Employee Benefits: Improvements Needed in Enforcing Health Insurance Continuation Requirements

Published by the Government Accountability Office on 1990-12-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


    I    ..^_.-... . .._...__._^.
                             . .._._.
                                  _ .. ..-“--.---    .-.._-----
  Ihw~llll,c~I* I!)!)()
                                                           Improvements Needed
                                                           in Enforcing Health


                                                  General Accoe       Omce unlw epeclfl~
                                                  appruvbd by the Office of Congreeeional

-..----      _..   -----..-   _...__   --.-._--      ,..   ,I,,#   >   ,,.,.   ,..   ,....   ..,..,.

_.I.I_   “.l-,“ll”----~   ------
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   Human Resources Division


                   December 18,199O

                   The Honorable John Glenn
                   United States Senate

                   Dear Senator Glenn:

                   On May 1, 1989, you asked us to review the Department of Labor’s and
                   the Internal Revenue Service’s (IRS) enforcement of the health insurance
                   continuation requirements of the Consolidated Omnibus Budget Recon-
                   ciliation Act of 1985 (COBRA). Specifically, you requested information on
                   their (1) efforts to help private individuals who bring cases of alleged
                   noncompliance by employers to their attention, (2) procedures for inves-
                   tigating these allegations, and (3) enforcement history.

                   We provided an interim response to you by letter dated January 30,
                   1990. This report is our final response.

Results in Brief   ante with COBRA’S health insurance continuation requirements. IRS sends
                   informational material to persons inquiring about continued insurance
                   benefits. This material states that while there are sanctions in the
                   Internal Revenue Code for employers who violate COBRA, the Code pro-
                   vides no remedy for individuals denied benefits. They are told that vio-
                   lations of the Code may also violate laws administered by Labor and to
                   contact Labor if they need additional information. The informational
                   material does not suggest that persons who believe they have been
                   improperly denied benefits notify IRS so it can consider imposing tax

                   Labor provides information on benefit entitlement and how to obtain
                   benefits. Labor will also contact employers on behalf of individuals who
                   appear entitled to continued health insurance and advise the employers
                   of their responsibilities. Hundreds of employees and other beneficiaries
                   have been helped through its efforts, according to Labor.

                   Labor officials believe that most employers will comply when they are
                   made aware of their responsibilities. However, if employers do not
                   comply, Labor will not take enforcement action unless a number of bene-
                   ficiaries are involved. In cases involving one beneficiary, the person is
                   advised of his or her right to sue. Labor has taken enforcement action
                   against two employers since COBRA’S enactment. One case involved four

                   Page 1                      GAO/HRD-91-37   Health Insurance   Continuation   Requirements

             employees; the other involved thousands. Both cases resulted in benefits
             to employees.

             IHSrefers allegations of noncompliance to its district offices. These
             offices decide whether to pursue the case to determine whether tax pen-
             alties should be imposed. IRS headquarters has received over 100 allega-
             tions of violations. In most cases, IRS had not decided whether it would
             take action on the allegations. In the five cases where IRS had begun
             action, only one examination was completed. In that case, IRS found no

             In this report we are recommending actions by IRS and Labor to help
             ensure that potential COBRA violations are reported to IRS.

             Title X of COBRA amended the Employee Retirement Income Security Act
Background   of 1974 (ERISA) and the Internal Revenue Code to require continuing
             employer-sponsored group health insurance in certain circumstances.l
             Through group health plans, workers and their dependents may obtain
             hospitalization, physician, and other health services at less cost than
             they could purchase them individually. Title X was enacted because of
             congressional concern about many Americans who lack health insur-
             ance. Some of them had health insurance but lost it because of job loss,
             or death of or divorce from the covered worker. Title X was designed to
             help people in these circumstances.

             Title X requires private employers with 20 or more employees that offer
             a group health insurance plan to provide employees and their families
             the option of continued coverage if certain qualifying events occur, such
             as loss of job except for gross misconduct, death of the covered em-
             ployee, or divorce.

