What Is COBRA? Guidance for Employers

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law enacted in 1986. It requires many employers with group health plans to offer a continuation of group health coverage when coverage would otherwise be lost due to certain qualifying events, such as employee termination or a reduction in hours. Federal law sets the COBRA threshold at 20 or more employees, but some states have mini-COBRA laws that apply to employers with fewer than 20 employees.

What Does COBRA Cover?

COBRA allows eligible employees and their families to temporarily continue their same health insurance coverage for medical, prescriptions, dental, and vision. It does not cover disability or life insurance. The law requires specific notices to be provided by the employer and health insurance plan and explains how to elect continuation of coverage.  

Who Is Eligible for COBRA?

People eligible for COBRA are covered employees, former employees, their spouses, former spouses, and dependent children under the age of 26. During open enrollment, family members who were not on the employee’s plan may be added with certain limitations. Most importantly, they must meet the plan’s eligibility requirements for regular coverage. 

Eligibility requires that the health plan is covered by COBRA and the employee is currently enrolled in it as of the day before the event occurs. Additionally, a qualifying event occurs, and the person must be a qualified beneficiary for that event. 

The qualifying events are employment termination for any reason other than gross misconduct, a reduction in hours, employee enrollment in Medicare, divorce or legal separation, death of the employee, or loss of “dependent child status” under the plan. Employment termination includes both voluntary and involuntary departures. 

The Department of Labor (DOL) provides a chart that shows qualifying events, qualified beneficiaries, and the maximum period for continuation of coverage. It includes this important note: “An event is a qualifying event only if it causes the qualified beneficiary to lose coverage under the plan.” For termination or reduction in hours, the maximum coverage period is 18 months. For all other listed reasons, the maximum coverage period is 36 months. 

Ineligibility 

If an employee declined your health insurance plan, is not eligible, is enrolled in Medicare, or was fired for gross misconduct, then you likely do not need to offer the employee continuation of coverage. Gross misconduct is a murky term not defined by the law, but gross misconduct does not include ordinary reasons for firing. Instead, it typically refers to dangerous or illegal, deliberate acts committed in the workplace. 

If you do not offer a group health insurance plan or your company is not required to comply with federal or state laws related to COBRA, then you probably do not have to offer it. Employers should consult with their insurance companies and legal departments before making ineligibility decisions, especially related to gross misconduct.

The Federal Law

COBRA, a federal law, applies to group health plans offered by private-sector employers with 20 or more employees, or by state or local governments. Plans sponsored by the federal government, churches, or certain church-related organizations are excluded from this law. Employers must offer identical health coverage under COBRA, meaning that employees continue the exact plan they already have. For federal employees and their family members, Temporary Continuation of Coverage (TCC) provides the option to keep their health benefits for up to 18 months.

According to the Department of Labor’s FAQs on COBRA, determining the number of employees is based on having “at least 20 employees on more than 50 percent of its typical business days in the previous calendar year.” This includes both full-time and part-time employees, but part-time “counts as a fraction of a full-time employee, with the fraction equal to the number of hours worked divided by the hours an employee must work to be considered full-time.” In other words, a part-time employee who works 20 hours per week counts as half.

State Laws: Mini-COBRA 

In addition to the federal law, the majority of states have state-specific COBRA laws, often called mini-COBRA. These laws may also require employers with fewer than 20 employees to offer health insurance continuation coverage. COBRA-like state laws vary significantly concerning company size, maximum coverage period, premiums, and specific provisions. Some state laws mirror federal laws. If there is a conflict between the federal and state laws, the federal law takes precedence. To see the requirements in your state, view this chart of State-by-State Continuation Rules.   

Penalties for Noncompliance 

Employers will face penalties for noncompliance with COBRA. Even when employers outsource COBRA administration, employers are still legally responsible. The penalty for noncompliance can be up to $110 per qualified beneficiary per day. For significant violations, the IRS may impose a penalty of up to $15,000 per violation. If employers become aware of a noncompliance issue and quickly provide a correction notice, they may be able to avoid the penalty. Additionally, lawsuits may result in employers needing to pay for medical expenses. 

How Much Does COBRA Cost and Who Pays?

Employers do not pay anything for COBRA coverage unless they agree to pay for it in a severance agreement. Employees pay the total premium for coverage, which can be up to 102% of the cost of the plan. Two percent is the administrative fee. If an 11-month disability extension is received, the premium can be up to 150 percent of the cost of coverage. 

