The COBRA statute makes clear that COBRA premiums for self-funded plans shall be determined on an actuarial basis which takes into account factors to be prescribed in regulations. Such regulations 7 are, to date, not issued. While many non-actuaries calculate such premiums as they see fit, many others have been computed by a qualified actuary. The reasons for having a qualified actuary compute such are these: (a) increased protection for the plan sponsor; (b) such calculations are often very complex; (c) ancillary results (reserves, funding levels, benefit content analysis, etc.). See the Actuarially-Determined COBRA Premiums sub-site for a more detailed analyses of such computations.
The determination of COBRA premiums is often a complicated calculation. These items are challenging:
- Claims experience and stop-loss are composite, but the plan has a high-middle-low benefit structure. Benefit content analysis is needed. The difficulty of ending up with the low benefit plan costing more than the high benefit plan must be avoided.
- All data is provided two-tier, but the client wants COBRA premiums to be four-tier.
- Need to separate non-core from core benefits. Sometimes this is not easily done.
- Client wishes variations in COBRA premiums by geographic area or by age, both of which are easy extensions of the actuarial service.
- Client wishes variations in COBRA premiums for reasons beyond COBRA such as: (a) preparing 1099’s to the highly compensated where benefits are discriminatory; or (b) a basis for determining participant contributions; (c) for funding purposes; or (d) for intercorporate expense transfers.
- Stop-loss is specific-only and experience data is limited or unavailable.
- Plan is a new plan with no prior claims experience.
- Managed care arrangements. What are out-of-network COBRA premiums?
- Unique computing challenges include the extra costs to be fairly added to COBRA premiums for: (a) lasered participants; (b) aggregating specific; (c) seasonal variations in claims; and (d) employer’s internal costs.
The practice of some practitioners to set COBRA at fixed cost; plus the aggregate funding factor is, at best, risky and at worst illegal. In one instance where COBRA premiums were challenged in a lawsuit (sticky employment termination dispute), the presence of an actuarial signature and the COBRA premiums below maximum proved to be critically favorable to the employer.