             Generally the coverage is to be provided for 18 or 36 months depending
             on the type of qualifying event. The covered persons can be required to
             pay up to 102 percent of what would normally be the combined
             employer/employee cost for the coverage. The Secretary of Labor can
             take civil action to enforce the continuation requirements, ERISA pro-
             vides that plan administrators who fail to provide participants and ben-
             eficiaries certain notices regarding eligibility or information they

             ‘Title X also amended the Public Health S&vice Act to provide coverage to state and local govern-
             ment employees, and coverage was later extended to federal employees. These employees are not
             discussed in this report,

             Page 2                            GAO/H&D-91-37     Health Insurance   Continuation   Requirements

                  request may be liable for up to $100 per day of noncompliance and such
                  other relief as a court may determine proper. In addition, participants or
                  beneficiaries may take civil action to enforce their rights, Title X
                  amended the Internal Revenue Code to deny the deduction of all health
                  insurance expenses for any group health plan unless all the employer’s
                  plans met COBRA’S continuing coverage requirements. Public Law
                  100-647, enacted on November 10, 1988, replaced this sanction with an
                  excise tax of $100 or $200 (if there is more than one beneficiary for the
                  same qualifying event) per day of noncompliance for each violation.
                  There are also upper and lower limits on the amount of excise tax
                  imposed and provisions for waiver of the tax. In addition, persons other
                  then employers can be liable for the excise tax. For example, an insurer
                  providing coverage under a group health plan can be liable if the insurer
                  fails to comply with an employer’s request to make insurance available
                  to a qualified COBRA beneficiary.

                  The Secretary of Labor was authorized to issue regulations imple-
                  menting the disclosure and reporting requirements for the health contin-
                  uation requirements. The Secretary of the Treasury was authorized to
                  issue regulations defining required coverage and premium cost

                  On June 26, 1986, Labor issued a model notice summarizing the rights
                  and obligations of employees and their families that employers could use
                  to satisfy the general notification provisions. Labor has no plans to issue
                  additional regulations. Labor is planning to issue a booklet that will pro-
                  vide information on individuals’ COBRA rights.

                  On June 15, 1987, IRS issued proposed regulations related to some health
                  continuation requirements. Additional regulations are being drafted,
                  including those to reflect the revised sanctions and other substantive
                  changes enacted in subsequent legislation. IRS officials advised us that
                  IRS plans to issue these regulations in proposed form as expeditiously as
                  possible but does not currently have an estimated issuance date.

                  To respond to your request we interviewed officials at Labor and IRS
Scope and         headquarters and obtained data on (1) telephone and written inquiries
Methodology       to these agencies about the health insurance continuation requirements,
              v   (2) actions taken on alleged violations of the requirements, and (3) infor-
                  mational materials provided to those who inquired about benefits. We
                  also reviewed Title X of COBRA and its legislative history.

                  Page 3                    GAO/HRD-91-37   Health Insurance   Continuation   Requirements

                         Our review was performed from June 1989 to July 1990 in accordance
                         with generally accepted government auditing standards. As agreed with
                         your office, we obtained only aggregate data on IRS enforcement activity
                         and did not evaluate IRS’S decisions on individual cases.

                         IRS estimates that it has received thousands of inquiries from potential
IRS Enforcement of       beneficiaries regarding COBRA coverage. Those inquiring are usually
COBRA                    (1) mailed information on COBRA requirements, (2) told that IRS has no
                         remedy for individuals denied their COBRA rights, and (3) referred to
                         Labor if they need more information. IRS headquarters has identified
                         over 100 potential violations of the health insurance continuation
                         requirements since COBRA was enacted. However, as of March 1990, IRS
                         had begun to investigate only a few of the cases. IRS found no violation
                         in the one investigation that it had completed.

                         Officials in IRS’S Office of Chief Counsel told us in June 1989 that since
                         November 1986, IRS headquarters had received and responded to over
                         8,000 telephone calls regarding COBRA. They estimated that about half
                         the calls came from people who are or believe they are entitled to cov-
                         erage. Since early 1988, calls have been answered with a tape recorded
                         message that tells employees to leave their names and addresses if they
                         have questions about COBRA and that IRS will send information on their
                         COBRA rights. Employees are given an address at Labor to which they
                         should write if they have questions after reviewing the information. The
                         message tells employers and plan administrators who need information
                         to leave their names and telephone numbers. A paralegal staff member
                         returns their calls and responds to questions.

