QUESTION: We are a TPA that provides COBRA administration services such as preparing and mailing election notices. Are there any circumstances under which we could be liable for COBRA penalties or excise taxes?
ANSWER: Generally, a third-party administrator (TPA) will not be directly liable for statutory COBRA penalties unless the TPA is designated by a plan as its plan administrator. But, depending on the circumstances, your company might have excise tax, contractual, or other liability.
ERISA Penalties. Under ERISA, a court can assess penalties of up to $110 per day against the ERISA plan administrator for certain COBRA violations (such as late election notices). The ERISA plan administrator is the person or entity so designated by the terms of the plan. If there is no designation, the plan administrator is the plan sponsor—generally the employer (see our Question of the Week). So, if the plan document does not designate a different plan administrator, the employer is the plan administrator and as such is liable for COBRA penalties even if it contracts with another entity such as a TPA to perform COBRA administrative services.
Code Excise Taxes. Under certain circumstances, Code § 4980B imposes excise taxes for COBRA compliance failures; the tax is self-reported on IRS Form 8928. Parties responsible for providing or administering benefits under the plan are potentially liable for excise taxes if their act or failure to act causes or contributes to a COBRA failure. A TPA that assists the plan administrator with COBRA administration but does not process benefit claims or otherwise administer the plan’s benefits would not generally be liable for excise taxes. In contrast, the TPA of a self-insured plan that both processes claims and administers COBRA could potentially be liable. Excise tax relief may apply when failures are not discovered exercising reasonable diligence or when failures due to reasonable cause (and not willful neglect) are timely corrected.
Contractual Liability. Aside from potential liability under ERISA or the Code, your company may have contractual liability under its service agreements. The service agreement should specify the services the company is required to perform, including details about the time and method of performance and the consequences of noncompliance. In addition, the agreement should clearly describe the employer’s obligations to provide information and notices (e.g., COBRA qualifying event notices), the necessary deadlines to enable your company to perform its duties, and the impact on your company’s liability if the employer fails to perform.
Other Liability. Even if your company is not at risk for penalties or excise taxes, and even if the service agreements provide adequate protection against claims from employers, this does not eliminate exposure to direct claims by qualified beneficiaries. For example, depending on the functions you perform for a plan, you could be a fiduciary under ERISA and be subject to possible claims for breach of fiduciary duty.
For more information, see EBIA’s COBRA manual at Sections XXV.B (“Excise Taxes Under the Code”), XXV.C (“Statutory Penalties for Failure to Provide Certain COBRA Notices”), and XXXI.E (“COBRA Third-Party Administration Agreements”). See also EBIA’s ERISA Compliance manual at Section XXIX.B (“Who Is the ERISA Plan Administrator?”) and EBIA’s Self-Insured Health Plans manual at Section XXIII.B (“Contracting With Service Providers”). You may also be interested in our recorded webinar “COBRA Basic Training: Practical Compliance Strategies.”
Contributing Editors: EBIA Staff.