Pete’s Pumpkin Patch has outsourced their COBRA to Xcellent Benefit Administrators (XBA) for the last four years. By all accounts it has been an ‘excellent’ relationship for Pete’s Pumpkin Patch and their HR Manager, Lori Wright.
On December 12th, Jessica Whimple terminated employment with Pete’s Pumpkin Patch. Lori Wright logged into XBA’s Client Portal and entered Jessica’s qualifying event information. XBA then promptly sent Jessica her COBRA specific rights election notice which communicated, among other things, the following information:
- First Day of COBRA - January 1st
- Medical - Family coverage - $600 per month
- Dental - Family coverage - $150 per month
Jessica elected to continue all benefits at current coverage levels and made her first three months of premium payments.
Jessica’s April premium payment was received by XBA on April 20th for $600 with no accompanying information about why her payment was less than the total amount due.
XBA’s COBRA software system allows for ‘cherry picking’ of premium payments across different insurance plans (also known as ‘manual allocation of payments to premiums’). Because of this functionality, XBA made the decision to apply the full $600 towards the dental premium for April, May, June and July. On May 1st, XBA COBRA system terminated the medical plan for Jessica and sent a termination of COBRA rights to her medical carrier.
The Problem
Regardless of the decision made by XBA on how to apply Jessica’s April premium payment, they would ultimately be ‘guessing’. For example, XBA could have applied the $600 for one month of medical or for four months of dental insurance. Also, Jessica may have forgotten to include a note indicating that she intended to drop her spouse from the medical plan or drop family coverage for the dental. The number of possible permutations is almost limitless and it is not up to XBA to ‘guess’ on how to apply Jessica’s premium payment.
Regardless of the decision made by XBA on ‘cherry picking’ payments, we can safely assume they would be immediately wrong. How in the world could XBA interpret the intentions of Jessica Whimple?
The Better Solution
XBA should accept the $600 and post it to her record. The COBRA system used by XBA should record the partial payment, apply any insignificant premium payment calculations, and send the appropriate letter informing Jessica of her short payment. If Jessica fails to pay the full $750 by the end of the April grace period, her COBRA rights for all plans should be terminated. This is the safest course of action for XBA and Pete’s Pumpkin Patch since Jessica was silent on her exact intentions.
We know of some administrators who would take it upon themselves to ‘reach out’ to Jessica and inquire about how to apply the premium. It seems to us that this action could make sense if XBA’s enrolled COBRA population was small AND XBA had a current telephone number for Jessica AND could make contact with her before the end of the April grace period. However, the overhead associated with this process is substantial and opens XBA to added exposure. What happens if XBA forgets to make the call? What if XBA does not have a working phone number or is unable to contact Jessica before the end of her grace period? The burden to determine how to apply the premium payment unnecessarily shifted from the Qualified Beneficiary to XBA.
Administrators must always watch out for activities that create an ever-expanding liability circle. For example, sending a ‘return receipt required’ letter to a Qualified Beneficiary widens the liability circle. If the ‘return receipt required’ document is returned unsigned, the administrator now has proof the letter was not received and must act upon this knowledge. If the administrator had simply sent a letter first class with proof of mail, the liability circle would not have been widened. The same logic applies to ‘cherry picking’ premium payments. By making arbitrary decisions on behalf of the Qualified Beneficiary will expand your liability circle and open the company up to unnecessary risk exposure.