What Is COBRA Coverage and What Do Employers Need To Know?

Many employers struggle to understand the regulations governing the Consolidated Omnibus Budget Reconciliation Act, better known as COBRA. Failure to comply with these rules can lead to significant penalties for an employer.

COBRA applies to employers with at least 20 common law employees and requires their employer-sponsored group healthcare plans to offer the option of temporary coverage continuation when it otherwise might be terminated. If your business employs 20 or more workers, take a closer look at this article that addresses some of the common questions related to COBRA requirements for employers.

What Is COBRA Coverage?

COBRA, which was originally enacted in 1986 as part of the larger Employee Retirement Income Security Act of 1974 (ERISA), offers certain employees the right to pay premiums and continue group health insurance coverage under certain circumstances. Prior to Congress passing this landmark health benefit provision, individuals who were on an employer-sponsored health plan immediately lost health insurance coverage when the qualifying employee terminated employment for any reason. This situation was further complicated when the ex-employee or a family member was ill and therefore unable to obtain new health insurance.

How Does COBRA Insurance Work?

After COBRA was enacted, employees who left an employer-sponsored plan could elect to continue health insurance coverage for a certain time period after leaving the company. This continuation of coverage is often significantly more expensive than the amount that active employees are required to pay for group health coverage, since the employer usually pays part or all of the cost of employees' coverage while they are employed. Under COBRA, the employer is no longer responsible for covering any part of this cost, and it can all be charged to the individuals directly receiving the continuation coverage. COBRA coverage is typically offered to qualifying employees for a period of 18-36 months, but an individual's eligibility for COBRA as well as the length of coverage both depend on specific qualifying events.

Is My Business Subject to COBRA?

COBRA laws generally apply to group health, dental, and vision plans offered by private employers with 20 or more employees on 50 percent of its typical business days during the preceding calendar year. When determining if COBRA applies to a business, both full-time and part-time employees count toward this number — the federal government calculates "full-time equivalent" employees, meaning the hours of two or more part-time workers will be combined to make a single full-time worker that counts toward the 20-employee threshold. Plans offered by state and local governments are also subject to COBRA; however, plans offered by the federal government and churches (within the meaning of Section 414(e) of the Internal Revenue Code) typically are not.

When Does COBRA Apply to Group Health Plans?

The law defines a group plan as "any arrangement that an employer establishes or maintains to provide employees or their families with medical care, whether it is provided through insurance, by a health maintenance organization, out of the employer's assets, or through any other means." Group health plans that do not meet this definition are not subject to COBRA, although they may be subject to certain state continuation requirements. Other group benefits, such as life insurance or disability benefits, are also not subject to COBRA. If your business employs 20 or more employees (Common Ownership of Corporations and Multi-employer Plan rules apply) and offers any kind of group health insurance, it's best to consult an expert to determine your COBRA eligibility to avoid any potential fines or penalties.

Who Is Eligible for COBRA Coverage?

Any employees who are enrolled in an eligible group health plan and meet certain qualifying event requirements may be eligible for COBRA continuation coverage. This can include:

• Full-time employees
• Part-time employees
• Spouses of eligible employees
• Dependents of eligible employees
• Retirees

Who Is Not Eligible for COBRA Coverage?

An employer's responsibility to offer COBRA coverage is not unlimited. Even if the business meets the 20-employee minimum, certain employees are not eligible for COBRA coverage based on their failure to elect a qualifying plan, their reason for termination, or other extenuating circumstances. This can include:

• Employees who are ineligible for coverage in the group plan
• Employees who declined to participate in the group health coverage
• Employees who are enrolled for benefits under Medicare
• Employees terminated for gross misconduct

Qualifying Events for COBRA Coverage

In addition to employee status and enrollment in an eligible group health plan, employees must also experience a qualifying event in order to be eligible for continuation coverage under COBRA. Generally, this will include an event that causes the employee to lose group health coverage. Examples of these events include:

• Termination for reasons other than gross misconduct
• Reduction in employee hours
• Temporary or permanent layoffs resulting in loss of benefits

Qualifying events can also extend to an employee's spouse or dependents if it results in a change in status for the entire family and affects the family's ability to maintain health coverage. COBRA may apply and provide continuation coverage whenever the spouse or dependent of a covered employee:

• Death of Covered Employee
• Gets divorced or Legal Separation
• Loses coverage because the covered employee qualifies for Medicare
• Loses coverage because the covered employee is terminated
• Dependent Child ceasing to be a Dependent

What Are My Employer Responsibilities Under COBRA?

