Human Resource Blog

Issues w/Taking on Administration of COBRA vs. Staying w/a TPA?

My company is currently using a TPA (third party administrator) to administer our COBRA benefits. We are very unsatisfied with their service. I am not a degreed HR professional and need to know the risks / potential issues involved with the company taking on administration of COBRA benefits.

This is a subjective question, and a management decision that each company has to make. There are pros and cons on both sides of the issue.

As you know, COBRA the Consolidated Omnibus Budget Reconciliation Act, requires employers with 20 or more workers to permit employees to extend their group health insurance when the employee is terminated. Dependents are also permitted to extend their group health insurance under COBRA. (Employees who are terminated due to gross misconduct are not eligible for COBRA.)

In most cases, an employee can extend their current group health insurance coverage up to 18 months under COBRA. The employee pays for COBRA, so workers must pay the entire insurance premium, in addition to any portion that the employer paid in the past. In addition, the employer may collect an administration fee of up to 2% of the total premium. So the cost to the former employee can be 102% of the total premium. Even so, COBRA is often a much more affordable option for the unemployed than private health insurance.

Each employer must decide whether to administer their COBRA plan, or hire a third party Cobra administrator, also called a TPA.

PROS to Using a TPA: One of the major benefits of using a TPA is that it limits the employer’s liability. Under many TPA contracts, the TPA is liable for any fines or penalties that the employer faces due to non-compliance with COBRA by the TPA.

Very simply, many employers prefer to delegate the potential liability under COBRA, as well as the duties. TPAs typically charge a flat fee per employee. Even one lawsuit filed by a former employee who did not receive a COBRA notice on time can easily amount to more than several years of TPA fees.

COBRA regulations do change from time to time. Under federal law, employees must be mailed COBRA notices within a certain period. Being even one day late with a notice can potentially result in a fine of $10,000 or more. TPAs are paid to stay current on every COBRA regulation, while HR Directors have many other responsibilities.

Many TPA firms offer other services, such as HIPAA administration. The major TPA firms claim that they can offer COBRA administration services for a lower price than if the employer did it in-house.

Some employers feel that a TPA is a COBRA specialist and will do a better job than they could do in-house. This is especially true since a TPA has specialized software and dedicated employees who do nothing except COBRA.  

CONS to using a TPA: Some small employers with low turnover handle their own COBRA administration. They feel it is not worthwhile paying TPA fees, and can easily track the notices and premiums due, since turnover is low.

Some larger employers add one or more HR people to handle COBRA administration. They reason that they would rather handle this at the company level, rather than contract it out. This gives them more control over the level of service provided.

It’s true that a TPA may not offer former employees the same personalized service they would receive through the company HR department.

With all due respect, if former employees are complaining about the quality of service from the TPA, one option is to hire a different TPA. Many, many companies offer this service.