Penalties for COBRA Violations

2/4/2026

The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides a critical lifeline to employees and their families, allowing them to continue health coverage during times of job loss or other life transitions. For employers, however, COBRA represents a minefield of administrative duties where even small mistakes can have enormous consequences. Non-compliance is not just a clerical issue; it is a serious legal failure that can unleash a cascade of severe financial and legal penalties.

Understanding the steep cost of COBRA violations is the first step toward appreciating the importance of flawless COBRA administration. The penalties are not just a slap on the wrist; they are designed to be punitive and can pose a significant threat to an organization's financial health. This guide will provide a detailed breakdown of the penalties for non-compliance, from staggering IRS excise taxes to costly private lawsuits, and offer actionable strategies to keep your organization safe.

The High Stakes of Non-Compliance

COBRA is jointly enforced by the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Department of Health and Human Services. This multi-agency oversight means that a single compliance failure can be attacked from multiple angles. A simple mistake, such as sending a COBRA Election Notice a few days late or miscalculating a premium, can be interpreted as a denial of a beneficiary's legally protected COBRA rights, triggering a range of severe consequences.

The risks are not hypothetical. Every year, employers across the country pay millions of dollars in penalties and legal fees related to COBRA failures. These costs can often dwarf the actual cost of the insurance premiums in question, making proactive compliance an essential business strategy.

A Detailed Breakdown of COBRA Penalties

The penalties for COBRA violations can be categorized into three main areas: IRS excise taxes, DOL statutory penalties, and private lawsuits brought by aggrieved individuals.

1. IRS Excise Taxes: The Per-Day Penalty

The IRS enforces COBRA compliance through the Internal Revenue Code, imposing steep excise taxes on employers who fail to meet their obligations. This tax is often the most financially damaging penalty for a compliance failure.

How the Tax is Calculated

The excise tax is assessed at a rate of $100 per day for each qualified beneficiary affected by a non-compliance event. If a failure affects a family, the penalty is capped at $200 per day per family.

Consider this scenario: An employer fails to send a COBRA Election Notice to a terminated employee who had family coverage (employee, spouse, and two children).

• The Violation: A failure to notify four qualified beneficiaries.
• The Daily Penalty: Capped at $200 per day for the family.
• The Annual Cost: If the violation goes undiscovered for a full year, the penalty would be $200 x 365 days = $73,000.

This tax continues to accrue for each day of the "non-compliance period," which starts on the date the failure first occurred and ends on the date it is corrected.

Caps on Excise Taxes

The IRS does provide some caps on the total tax liability, but they are substantial. For unintentional failures, the tax for an employer during a taxable year is limited to the lesser of:

• 10% of the total amount the employer paid for their group health plans in the previous year.
• $500,000.

While these caps prevent a penalty from bankrupting a large corporation, they can still be devastating, especially for small to medium-sized businesses. The IRS has the authority to waive these penalties if the failure was due to reasonable cause and not willful neglect, but banking on this leniency is a risky strategy.

2. Department of Labor (DOL) Penalties and Audits

The DOL's primary enforcement mechanism is through investigating complaints and conducting audits. If the DOL finds a violation, it can impose its own set of penalties and take legal action.

Statutory Penalties for Notice Failures

Under the Employee Retirement Income Security Act (ERISA), which governs COBRA, plan administrators can be held personally liable for failing to provide required documents. The DOL can assess a penalty of up to $110 per day, per participant, for failing to provide a COBRA notice.

This penalty is separate from and in addition to any IRS excise taxes. If an employer (acting as the plan administrator) fails to send an Election Notice, they could theoretically be hit with both the IRS tax and the DOL penalty simultaneously.

DOL Audits

The DOL has the authority to audit an employer's benefits plans, and a COBRA complaint can easily trigger a broader investigation. During an audit, investigators will demand extensive documentation, including copies of all notices sent, proof of mailing, and records of premium payments. A failure to produce this documentation is often treated as a presumption that compliance failed, shifting the burden of proof entirely onto the employer.

3. Private Lawsuits: The Ultimate Financial Risk

Perhaps the most unpredictable and financially damaging consequence of a COBRA violation is a private lawsuit filed by a qualified beneficiary. An individual who believes their COBRA rights were violated can sue the employer to be "made whole."

Recovering Medical Costs

If a court finds that an employer improperly denied or terminated COBRA coverage, the employer can be held liable for all medical expenses the individual incurred during the period they should have been covered. This can be catastrophic.

