COBRA OUTSOURCING: 'WtlATYOU, NEED TO KNOW -

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2 OUTSOURCING: 'WtlATYOU, NEED TO KNOW - Brian Meharry OVERVIEW In the last several decades, amount the of legislative changes to the health benefits industry has been perienced drastic. We changes have ex- recently to -mated through the American Recovery Re- investment Act (ARRA), more revisions are likely to come as health care reform priority for the current remains a Admin- BRiAN MEHARRY is President if Payroll, FSA, Administration for CPI-HR., a premier provider if payroll, human resource solutions, employee benifit packages. He is also responsiblefor leading CPI-HR.'s national expansion. In addition, CPI-HR is a member if the Benefit Advisors Network, the leading national network if independent benifit advisory consulting companies. For more iriformation, please visit: uunu.cpihr.com. KRJSTI jancar, Marketing Manager, focuses on Benefits,, FSA, Payroll businesses at CPI-HR.. She has her MBA from Clevel State University sits on the national Marketing Committee for the Benefit Advisors Network. For more information, please visit wwu/.cpihr.com or contact Kristi at [email protected]. Kristi Jancar istration. Since 63 percent' of employers offer health benefits to their employees, many companies are affected when health welfare benefits regulations change. When modifications occur, companies are liable for maintaining compliance-especially when there are penalties involved for noncompliance. In today's economy, employees in the human resources space are faced with many concerns. According to a survey conducted by MetLife, employers' top three benefits objectives entering into 2009 were employee retention, cost containment, increasing productivity." Similarly, a 2009 survey conducted by Hewitt Associates listed the top pressures on the HR function as reducing operating costs; better support business by focusing HR on strategic/core capabilities; support business changes; attract, retain, grow talent.' With these concerns to address, Human Resources personnel has little time to keep up with the ever-changing lscape of health welfare benefits. It is important for employers to have 20 "subject matter experts" upon whom they can rely. Outsourcing certain services often equates to efficiency overall cost reduction because the penalties associated with noncompliance can often outweigh the administrative cost of outsourcing. Specifically, this article will address the effectiveness of outsourcing administration. WHAT IS? The Consolidated Omnibus Budget Reconciliation Act () of 1985 gives employees their dependents the opportunity to maintain health coverage for limited periods of time after Qualifying Events occur. Qualifying Events are those that cause the employee to lose access to an employersponsored plan. These events can be related to voluntary or involuntary job loss, reduction in hours worked, transition between jobs, death, divorce, other life events." When those events occur, requires that employers with 20 or more employees offer continuation of benefits. The administration of the continuation of

3 OUTSOURCING: benefits can either be completed by the employer or outsourced to a third party. WHAT'S INVOLVED IN ADMINISTRATION? The components of administration include sending notices to employees, former employees, their dependents (spouses / or children); reinstating eligible individuals to one or more health plans; calculating collecting premiums; keeping records of all of these activities. While these tasks may not appear to be overly complex, the timing coordination of these activities is a large part of remain~ ing compliant with legislation. Take for instance the variety of notifications to be sent with varying deadlines: I Initial Notification: These notices are to be sent within 90 days to new employees their dependents that enroll in the employer-sponsored group health plan to notify them of their rights to continuation of coverage. I Qualifying Event N otification: These notices are sent to employees beneficiaries within 14 days of the plan sponsor being notified of a Qualifying Event. The notice is used to inform recipients of their rights to continuation of coverage under. I Notice of unavailability: This notice is sent to individuals when it has been determined that they are ineligible for coverage. This notice must be sent within 14 days of the qualifying event. WHAT YOU NEED TO KNOW I Notice of Terrninarion: This notice is sent to participants when their coverage under the group plan is about to expire either due to failure to pay premiums or the temporary period of coverage has come to an end." After the passing of ARRA on February 17, 2009 compliance became even more complex. Additional responsibilities required by employers under these recent modifications to include: I General Notification: This notification is to be provided to all qualified beneficiaries, whether enrolled in coverage or not, who had a qualifying event during the period from September 1, 2008 through December 31, This notice may be provided separately or with the election notice following a qualifying event. I Second Election Opportunity: If the employee was offered coverage as a result of an involuntary termination of employment that occurred from September 1, 2008 through February 16, 2009, that individual declined to elect coverage