COBRA Litigation Risk on the Rise

If you are an employer that is subject to COBRA, you are probably aware that there are significant penalties that the Department of Labor can assess if you fail to offer coverage or give proper COBRA notice to employees or beneficiaries who lose the health coverage that you provide. These penalties are up to $110 per day for each violation, and they can add up quickly. This alone causes most employers and vendors to take COBRA compliance seriously. What you may not know is that these same employees or beneficiaries can also sue you for common and inadvertent COBRA compliance issues.

COBRA Litigation Risk on the Rise

COBRA Lawsuits

Unfortunately, there appears to be a new wave of class-action lawsuits targeting employers who may have used an outdated COBRA notice or maybe did not give clear instructions on where to mail COBRA premiums or really any number of other COBRA compliance violations.

One of the firms filing these lawsuits is ClassAction.com. Visiting their web site you will note a list of common mistakes employers make that can lead to litigation. These mistakes involve more than just missing deadlines in providing a COBRA election notice. The list includes contacting only the employee losing health coverage and forgetting to also contact the covered spouse and dependent children—remember each covered family member has an individual COBRA election right.

The ClassAction.com website also boasts about million dollar settlements recently won on behalf of individuals whose COBRA rights were either violated or not administered properly. This should be a wake-up call for employers to examine their COBRA procedures to ensure full compliance. Given the number of furloughs and lay-offs occurring throughout the U.S. due to COVID-19, this COBRA examination or audit becomes urgent.

Reviewing COBRA Practices

Findley stands ready to assist employers in reviewing their COBRA practices. This can even be in the context of a full ERISA audit. Since many employers outsource COBRA administration to a third party, Findley can also help employers review those administrative agreements and recommend changes to indemnification provisions to protect the employer from the administrator’s failures or omissions.

For more information about auditing COBRA administration and litigation risk, please contact Bruce Davis in the form below.

Published May 29, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved.

2020 Health and Group Benefits Plan Compliance Calendar

Calendar Plan Year & Calendar Employer Tax Year*

2020 Health and Group Benefits Plan Compliance Calendar January through June
2020 Health and Group Benefits Plan Compliance Calendar July through December

January 2020

31   Last day to report on Form W-2 to employees the cost of applicable employer-sponsored coverage under a group health plan

February 2020

28   Paper Filing – Last day for applicable large employer member to file one or more Forms 1094-C and to file Form 1095-C for each employee who was a full-time employee for any month of the calendar year 2019

28   Paper Filing – Last day for person that provides minimum essential health coverage to an individual during calendar year 2019 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS.

28   Notice of Breach of Unsecured Protected Health Information – breaches affecting fewer than 500 individuals. Last day for covered entities to notify HHS of a breach affecting fewer than 500 individuals. (Covered entities must notify affected individuals of such a breach without unreasonable delay and in no case later than 60 days following the discovery of a breach.)

March 2020

02   Last day to file electronically with DOL Form M-1 annual report for MEWAs (and certain entities claiming exception) for 2019 (without extension)

02   Last day for filers of IRS For 1095-B, Health Coverage, to furnish a copy of Form 1095-B to the person identified as the “responsible individual” on the form for coverage in 2018

02   Last day for an applicable large employer member to furnish a Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each of its full-time employees

31   Electronic Filing – Last day for an applicable large employer member to file one or more Forms 1094-C and to file a Form 1095-C for each employee who was a full-time employee for any month of the calendar year 2019 bb

31  Electronic Filing – Last day for person that provides minimum essential coverage to an individual during calendar-year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Insurance Offer and Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS

May 2020

15   Last day (unextended deadline) to file Form 990 series for a 2019 VEBA. An automatic filing extension of 6 months may be requested by filing Form 8868 by the due date of the Form 990

July 2020

28   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2019 without extension

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on disqualified benefits underfunded welfare plans

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on certain excess fringe benefits

September 2020

30   Last day to furnish Summary Annual Report (SAR) for 2019 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2020

Prior to Oct. 15, 2020 – Medicare Part D Creditable Coverage Notice – Employers offering prescription drug coverage to Medicare Part D eligible individuals must notify those individuals whether the offered prescription drug coverage is creditable coverage. Notice must be provided prior to Oct. 15, 2020.

15   Last day to file Form 5500 with extension

December 2020

15   Last day (with extension) to furnish Summary Annual Report (SAR) for 2019 plan year to participants and beneficiaries

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

Copyright © 2020 by Findley, Inc. All rights reserved.

To access other selected requirements with no specific deadline plus a detailed description of each compliance item, click below.

View 2020 Detailed Health and Welfare Plan Compliance Calendar/Checklist and other selected requirements with no specific deadline

Interested in other compliance calendars?

