Risks Adequately Spelled Out?

Buckey wishes that the notices and FAQs had done a better job clarifying issues around the timing of Medicare enrollment and potential penalties. "It would have been helpful to include examples showing the impact of certain time frames for enrollment," she said. "While I understand why the agencies stayed away from adding that level of detail to the notices, this should certainly have been addressed in the FAQs."

Moreover, Question 3 in the FAQs includes the statement, "Certain plans may pay as if secondary to Medicare, even if you are not enrolled in Medicare."

Buckey noted, "If I'm the reader, I want to know what plans might do that? A better statement might have been, "Some plans may pay based on the assumption that you have enrolled in Medicare—even if you haven't. Check with your former employer for more information."

[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?]

Review Notice Practices

"The DOL has made it abundantly clear that use of the notices are not mandatory, but would be considered good faith compliance—except only by the DOL, "noted Karen Martinez and Mark Stember, attorneys at Kilpatrick Townsend. "Because qualified beneficiaries have an independent right to sue under ERISA for COBRA violations, the recent trend in COBRA notice litigation will not be affected."

They advised, "If a plan sponsor has undergone furloughs, the threat of COBRA notice litigation will only increase due to the larger number of outstanding notices and the larger number of potential plaintiffs. This puts more pressure on plan sponsors to properly review and vet their COBRA notices."

How COBRA Works

COBRA generally 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.

During the COVID-19 pandemic, some employers are choosing to pay for a former employee's COBRA coverage if the person has been laid off, or to do so for current employees who lost group health plan coverage when they were furloughed or had their hours reduced.

Related SHRM Articles:

DOL Temporarily Extends COBRA Deadlines, SHRM Online, May 2020

COBRA Notice Litigation Mushrooms, Along with Settlements, SHRM Online, March 2020

House Leaders Want to Reduce COBRA Confusion, SHRM Online, January 2020

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

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