Joey plays the loveable Dr. Vic Torie for the soap opera series, Days of Wine and Roses.  Late last week, in episode 518, Dr. Torie was killed in a terrible smelting accident. Needless to say, Joey was out of work.

While Joey worked for the Studio, he was covered under the group medical plan. His termination of employment was a qualifying event under COBRA, so the Studio's Human Resources Department sent a COBRA election letter. Joey enrolled and paid the proper premium for his first three months of COBRA coverage. Unfortunately, Joey was never very good with details. In his fourth month on COBRA, his premium was $298.19. Joey mailed a check for $289.91. Should Joey be allowed to continue on COBRA? What additional action, if any, should the Studio take?

How Much is Enough?

Prior to 2001, employers and administrators were up to their own discretion when determining how to handle COBRA premium underpayments. It was common for COBRA continuation coverage to be terminated due to an under payment by as little as a penny.

Thanks to the Final Regulations released in January of 2001, we have a rule to follow. Administrators are able to terminate COBRA continuation rights provided the premium payment is considered significantly less than the total amount due. That then begs the question, what is a significant underpayment?

The IRS defines this for us as the 'Insignificant Underpayment Rule". Basically, if a premium payment is short by no more than the lesser of $50.00 or 10% of the total required amount, it is an insignificant underpayment. In situations where the underpayment is insignificant, the administrator has two choices, (a) accept the payment as payment in full; or (b) grant the QB an additional grace period of 30 days to remit the balance due.

The administrator must perform a calculation to determine if the payment is insignificant and thus eligible for the additional grace period. Let's take a look at Joey's situation and determine if his math error is significant or not:

1.  Determine 10% of the Premium: In this case, 10% of $298.19 is $29.82
2.  Use the lesser of 10% or $50 as the safe harbor: In this case, use $29.82
3.  Determine the shortage: $298.19 - $289.91 = $8.28
4.  If the shortage (#3) is less than the safe harbor (#2), the shortage is insignificant

Clearly, Joey's premium payment is considered insignificant by the IRS. The best way for an employer or administrator to deal with this shortfall is to send notice and begin a safe harbor grace period of 30 days for the shortfall to be made up. Administrators will find that requiring the necessary premium and tracking the additional timeline will significantly reduce the total number of COBRA continuants. Because COBRA continuants cost a plan an average of 156% of active employees, savings to the plan often eclipse the additional administrative time and expense.