Defined Benefit

Defined Contribution

2019 Health and Welfare Plans Compliance Calendar/Checklist

Significant Due Dates – Calendar Plan Year & Calendar Employer Tax Year*

2019 Health and Group Benefits Compliance Calendar

January 2019

31   Last day to report on Form W-2 to employees the cost of applicable employer sponsored coverage under a group health plan

February 2019

28   Paper Filing – Last day for applicable large employer member to file one or more Forms 1094-C and to file Form 1095-C for each employee who was a full time employee for any month of the calendar year 2018

28   Paper Filing – Last day for person that provides minimum essential health coverage to an individual during calendar year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS.

28   Notice of Breach of Unsecured Protected Health Information – breaches affecting fewer than 500 individuals. Last day for covered entities to notify HHS of a breach affecting fewer than 500 individuals. (Covered entities must notify affected individuals of such a breach without unreasonable delay and in no case later than 60 days following the discovery of a breach.)

March 2019

01   Medicare Part D Creditable Coverage Disclosure to CMS – Last day for employers offering prescription drug coverage to Medicare Part D eligible individuals to disclose to CMS whether coverage is creditable prescription drug coverage by submitting a completed online Creditable Coverage Disclosure to CMS Form

01   Last day to file electronically with DOL Form M-1 annual report for MEWAs (and certain entities claiming exception) for 2018 (without extension)

04   Last day for filers of IRS For 1095-B, Health Coverage, to furnish a copy of Form 1095-B to the person identified as the “responsible individual” on the form for coverage in 2018

04   Last day for an applicable large employer member to furnish a Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each of its full-time employees

31   Electronic Filing – Last day for an applicable large employer member to file one or more Forms 1094-C and to file a Form 1095-C for each employee who was a full time employee for any month of the calendar year 2018. [IRS 2018 Instructions for Forms 1094-C and 1095-C provide that, while generally the Forms must be filed by March 31 when filing electronically, for calendar year 2018 the Forms are required to be filed by April 1, 2019 when filing electronically.]

31  Electronic Filing – Last day for person that provides minimum essential coverage to an individual during calendar-year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Insurance Offer and Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS. [The IRS 2018 Instructions for Forms 1094-B and 1095-B provide that, while generally the Forms must be filed by March 31 (when filing electronically) of the year following the calendar year of coverage, for Forms filed in 2019 reporting coverage provided in calendar year 2018 the Forms are required to be filed by April 1, 2019 when filing electronically.]

May 2019

15   Last day (unextended deadline) to file Form 990 series for a 2018 VEBA. An automatic filing extension of 6 months may be requested by filing Form 8868 by the due date of the Form 990

July 2019

29   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2018 without extension

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on disqualified benefits under funded welfare plans

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on certain excess fringe benefits

31   Last day for plan sponsor of a self-insured plan to file Form 720 and pay the PCORI fee for 2018 plan year

September 2019

30   Last day to furnish Summary Annual Report (SAR) for 2018 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2019

14   Prior to Oct. 15, 2019 – Medicare Part D Creditable Coverage Notice – Employers offering prescription drug coverage to Medicare Part D eligible individuals must notify those individuals whether the offered prescription drug coverage is creditable coverage. Notice must be provided prior to Oct. 15, 2019.

15   Last day to file Form 5500 with extension

December 2019

15   Last day (with extension) to furnish Summary Annual Report (SAR) for 2018 plan year to participants and beneficiaries

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

Copyright © 2019 by Findley, Inc. All rights reserved.

To access other selected requirements with no specific deadline plus a detailed description of each compliance item, click below.

View 2019 Detailed Health and Welfare Plan Compliance Calendar/Checklist and other selected requirements with no specific deadline

Interested in other compliance calendars?

Defined Benefit

Defined Contribution

Terminating an Overfunded Pension Plan? Who Gets the Excess?

If a single employer overfunded pension plan is terminating and its participants and beneficiaries are on track to receive full benefits, the plan sponsor will likely ask if the excess is theirs. In other words, will the surplus revert to the plan sponsor? The answer is maybe.

To determine how excess plan funds can be exhausted, which may include a reversion to the plan sponsor, there are 7 possibilities to consider. As always, the place to start with any retirement plan issue is to answer the question: what does the plan say?

Terminating an Overfunded Pension Plan

Possibilities to Consider if the Terminating Plan Document does not Permit a Reversion

A plan document may state that no part of the plan’s assets can be diverted for any purpose other than for the exclusive benefit of participants and beneficiaries. The plan may also indicate that the plan cannot be amended to designate any part of the assets to become the employer’s property. If an overfunded pension plan has these provisions, it is tempting to assume the only choice is to allocate the excess among participants and beneficiaries. However, even in the face of these explicit provisions, there may be other provisions that permit an employer to recover or use a portion of the excess assets.

Possibilities 1 and 2 – Return of Mistaken and Nondeductible Contributions

Plan documents generally indicate that if an employer makes an excessive plan contribution due to a mistake, the employer can demand the surplus is returned. The employer is required to request this from the trustee within one year after the contribution was made to the trust. In addition, plans generally provide that a contribution is made on the condition that the employer receives a corresponding tax deduction. In the unlikely event that the deduction is not permitted by the IRS, the contribution can be returned to the employer within one year following the IRS’ final determination that the tax deduction was not allowed.

