Employer-Sponsored Benefit Plans

COBRA Fraud: When An Employer Can Terminate Early

Employers with 20 or more employees are generally required to offer continuing health care coverage to departing staff members. This is commonly referred to as ‘COBRA’ after the legislation that made it law: the Consolidated Omnibus Budget Reconciliation Act of 1985.

Like any type of health care benefit, COBRA coverage can present an opportunity for dishonest individuals to try to commit fraud. If you catch a qualified beneficiary submitting a fraudulent claim to your employer-sponsored health plan, you may be able to terminate their coverage early but only if you follow the rules.

Three requirements

You may terminate a qualified beneficiary’s COBRA coverage for submission of fraudulent claims if three requirements are met:

  1. Your health plan must permit you to terminate active employees’ coverage for the same reason.
  2. The plan must allow you to terminate COBRA coverage for cause.
  3. The plan’s COBRA notices and communications must disclose the plan’s right to terminate coverage for cause.

You may terminate a qualified beneficiary’s COBRA coverage before the end of the maximum coverage period (generally 18 or 36 months, depending on the qualifying event) only for reasons specified in the COBRA statute and regulations.

The regulations specify that a qualified beneficiary’s coverage may be terminated for cause on the same basis that would apply to similarly situated active employees under the terms of the plan. Submission of fraudulent claims is listed as an example.

Thus, if an active employee’s coverage may be terminated for submission of fraudulent claims, COBRA coverage may be terminated early for the same reason. But this holds true only as allowed under the plan and disclosed in COBRA notices and the plan’s summary plan description.

Proceed with caution

There is little additional guidance on early termination of COBRA for cause — submission of fraudulent claims is the only basis that is specifically mentioned in the regulations. If you decide to terminate a qualified beneficiary’s coverage based on a fraudulent submission, do not forget about the required notice of termination of COBRA coverage that must be sent to any qualified beneficiary whose COBRA coverage terminates before the expiration of the maximum coverage period.

Should you wish to terminate COBRA coverage early for other types of misconduct, you will need to analyze the circumstances to determine whether the plan would allow termination of an active employee’s coverage for that transgression.

Ask for help

Do not terminate coverage early, whether for fraud or another reason, without consulting legal counsel and your plan’s insurer or stop-loss insurer, if applicable. Our firm can provide assistance in monitoring and managing the financial risks of offering health care benefits.

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