at that time (or elected later discontinued it); that employee his or her beneficiaries had to be provided with another opportunity to elect coverage pay a reduced premium. These notifications were to be sent by April 18, 2009 with a 60 day window to elect continuation of coverage. JANUARY/FEBRUARY Determining Assistance Eligible Individuals(AEls): ARRA authorizes the reduction of premium for "assistance eligible individuals." An Assistance Eligible Individual is a qualified beneficiary who was involuntarily terminated between September 1, 2008 December 31, The following would exclude an individual from being deemed assistanceeligible: I The individual is eligible for other group health coyerage (such as through a new employer's plan or a spouse's plan) or Medicare The employee's termination of employment was for gross misconduct I Subsidy Coordination: The employer (or other responsible entity) may recover the prefunded subsidy provided to Assistance Eligible Individuals by claiming the subsidy amount as a credit on their IRS Form 941 quarterly employment tax return." These recent changes to legislation have made this law even more complex to administer. The growing responsibilities required to remain compliant with this law places an administrative burden on employers that manage "in-house." Even if an employer utilizes specialized software to manage some of the administrative burdens associated with, it does not become a substitute for expertise. Relying on software to manage administration can have its caveats, courts have not shown sympathy to software glitches that may cause an employ-

4 er to improperly administer. In Chenoweth v. Wal-Mart Stores, Ine. the court sided with the qualified beneficiary when the employer explained that its computer system likely failed to send out a packet. The qualified beneficiary was awarded payment of medical bills, attorney's fees statutory penalties." PENALTIES FOR NONCOMPLIANCE is a government mated benefit for employees in organizationswith 20 or more employees. Failure to comply with these regulations can lead to serious penalties, employers that self-administer become liable for any repercussions associatedwith administering these benefits improperly. The most common violations of include: I Failure to send notices on time, or at all; I Neglecting to list Flexible SpendingAccountson notices; -E:GBRA-9lJfS0URCING:WHATYOIJ NEED m- KNOW--; Generally, the excise tax penalties act as a deterrent to noncompliance rather than a remedy for individuals that have been affected." Under the Employee Retirement Income Security Act of 1974 (ERISA) an employee can sue to recover statutory penalties of up to $110 per day, if initial notices or election notices are not provided on a timely basis, as required by.io In addition to government penalties, employees can also sue under ERISA for attorney's fees as seen recently in Fiveash v. Commerce Lexington, Inc. In this recent ruling a terminated employee was declined coverage because she had missed her election period window. The employee sued her former employer for notice violations was seeking related attorney's fees. Because the employee failed to receive an election notice in a timely fashion the court sided with the employee awarded statutory penalties that equated to $2,000, as well as awarding attorney fees.ii I Inadequate record keeping; I Not offering participants the right to add or change health plans at open enrollment. 8 The penalties for these violations are enforced as follows: employers who fail to notify terminated employees qualified beneficiaries of their privilegesmay be subject to a non-deductible excise tax penalty equal to $100 per day, per affected individual, per violation tor the period of noncompliance. In instances where there is more than one qualified beneficiary, this fee can be increased to $200 per day. The period of noncompliance starts with the date that the failure to comply first occurs ends when the failure is corrected. HOW DOES OUTSOURCING IMPACT EMPLOYERS? Outsourcing the administration of benefits can have many advantages. Using a Third Party Administrator (TPA) can offer employers a way to mitigate their risk of noncompliance penalties. The increased technological capabilities subject matter expertise of TP As can provide consistent efficient administration of benefits. In a survey conducted by Hewitt Associates in 2005, it was reported that 77 percent of companies outsource their administration." In a subsequent survey conducted by Hewitt, the top reasons for outsourcing HR administrative services were listed 22 as: reducing costs; gammg access to outside expertise; improving service quality; realigninglfocusing on strategic HR priorities; relief from regulatory / administrative burdens. In this survey, it was noted that 70 percent of respondents listed "Relief from regulatory/administrative burdens" as a top reason for outsourcing which is up from 46 percent in 2006, is likely caused by increased regulatory dems." Additional benefits of outsourcing include saving time increased productivity when employees do not have to partake in such tasks as printing mailing notifications, researching changes to the law, enrolling eligible participants, declining noneligible participants, tracking the status of these activities. All of these responsibilities can be assumed by a TPA. Relieving HR of these