An example of a contribution mistake may be an actuarial calculation error. In a 2014 Private Letter Ruling, the IRS considered a surplus reversion when a terminating single employer plan purchased an annuity contract. The excess assets were created when the purchase price selected to fully fund plan benefits actually came in at a lower price than estimated. Using reasonable actuarial assumptions, the plan’s actuary had advised the employer to contribute a higher amount than was ultimately calculated as necessary by the insurance company. In this case, the IRS permitted the return of the mistaken excess contribution. 

Possibility 3 – Have all Reasonable Plan Expenses Been Paid from the Trust?

Many plan documents provide that plan expenses can be paid from the trust. In some instances, appropriate and reasonable plan termination expenses will go a long way to exhaust excess assets. Reasonable plan termination expenses include determination letter costs and fees, service provider termination charges and termination implementation charges such as those for the plan audit, preparing and filing annual reports, calculating benefits, and preparing benefit statements.

Possibilities to Consider if the Terminating Plan Document Permits a Reversion

The overfunded pension plan may explicitly state that excess assets, once all of the plan’s obligations to participants and beneficiaries have been satisfied, may revert to the plan sponsor. On the other hand, the plan may not explicitly permit a reversion. In that case, the plan sponsor may want to consider amending the plan to allow a reversion well ahead of the anticipated termination.

Possibilities 4 – Take a Reversion

If the first three possibilities do not work or are inadequate to exhaust the surplus, and the overfunded pension plan allows a reversion, there are three more possibilities. In the first, the employer takes all. The employer can take all of the excess funds back subject to a 50% excise tax, as well as applicable federal tax.  Notably, a not-for-profit organization may not be subject to the excise tax on the reversion at all if it has always been tax-exempt.

Possibility 5  – Transfer the Excess to a Qualified Replacement Plan

The opportunity to pay only a 20% excise tax (and any applicable federal tax) on part of the surplus is available where the remaining excess assets are transferred from the terminating pension plan to a newly implemented or preexisting qualified replacement plan (QRP). A QRP can be any type of qualified retirement plan including a profit sharing plan, 401(k) plan, or money purchase plan. For example, an employer’s or a parent company’s 401(k) plan, whether newly implemented or preexisting, may qualify as a qualified replacement plan.

Once an appropriate plan is chosen, the amount transferred into the QRP must be allocated directly into participant accounts within the year of the transfer or deposited into a suspense account and allocated over seven years, beginning with the year of the transfer.

There are additional requirements for a qualified replacement plan. At least 95% of the active participants from the terminated plan who remain as employees must participate in the QRP. In addition, the employer is required to transfer a minimum of 25% of the surplus into a qualified replacement plan prior to the reversion. If all of the QRP requirements are satisfied, then only the amounts reverted to the employer are subject to a 20% excise tax and federal tax, if applicable. 

Possibility 6 – Provide Pro Rata Benefit Increases

If the employer chooses not to use a QRP, it can still limit the excise tax if it takes back 80% or less of the surplus and provides pro rata or proportionate benefit increases in the accrued benefits of all qualified participants. The amendment to provide the benefit increases must take effect on the plan’s termination date and must benefit all qualified participants. A qualified participant is an active participant, a participant or beneficiary in pay status, or a terminated vested participant whose credited service under the plan ended during the period beginning 3 years before termination date and ending with the date of the final distribution of plan assets. In addition, certain other conditions apply including how much of the increases are allowed to go to participants who are not active.

A Possibility That’s Always Available

Possibility 7 – Allocate all of the Excess Among Participants and Beneficiaries

It is always possible to allocate all of the excess assets among participants in a nondiscriminatory way that meets all applicable law. A plan amendment is necessary to provide for these higher benefits.

You may know at the outset of terminating your plan that there will be excess assets. On the other hand, a surplus may come as a surprise. Even if a pension plan is underfunded at the time the termination process officially begins, it is possible that the plan becomes overfunded during the approximate 12 month time period to terminate the plan. In this scenario, the plan sponsor will have to address what to do with the excess assets.

Dealing with the excess assets in a terminating defined benefit plan can be a challenge. There are traps for the unwary, and considerations beyond the scope of this article. Plan sponsors need to determine first how the excess was created, because the answer to that question may determine what happens to it. If there is no obvious answer in how to deal with the surplus, then the plan sponsor needs to look at all of the possibilities. It may be that a combination of uses for the excess plan assets is best. If you think you will find yourself in this situation with your defined benefit plan, consult your trusted advisors at your earliest opportunity so that you know the possibilities available to you.

Questions on your defined benefit pension plan’s possibilities? Need help navigating your options? Please contact Sheila Ninnenam in the form below.

Published July 10, 2019

© 2019 Findley. All Rights Reserved.

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