Compliance with COBRA and ACA regulations is an essential responsibility for employers of all sizes, particularly in high-growth environments where rapid changes can increase regulatory challenges related to employee benefits.
Closely adhering to these requirements ensures companies avoid penalties, protect their reputation, and maintain employee trust. This review covers record keeping, reporting requirements, qualifying events, and common pitfalls and how to avoid them.
The Importance of COBRA and ACA Requirements
Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Affordable Care Act (ACA), employers are subject to specific healthcare provision requirements in particular scenarios.
COBRA mandates that employees and their families can continue their health benefits for a limited time after experiencing certain qualifying events, such as job loss or reduction in hours. Meanwhile, the ACA obligates Applicable Large Employers (ALEs) to provide affordable essential care to full-time workers and report this to the IRS through Forms 1094-C and 1095-C.
Fully insured plans primarily shift reporting responsibilities to the insurance carriers, whereas self-insured plans require employers to take on direct reporting responsibilities, even for individuals enrolled in COBRA coverage.
Reporting Requirements for Fully Insured vs. Self-Insured Plans
Employers offering fully insured medical plans are required to manage ACA reporting, especially in cases where employee hours are reduced. In these cases, coverage must be offered at the self-only COBRA rate, and the necessary information must be detailed in Forms 1094-C and 1095-C.
Fully insured employers are exempt from reporting in certain other qualifying events, such as termination of employment, as the insurance carrier takes responsibility for reporting COBRA-qualified beneficiaries through Form 1095-B.
Conversely, employers with self-insured medical plans have a broader set of reporting responsibilities. They must report COBRA coverage for all individuals covered under their plan, including active employees, dependents, and those enrolled in COBRA, to meet the §6055 coverage reporting requirements.
This part of the process entails detailing active and COBRA coverage in Part III of Form 1095-C. If the individual is no longer an employee, Line 14 should be coded as “1G,” with Part III documenting the months of coverage provided.
Qualifying Events and How They Impact Reporting
Qualifying events for COBRA include termination of employment, reduction in hours, divorce, and a dependent losing eligibility due to age. Each event requires specific reporting actions to remain compliant.
For instance, when an employee loses coverage due to termination, the employer reports the coverage offered during active employment. Post-termination months are then coded as “not offered coverage” in Part II of the 1095-C, with Line 14 coded as “1H” and Line 16 as “2A” to reflect the individual is no longer employed, regardless of whether COBRA was offered or elected.
A reduction in hours event requires continued documentation. If an employee loses full-time status and elects COBRA, the report must indicate that coverage was offered at the self-only COBRA rate (“1B” for employee-only coverage or “1E” for family coverage on Line 14). Declining COBRA should be documented in Line 16, which should reflect that the individual is still employed but no longer full-time (“2B”).
For situations where a spouse or dependent elects COBRA independently, such as after a divorce, a separate Form 1095-C must be generated. The former spouse’s information is reported in Part I, and Part III must include the months of COBRA coverage. Part II reflects that the former employee status applied for the entire year, using “1G” coding.
Accurate Record Keeping and Documentation
Employers must retain records of offers of COBRA coverage, beneficiary elections, and all related communications. Documentation should also outline how each qualifying event is handled, the specific coding used on Forms 1094-C and 1095-C, and any IRS guidance followed in determining reportable information.
Proper record-keeping helps avoid errors during reporting. Employers must be prepared to support their coding decisions with adequate records, especially in scenarios involving reductions in hours where COBRA was accepted or declined.
Inadequate documentation may lead to inaccuracies that could expose employers to penalties under ACA’s shared responsibility provisions, also known as “B penalties.”
Coordination Between Employers, Insurers, and Vendors
Since the insurance carrier handles the issuance of Form 1095-B for COBRA beneficiaries, effective communication between the employer and carrier is essential to avoid discrepancies. Inaccuracies between what the employer reports (through Form 1095-C) and what the carrier reports (through Form 1095-B) can lead to confusion and potential compliance issues.
Self-insured plans often involve partnerships with third-party administrators (TPAs) or vendors to assist with COBRA administration and ACA reporting. Vendors help with record-keeping, maintain compliance with reporting practices, and manage deadlines. However, selecting a reliable partner is essential.
Common Challenges and How to Avoid Penalties
Accurate coding is one of the most common challenges employers face, especially when transitioning between active employment, COBRA coverage, and other employment status changes.
Misreporting can lead to IRS inquiries or penalties, such as when COBRA continuation is improperly documented for former employees or incorrect codes are used to denote the type of coverage offered.
When a full-time employee reduces hours but remains within a stability period, leaving Line 16 blank exposes the employer to a potential “B penalty” if the IRS determines that an affordable coverage offer should have been reported.
Regular training for HR staff and consulting with legal or compliance experts can help reduce the risk of non-compliance. Conducting annual audits of ACA and COBRA practices helps identify potential vulnerabilities.
Audits should include reviewing reporting codes, verifying records for all COBRA-eligible employees, and making sure that third-party administrators are following proper procedures.
Achieve Compliance and Build Trust With SIMA Benefits Consulting Group
Staying compliant with COBRA and ACA regulations requires a thorough understanding of the nuances of each, accurate record-keeping, and proper coordination between all parties involved.
Managing these responsibilities effectively helps avoid penalties and builds trust with employees—making sure that they receive the coverage and employee benefits they need when it matters most. Implementing sound practices and partnering with knowledgeable experts empowers your organization to handle compliance confidently.
If your company needs expert assistance to simplify compliance with employee benefits, SIMA Benefits Consulting Group can help connect you with trusted vendor partners for assistance. Learn more about our wide range of financial services by filling out our online contact form or calling us at 1-(804)-285-5700 today.
