Penalties and Related Costs
Hold-harmless protection is about money lost to a provider error: the penalty itself and, depending on the terms, the costs around it. Which items count as covered is a matter of the written wording.
What to know.
A penalty can be an excise tax, a civil amount assessed by a court or an agency charge. Related costs can include the cost of correcting a filing or sending a corrected notice. Some agreements name them and some do not.
Ask for the definition of a covered loss and read it line by line. Where legal or defense costs are covered, ask whether they count toward the same limit.
Where to look next.
Know the Penalty Amounts
Notice failures carry daily amounts under the law. See the COBRA rules.
Know the Limit
Covered losses are paid up to one stated limit. See how the limit works.
Know the Boundaries
Some losses are outside the terms. See what is not covered.
Reading the definition of a covered loss.
The definition of a covered loss is where most disagreements start. Read it for four things: whether it names penalties and excise taxes, whether it includes interest, whether it covers the cost of correcting a filing or sending a corrected notice, and whether legal and defense costs are inside or outside the limit.
Then ask about timing. A penalty may be assessed months after the error, and correction costs are paid as they occur. The agreement should say when a loss is treated as having happened, how reimbursement is requested and how long the review usually takes. Questions answered in writing at the start save an argument later.
Common questions on this topic.
Four questions to settle before you rely on it.
Are penalties the only thing covered?
Not necessarily. Related costs can be included if the written terms name them.
Does it cover interest?
Only if the terms say so. Ask whether interest and fees are part of a covered loss.
Are legal costs included?
Ask whether defense costs are covered and whether they sit inside the limit or outside it.
Who pays first, the employer or the provider?
The agreement sets the process. Ask how reimbursement works and how long it takes.
Are correction costs a covered loss?
Only if the written terms name them. Ask whether the cost of filing a corrected return or sending a corrected notice counts, and whether it counts against the limit.
When is a loss treated as having happened?
The agreement should say. It could be the date of the error, the date of the agency letter or the date the amount is paid. Ask which one applies.
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General information about compliance service protections, not legal or tax advice. Plan-specific questions belong with your counsel, and we will bring them in.
Related guides.
What Hold-Harmless Protection Covers
The overview this page belongs to.
Compliance Services With Hold-Harmless Protection
What the protection is, what it covers and what to ask.
One Stated Limit
The next question on the same topic.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
COBRA Excise Tax (26 U.S.C. 4980B)
The tax on failures to meet COBRA continuation coverage requirements.
ERISA Civil Enforcement (29 U.S.C. 1132)
Includes the daily amounts a court may assess for failing to provide required notices.
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