                         The Chief Counsel officials said that since November 1986, they had
                         received and responded to over 1,300 letters regarding COBRA. They said
                         that employers’ letters are answered by telephone. Employee letters are
                         responded to with a letter that provides general information on COBRA.
                         The letter includes statements that

                     l   “The Internal Revenue Service answers inquiries of individuals and
                         organizations about their status for tax purposes and the tax conse-
                         quences of their acts and transactions. COBRA continuation coverage
                         requirements affect the tax liability of employers and certain other indi-
                         viduals or entities.

                         Page 4                   GAO/HRD91-37   Health Inrmrance Continuation   Requirementa

  “Because COBRA continuation requirements have no effect on the tax
  liability of ‘qualified beneficiaries’ (certain employees and dependents),
  we are unable to issue you a specific response . . ..”

. While there are sanctions for employers who violate COBRA “. . . there is
  no remedy under the Internal Revenue Code for individuals who have
  been denied COBRA continuation coverage by employers.”
. Failure to comply with COBRA requirements may violate ERISA, which is
  administered by Labor.

  Employees who need additional information are told to write Labor.

  Office of Chief Counsel officials said that, when they become aware of
  potential violations of COBRA, they refer them to IRS’S Assistant Commis-
  sioner (Examination). They estimated that there had been about 90 such
  referrals as of June 1989.

  Officials in the Office of the Assistant Commissioner (Examination) said
  that they sent these referrals to IRS regional offices, which would refer
  them to district offices where staff who examine tax returns are
  located. They said the district offices decided whether to act on these
  cases and that the actions taken are not summarized or reported to

  IHScompiled data on these referrals at our request. In March 1990, IRS'S
  Assistant Commissioner (Examination) told us that since the enactment
  of COBHA,his office had referred 95 cases to the regions-37 in 1987,25
  in 1988, and 33 in 1989.2IRS had begun examinations for only five of
  these cases, and only one was completed. IRS determined that there was
  no violation in the completed examination. See figure 1 for the status of
  the 95 referred cases,

  2He said an additional 19 allegations were being reviewed in his office and would be sent to the
  regions soon.

  Page 6                             GAO/HRD-91-37     Health Insurance    Continuation   Requirements

Violations Referred to IRS Field Officeo

                                                                                                   In Transit to RegionsIDiitricts (23 cases)

                                                                                                  Dedded Not to Examine (5 cases)

                                                                                                   Examination Not Complete (4 cases)

                                                                                                  Examination Complete, No Violation (1

                                                                                                  No Decision Whether to Examine (62

                                           Labor provides employees and other potential beneficiaries with infor-
Labor’s Enforcement                        mation on COBRA benefits and how to apply for them. Labor also assists
of COBRA                                   employees in obtaining coverage by calling employers and advising them
                                           of their responsibilities. However, Labor will not take enforcement
                                           action against employers in cases involving only one beneficiary.

                                           Labor has a unit to handle ERISA inquiries.3 This unit reported that of
                                           23,887 written inquiries received between October 1, 1988, and April 11,
                                           1990,3,484 were on COBRA. The unit head said that the unit received
                                           42,000 telephone calls from July 1, 1989, through March 30, 1990. Labor
                                           does not keep data on what information callers requested. The unit head
                                           estimated that a majority of calls were about COBRA He said that a
                                           survey of calls received in April 1990 showed that 51 percent of the
                                           calls were about COBRA. He also said that people with COBRA coverage
                                           problems tend to telephone rather than write.

                                           3The telephone number of the unit, which is called the Division of Technical Assistance and Inquiries,
                                           is (202) 623-8776.