responsibilities allows them to focus their resources on the areas of concern that were previously addressed in this article. An added benefit that some companies find from outsourcing is a buffer between human resources former employees. There may be some circumstances in which this degree of separation is considered a good thing in sensitive situations. Further, it prevents employers from having to become a "collection agency" by collecting tracking premium payments from former employees.14 With all of the advantages of outsourcing administration, there are also potential downsides. Some of those may include: lack of control over the administration process; coordination of multiple TPAs (if more than one is present); lack of in-house expertise; difficulty in changing TPAs gaps in service. In every situation when deciding whether or not to use a

5 OUTSOURCING: WHAT YOU NEED TO KNOW TP A to administer these services employers should weigh all factors carefully, including evaluating the overall need to outsource, selecting an appropriate TPA, monitoring the TP As performance. 15 SELECTING A THIRD PARTY ADMINISTRATOR Not all TPAs are created equal. Some administrators have varying specialties including the size of clients they work with-large or small, multiple plans locations; geographic area; particular industries; particular plan types-fully insured or self-insured plans. In evaluating providers, an employer should consider these factors as well as the level of responsiveness they hope to receive from their TP A. 16 Another important factor in comparing vendors is determining which method of fees is a better fit for their organization. There are two basic methods for calculating costs for administration. The first approach is per qualifying event, the second is a per plan participant per month fee. In recent times, administrators may be charging additional fees as a repercussion of the ARRA. Some administrators have designed modified pricing models to compensate for recent fluctuations in administration. When determining which pricing model is the best fit for an organization, a company should consider the level of turnover they have. If turnover is high, then a per qualifying event notification fee structure will likely yield a higher cost than a per participant fee. Conversely, employers with little to no turnlover should look for an arrangement that would allow them to pay by Qualifying Event. Most importantly, employers should examine the indernnifi- cation language in their service agreements. Employers should review whether the clause covers liability for statutory penalties for failure to provide notices, attorney's fees, benefit obligations, liability for "other relief' under ERISA. Magazine. March 2006 Vol. 51, No FAQs For Employers About, Pre1l1iUIIIReduction Under ARRA. United States Department of Labor. Employee Benefits Security Administration. 15 July 2009, NOTES Software Outsourdng. XXI, 4" Quarter 2008, p Carolyn Hirschman "Sending off Magazine. March 2006 VoL 51, No admin- istration is an easy choice for employers given the recent regulatory changes to the cost of outsourcing this service, as compared to the liabilities that are involved with noncompliance. Employers not currently outsourcing this function should evaluate how much they spend today administering this benefit in-house what their exposure might be if administered improperly. Consequences of FailitlJ to Call/ply with. : The Developing Law, Employee Benefits Institute of America, LLC Section XXV, 4'h Quarter 2008, p Consequences of Failil1g to.: The Comply with Developing Law, Employee Benefits Institute of America, LLC Section XXV, 4'h Quarter 2008, p Notice Stopped Accrual of Penalties, Even Though Employer Later Issued Revised Notice. From the April 16, 2009 EBlA Weekly. [Fiveash v, Commerce Lexington Inc., 2009 WL (E.D. Ky. 2009)], Weekly Archives!! COU11:Cases. 12. Survey Highlights HR Outsourcing: Trends & Insights Hewitt Associates, MetaBaslcCMAssetCache_/ Assets/ Atticles!hrtrends_highlights.pdf. 13. Survey Findings HR Outsourcing Trends 1. _ The Kaiser Family Foundation Health Research Educational Trust Employer Health Benefits 2008 Summary of Findings, p Metl.ife Seventh Annual Study of Employee Benefits Trends: Findings from the National Survey of Employers Employees, p 7, whymetlife. com! trends/downloads! MetLife EBTS09.pdf 3. Survey Findings HR Outsourcing Trends Insights Hewitt Associates. MetaBasicCMAssetCache_! Assets! ArticlesI2009/HewitcHR_Outsourcin~ Study_2009_Results.pd[ Continuation of Health Belllifits-. United 7. Human Resources departments today are pulled in many directions. Companies are asking their HR departments to do more 'with fewer resources. Outsourcing functions that are administratively burdensome can provide HR departments the opportunity to free their time to work with management on solving important business objectives. 4. Carolyn Hirschman "Sending off cobra-premiumreductioner.html. CONCLUSION Outsourcing 5. States Department of 23 Insights Hewitt Associates, MetaBaslcCMAssetCache_! Assets! ArticlesI2009!Hewitt_HR_Outsourcin~ Study_2009 _Results.pd[ 14. Carolyn Hirschman "Sending off Magazine. March 2006 Vol. 51, No Scfnvare Outsouning. XXI, 4"' Quarter 2008, p Softwore Outsourcing. Labor. Secretary of Labor Hilda L. Solis. 15 July 2009, doll topic! health-plans/cobra. hrm. XXI, 4'h Quarter 2008, pp