Imagine a former employee was denied COBRA and subsequently suffered a major medical event, like a heart attack or a serious car accident, resulting in hundreds of thousands of dollars in medical bills. The employer could be ordered to pay that entire amount.

Statutory Damages and Attorney's Fees

In addition to medical costs, courts can award statutory damages (similar to the DOL's $110 per day penalty) to plaintiffs. Even more significantly, if the plaintiff wins, the employer is typically required to pay the plaintiff's legal fees. In complex benefits litigation, these attorney's fees can easily run into the tens or even hundreds of thousands of dollars, sometimes exceeding the value of the medical claims themselves.

Real-World Consequences: A Cautionary Tale

These penalties are not just theoretical. Consider a real-world, albeit simplified, example. An HR manager at a mid-sized company forgets to send a COBRA Election Notice to a terminated employee. Six months later, the former employee is diagnosed with a serious illness and, upon realizing they have no insurance, hires an attorney.

• IRS Excise Tax: At $100/day for 180 days, the potential tax is $18,000.
• Medical Bills: The employee's initial treatment costs $75,000. The employer is sued for this amount.
• Legal Fees: After a year of litigation, the employee's attorney's fees amount to $50,000. The employer's own defense costs are $60,000.
• Total Cost of a Single Mistake: $18,000 + $75,000 + $50,000 + $60,000 = $203,000.

This single administrative error, which could have been prevented by a simple checklist, ends up costing the company over $200,000. This is the reality of COBRA penalties.

How to Avoid Penalties Through Proactive Compliance

The only way to avoid these devastating penalties is to build a bulletproof COBRA administration process. Prevention is infinitely cheaper than correction.

1. Master Your Notice Requirements

The vast majority of COBRA violations are related to notices.

• Timeliness: Send the General Notice within 90 days of new enrollment and the Election Notice within the 14/44-day window without fail.
• Completeness: Use the latest DOL model notices and fill them out completely and accurately for every beneficiary.
• Proof of Delivery: Send all Election Notices via a method that provides proof of mailing, such as certified mail. Keep this proof in the employee's file.

2. Implement a Comprehensive COBRA Compliance Checklist

Do not rely on memory. Use a detailed COBRA compliance checklist for every single qualifying event. This ensures consistency and creates a contemporaneous record of your actions, which is your best defense in an audit.

3. Maintain Meticulous Records

If it isn’t documented, it didn’t happen. Your COBRA files should contain:

• A copy of every notice sent.
• Proof of mailing for each notice.
• A log of all premium payments received.
• Documentation of any status changes or special circumstances.

4. Conduct Regular Self-Audits

Don't wait for the DOL to find your mistakes. Once a year, pull a random sample of your COBRA files and audit them against your checklist. Did you meet every deadline? Is the documentation complete? This proactive step allows you to identify and fix systemic weaknesses before they become costly violations.

Resources for Improving COBRA Administration

You do not have to face this risk alone. There are excellent resources available to help you achieve and maintain compliance.

• Third-Party Administrators (TPAs): For many employers, outsourcing COBRA to a TPA is the single best risk-management decision they can make. These specialized firms have the expertise and COBRA tools for employers to handle the entire process, shifting much of the liability away from you.
• Professional Training and Certification: Investing in your HR team's knowledge is critical. An in-depthCOBRA Training & Certification Program can provide your staff with the skills and confidence to manage this complex function flawlessly. As our clients often state in theirtestimonials, this type of focused training provides immediate and tangible value, empowering them to build compliant, defensible processes.
• Expert-Led Webinars: The legal landscape can change. Attending regularwebinars on COBRA and other benefits compliance topics is a great way to stay current.

Conclusion: Compliance is Not Optional

The penalties for COBRA violations are severe, multi-faceted, and designed to be a powerful deterrent. From daily accumulating IRS taxes to DOL fines and the unlimited liability of private lawsuits, the financial risks of non-compliance are simply too great to ignore.

The key to avoiding these penalties lies in a proactive, disciplined, and well-documented approach to COBRA administration. By treating every qualifying event with the seriousness it deserves and implementing robust systems like a comprehensive compliance checklist, you can protect your organization from staggering financial loss. Investing in training, technology, or a trusted TPA is not an expense—it is an essential insurance policy against the high cost of failure.

To build an unbreakable compliance framework for your organization, explore our full range ofcourse listings and equip your team with the expertise needed to master this critical responsibility.