                                           Page 6                             GAO/HRD91-37      Health Insurauce   Continuation   Requirements

Labor responds to requests for information orally or with written
responses and/or informational materials, such as a fact sheet on
COBRA'S requirements, IRS’S proposed COBRAregulations, and a brochure
on the procedures for filing a claim under a benefit plan covered by
ERISA. The unit head told us that he believed most people did not need
help in obtaining benefits once they knew their rights.

Labor will contact employers and advise them of their obligations and
the possible penalties for noncompliance. The unit head told us that he
believes such contacts usually result in compliance. The unit keeps data
on the number of times they helped persons obtain COBRG benefits. These
data are based on a form filled out by the Labor employee who provided
the assistance. The unit head told us that between October 1988 and
March 1990 Labor employees had identified 590 instances where they
helped people obtain COBRAbenefits. He noted that some cases involved
a number of people and sometimes involved large amounts of health

In addition, he said that there were probably a few instances where
employers would not comply with COBRAbut he was not aware of any
specific cases. Labor does not keep records of cases where employees
were not helped. He said he was not aware of any referrals for enforce-
ment action, noting that the unit would not refer a case for enforcement
that involved only one beneficiary.

Labor officials responsible for enforcing ERISA said that there are no spe-
cific sanctions under ERISA for COBRA violations. The general ERISA
enforcement mechanisms apply. They said that Labor does not enforce
COBRA in cases involving one person. Individuals who believe they are
improperly denied COBRAbenefits would be advised of their rights to sue
under ERM. For example, a letter sent to people who inquire about

“Section 502 of Title I of ERISA provides, in relevant part, that a civil action may be
brought by a participant or beneficiary ‘to recover benefits due to him under the
terms of his plan, to enforce his rights under the terms of the plan, or to clarify his
rights to future benefits under the terms of the plan.’ In this regard, if you believe
you are improperly being denied benefits or coverage to which you are entitled, you
may wish to contact an attorney or a legal aid organization.”

Labor has taken legal action in two cases, both involving multiple bene-
ficiaries. One case involved four employees of a subsidiary of Dayton-
Hudson Corporation who were allegedly denied coverage because they

Page 7                        GAO/HRB9137    Health Insurance   Continuation   Requirements

              were dismissed for gross misconduct. Terminated employees are entitled
              to coverage except those terminated for gross misconduct. Labor chal-
              lenged the contention that the terminated employees’ actions constituted
              gross misconduct. Labor reported that on February 21, 1990, a consent
              order and judgment was entered where the defendants, without admit-
              ting or denying the charges, agreed to reimburse the former employees
              for any uninsured medical expenses.

              The second case involved allegations by many striking employees of
              Eastern Airlines that they had paid insurance premiums but were told
              by insurance carriers that they were not covered. Labor reported on
              December 11, 1989, that it obtained a consent order requiring Eastern to
              provide striking and laid-off employees and their families with the
              opportunity to obtain continued health benefits under COBRA.

              Labor has an enforcement staff of about 200 persons to carry out its
              ERISA enforcement actions. They are responsible for overseeing about
              900,000 pension plans with about $2 trillion in assets and about 4.5 mil-
              lion welfare plans, such as health insurance plans. In a 1985 report,4 we
              pointed out that Labor’s staffing level permitted reviewing less than 1
              percent of all plans subject to ERISA. Staff levels have remained about
              the same since that report.

              Both IRS and Labor provide information about COBRA to those who
Conclusions   inquire. Also, Labor will contact employers to help employees and other
              potential beneficiaries obtain benefits. However, if employers refuse to
              provide benefits, IRS cannot and Labor generally does not take action to
              compel employers to provide the benefits.

              The extent of COBRA violations is unknown. IRS’S method of dealing with
              potential COBRA beneficiaries, in our view, discourages the reporting of
              violations. We believe it unlikely that people denied COBRA benefits
              would take the additional effort to notify IRS of violations after reading
              IRSmaterial that says IRS cannot help them get benefits and refers them
              to Labor. Neither IRS’S taped telephone message nor its informational
              materials solicit information on violations. Also, being told, in effect,
              that IRS will not talk to you if you are an employee, in our view, discour-
              ages further communication.