Employees can research other options that may be cheaper, including the Health Insurance Marketplace in their state or Medicaid. They may also purchase a private plan directly with a health insurance company or through a broker. When weighing the total costs between keeping the same insurance or switching to a new plan, the timing, medical needs, and the out-of-pocket maximum already used during the year are significant factors. When employees have already hit or are close to the out-of-pocket maximum, it can be financially beneficial to stick with that plan, even if premiums are higher than switching to a new plan.

Employees have 45 days after they elect COBRA coverage to pay their first premium, and coverage is retroactive. If this deadline is missed, their COBRA coverage may be terminated. Subsequent payments should have a grace period of at least 30 days.

The Health Insurance Portability and Accountability Act (HIPAA) includes special enrollment rights allowing individuals to request special enrollment for a health plan when specific events occur. The timeframe for making the request is 30 days unless the event is due to the loss of Medicaid or Children’s Health Insurance Program (CHIP) eligibility, which both have a 60-day timeframe.

For employees and their families, COBRA premiums can be expensive to pay for, especially when dealing with layoffs. “Because of the employer portion being added back in, and also because the employer’s plan covers a bunch more than is individually necessary for households, the total package nowadays can end up being north of $2.5K for a family (literally the cost for a 3-person household that’s on COBRA after a recent departure),” said Sid Pailla, Founder and CEO at Sunny Day Fund. 

Luckily, employees have other insurance options and ways to prepare for an unexpected loss of income. The most critical item is for employees to start building and maintaining emergency savings. “The best way to be disciplined about saving is to have it be automated through the paycheck, which is what we do at Sunny Day Fund,” said Pailla. 

Since COBRA was first introduced, there have been more affordable options and new laws. “COBRA was put in place before the Affordable Care Act [2010], and the ACA Health Insurance Marketplace has really made healthcare more affordable, especially for cases of job loss,” he explained. “Depending on the case (if the household is below 400% of the Federal Poverty Level), the household may end up qualifying for healthcare cost relief as well.” 

How Long Does COBRA Last?

COBRA provides temporary health insurance continuation for 18 to 36 months, depending on the specific qualifying events. Coverage may be terminated early for several reasons, including if premiums are not paid or a new job is obtained that offers health insurance. When COBRA is ending, there may be the option for an individual conversion health plan that converts the group plan into an individual plan.  

According to the DOL, there are two situations in which COBRA can be extended: a qualified beneficiary is disabled as determined by the Social Security Administration (SSA), or a second qualifying event occurs. Disability results in an 11-month extension, while a second qualifying event results in an 18-month extension. 

The COBRA Loophole

The COBRA loophole is a commonly used term, not a legal term. It refers to a provision built into the law that lets individuals delay electing health coverage continuation. COBRA has a 60-day election window and retroactive coverage to the date you lost coverage once premiums are paid. This means that employees can wait to enroll until they have had time to research other options or when they know medical care is needed. However, they will need to pay back premiums for the retroactive coverage to be effective.

Employer Communication Responsibility

Employers are legally required to communicate to new hires about COBRA when they elect health insurance. “One of the things that many employers don’t realize is that their compliance obligations start when an employee is hired, not when they are terminated,” said Joshua Lavine, CEO at Capitol Benefits, LLC. “Employers must provide covered employees with a general COBRA notice letting new hires know that they could be eligible for COBRA if they leave, within 90 days of enrollment.”

The General COBRA Notice for new hires should be provided to the employee, spouse, and adult dependents within 90 days from the date that they first become covered under the plan. In order to ensure that the required information is included in the notice, use this DOL model general notice as a template. While employers may write their own notice, using the model notice will enhance compliance. For employees who decline health insurance coverage, the general notice is not necessary. 

If former employers encounter a major medical issue, they will desperately seek coverage. “Oftentimes, the first place they look is to their former employer to see if they dropped the ball at any point with the compliance process, giving them grounds to sue for not being properly offered COBRA coverage,” explained Lavine. “For this reason, it often makes sense to outsource COBRA administration to a third-party vendor that can absorb that liability exposure and ensure compliance.” Your HR software can also assist with managing the termination process. 

Employers are required to notify their group health plan within 30 days of a qualifying event. For some events, such as divorce, the employee must notify the group health plan directly. Within 14 days of notification, the group health plan must provide qualified beneficiaries with an election notice. The DOL also provides a model election notice that may be used. Qualified beneficiaries have up to 60 days to elect COBRA, starting from the date of the election notice or the date that the existing coverage would otherwise end, whichever is later.