Plan administrators have certain responsibilities to notify eligible individuals as their status changes under the law. In some cases, the employer is the plan administrator and must assume any and all of these responsibilities. If you have employees that could qualify for COBRA, you must:

• Notify the group health plan administrator of an individual's COBRA eligibility within 30 days of a qualifying event
• Provide notification about COBRA privileges to any employees who are eligible for COBRA within 44 days
• Notify beneficiaries within 14 days if COBRA coverage is denied for any reason
• Provide coverage identical to the plan the employee was enrolled in before the qualifying event if they elect to continue coverage under COBRA

There are additional employer responsibilities outlined in a detailed and specific process that must be followed, including what notices must be given, what the election process looks like, and more. For detailed information on this topic, please consult An Employer's Guide to Group Health Continuation Coverage Under COBRA.

COBRA Election Process

Once an employee experiences a qualifying event, COBRA requires group health plans to give qualifying individuals (the employee and any qualifying spouse or dependents) an election period to review the associated costs of continuing coverage and decide if they want to maintain coverage under COBRA. Once the qualifying event occurs, individuals must be given 60 days to elect or decline continuation coverage.

While the election period is the same for all individuals within a household who experienced the same qualifying event, the election process is determined on an individual basis. The employee, their spouse, and each qualifying dependent can elect or decline coverage as appropriate for their unique situation.

What Benefits Are Covered Under COBRA?

Under COBRA, the benefits provided must be identical to those provided while the qualifying individual was still employed. This coverage rule also extends to spouses and dependents of qualifying employees who may opt to continue coverage, even if the covered employee decides to seek benefits coverage elsewhere. Any qualifying individuals who continue benefits through COBRA are subject to the same co-pay, deductible, coinsurance, and minimum/maximum benefits levels as under the original group health plan.

How Long Do I Have To Provide COBRA Coverage for My Employees?

Typically, COBRA coverage will last between 18 and 36 months, depending on the qualifying event, the type of plan offered, and any state regulations that may apply. However, it's also important to note that individuals may extend COBRA coverage past the maximum period if they experience a disability or other qualifying event while under COBRA coverage. If a qualifying beneficiary is disabled, for example, they are able to extend the coverage for 11 months past the standard coverage period. Standard coverage periods for common qualifying events are:

• 18 months for termination for reasons other than gross misconduct
• 36 months when an employee enrolls in Medicare
• 36 months when coverage status changes due to divorce or legal separation
• 36 months when the covered employee passes away

In addition, some states allow for continuation coverage for a longer period than required under COBRA. Employers that are not subject to COBRA under federal guidelines may still be required to offer continuation coverage under state law. Contact your state insurance commissioner's office to determine the availability and exact length of continuation coverage required in your state.

What Is a Qualifying Event?

To qualify for COBRA, employees must quit voluntarily, be terminated for reasons unrelated to gross misconduct, or had their hours reduced to a point that they are no longer eligible for health coverage (covered spouses and dependent children may also be eligible for COBRA under these circumstances). COBRA qualifying events, listed on the U.S. Department of Labor (DOL) website, are:

• Voluntary or involuntary termination of employment for reasons other than gross misconduct
• Reduction in the number of hours of employment below plan eligibility requirements

Qualifying events for covered spouses are:

• Voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct
• Reduction in the hours worked by the covered employee below plan eligibility requirements
• Covered employees become entitled to Medicare
• Divorce or legal separation of the covered employee
• Death of the covered employee

Qualifying events for covered dependent children are:

• Loss of dependent-child status under the plan rules
• Voluntary or involuntary termination of the covered employee's employment for any reason other than gross misconduct
• Reduction in the hours worked by the covered employee below plan eligibility requirements
• Covered employees become entitled to Medicare
• Divorce or legal separation of the covered employee
• Death of the covered employee

Who Pays for COBRA Insurance?

Although employers are responsible for providing eligibility notification to qualifying individuals and making equivalent coverage available during the COBRA eligibility period, employers are not responsible for covering any part of the cost of this coverage. Employers are allowed to pass 100% of the cost of the group health plan on to the employee during the COBRA continuation period. In addition, if COBRA payments for this coverage are paid late, the employer is allowed to terminate coverage before the end of the standard COBRA eligibility period, as long as a 30-day grace period has been given.

What Fines or Fees May Apply for Non-Compliance?

Non-compliance around COBRA insurance rules can be very expensive for employers. When a COBRA notice is delinquent, the DOL can fine employers $110 a day. In addition, the IRS is authorized to levy excise tax penalties on employers for failing to correct COBRA violations in a timely manner. Penalties can be $100 per day or $2,500 per beneficiary affected by the rule violation — whichever is greater.

Employers can also be sued in civil court by any employees who were eligible for, but did not receive, COBRA continuation options. Attorney fees, monetary damages, and medical expenses related to these incidents can be in the tens or even hundreds of thousands of dollars per incident.

How Can I Choose a COBRA Plan That Is Right for My Business?

Employers should consider engaging specialists in COBRA administration to help avoid financial penalties for non-compliance and to ensure that COBRA requirements are followed in a timely manner. These specialists can also provide useful assistance in the event of an IRS or DOL audit. Since each situation is unique, it is important to fully explore all options available and choose an approach that's right for your business.