              4Strong Leadership Needed to Improve Management at the Department of Labor (GAO/IIRD-86- 12,
              Oct. 21, 1986).

              Page 8                             GAO/IUD91-37   Health Insurance   Continuation       Requirementa


                  Labor officials believe that the number of employers who violate COBRA
                  once they are made aware of its requirements is small. However, Labor
                  only keeps track of the callers that it helps. People who are told that
                  Labor will not take enforcement action on their behalf are unlikely to
                  keep Labor informed as to their success in obtaining benefits.

                  Given Labor’s limited staffing, we are not proposing that it change its
                  policy of limiting enforcement to cases involving several people. We
                  believe, however, that Labor and IRS should do more to ensure that IRS is
                  made aware of potential COBRA violations. The knowledge that excise
                  taxes may be assessedfor these violations could deter such violations.
                  In addition, people referred by IRS to Labor could get assistance quicker
                  if they were given a telephone number as well as an address for Labor.

                  We recommend that the Secretary of Labor and the Commissioner of
Recommendations   Internal Revenue act to encourage people who believe they are improp-
                  erly denied COBRA benefits to report these denials to IRS. In addition to
                  the informational materials Labor and IRS provide, these actions should
                  include (1) a discussion of the tax consequences of violating COBRA,~ (2) a
                  statement that IRS wants to be made aware of possible COBRA violations,
                  and (3) a description of the information that IRS needs to pursue a case.
                  Similar information should be provided to callers who may not be sent
                  this material. The information should make clear that the Internal Rev-
                  enue Code provides no remedy for individuals who are denied COBRA
                  benefits and that people will need to pursue remedies on their own, such
                  as through lawsuits, to obtain COBRA  benefits.

                  We also recommend that IRS provide people inquiring about COBRA bene-
                  fits with the telephone number as well as the address of Labor’s Division
                  of Technical Assistance and Inquiries, so that those needing further
                  assistance can promptly contact Labor. Inquirers should be advised that
                  there may be difficulty reaching Labor by telephone because of the
                  number of calls, and they should write if their situation is not urgent.

                  We did not request written comments on this report. We did, however,
Agency Comments   discuss matters in it with IRS and Labor officials.


                  ‘The IRS form letter sent in response to inquiries already contains some discussion of the tax

                  Page 9                             GAO/HRD-91-37      Health Insurance   Continuation   Requirements

Labor officials had no objection to IRS providing Labor’s telephone
number to inquirers. They expressed concern, however, that Labor was
already inundated with COBRA and other ERISA inquiries. They said that
if IRSprovides Labor’s number, it should advise inquirers that because
of a heavy telephone work load, it may be difficult to reach Labor by
telephone and people should write if their situation is not urgent.

IRS officials said that they had no objection to encouraging people who
believe that they have been improperly denied benefits to report the
denials to IRS. They believe, however, that it should be made clear to
people reporting possible violations that IRS cannot make employers pro-
vide COBRA benefits. People who report COBRA violations to IRS will need
to continue pursuing COBRA benefits on their own, such as through

We have revised the report to reflect these and other comments by                IRS
and Labor officials.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days from
its date of publication. At that time we will send copies of the report to
the Secretary of Labor, the Secretary of the Treasury, and the Commis-
sioner of Internal Revenue. We will also send copies to interested con-
gressional committees and other interested parties, and we will make
copies available to others upon request.

If you have any questions concerning this report, please call me on
(202) 275-6193. Other major contributors to this report are listed in
appendix I.

Sincerely yours,

Joseph F. Delfico
Director, Income Security Issues

Page 10                   GAO/HRD-9137   Health Insurance   Continuation   Requirements
Page 11   GAO/HRD91-37   Health Insurance   Continuation   Requirements
Appendix I

Major Contributorsto This Report

                  Robert F. Hughes, Assistant Director, (202) 535-8358
Human Resources   James J. Pecora, Intern
Washington, DC.

(207407)          Page 12                 GAO/HRD-9137   Health Insurance   Continuation   Requirements