Understand COBRA, who must provide it and an employer's COBRA duties.
What is COBRA?
COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) is a federal law that requires employers of 20 or more employees who offer health care benefits to offer the option of continuing this coverage to individuals who would otherwise lose their benefits due to termination of employment, reduction in hours or certain other events. Individual states may also have COBRA-like laws that apply.
If you are employer covered by the COBRA laws, you'll need to familiarize yourself with the basics of the law, including which employees are eligible for COBRA and which benefits are covered by COBRA, the events that trigger COBRA coverage, and what your communication duties entail. Administrative duties involving signing up eligible employees may be outsourced.
What employers must provide COBRA benefits?
If you're subject to COBRA, and if you have a group health plan, you have to provide COBRA benefits to qualified beneficiaries. A qualified beneficiary is anyone covered under your group health plan on the day before an event that causes loss of coverage, and it includes:
- employees, including part-time employees, if they are participants in your plan on the day before the qualifying event
- their spouses
- their dependents
- retirees (unless they are eligible for Medicare)
- partners in a partnership
You do not have to offer COBRA coverage to any of the following:
- an employee who is not yet eligible for your group health plan
- an eligible employee who declined to participate in your group health plan
- an individual who is enrolled for benefits under Medicare
Which benefits are covered?
The following types of plans generally need to be offered to employees when COBRA is triggered (but only if you already offer them to employees):
- health care plans
- medical spending accounts
- dental plans
- vision plans
- hearing plans
- prescription drug plans
- alcohol and substance abuse plans
- mental health plans
Life insurance, disability insurance, retirement plans, and vacation plans are not plans that you must extend to people entitled to COBRA coverage.
Which events trigger COBRA?
Events that trigger coverage are known as qualifying events. The following are qualifying events:
- an employee's voluntary or involuntary termination of employment, unless it is for gross misconduct. COBRA does not define misconduct, but some criteria to use if you are thinking of denying COBRA benefits on the basis of misconduct are:
- There must be a connection between the offense and the employee's job.
- The employee must be able to understand the gravity of the misconduct.
- The offense must be willful.
- If the departing employee decides to challenge your determination, you're probably going to end up in federal court. Balance the estimated costs of fighting the enforcement suit against the estimated costs of the COBRA coverage.
- an employee's reduction in hours of employment (e.g., from full time to part time)
- a covered spouse's divorce or legal separation from an employee
- an employee's death
- an employee's entitlement to Medicare
- a covered dependent's change in status (for example, reaching an age that no longer qualifies the dependent for coverage under the parent's health plan)
- active military duty when you don't voluntarily maintain health coverage
- failure to return to work at the end of family and medical leave where coverage was in effect at the beginning of the leave but was lost during the leave
- your business's bankruptcy
How long does COBRA coverage last? Depending upon the type of event and who the beneficiary is, coverage could continue for 18 or 36 months after the date of the event or the coverage loss:
- in the case of termination of employment or reduction in hours — 18 months for the employee and any covered dependents
- in the case of qualifying events for reasons other than termination of employment or reduction in hours — 36 months of coverage
Employer COBRA communication duties
COBRA stresses communication to the employee of the right to continue benefits when a qualifying event occurs. Communication requirements include the following notifications:
- You have to notify covered employees and covered spouses of their initial rights under COBRA when they first join the plan.
- You have to notify covered persons of their election rights to continue coverage after a qualifying event occurs.
- You have 30 days to notify the plan administrator (usually the insurance company) when a loss occurs for any of the reasons listed above, except for divorce and change of status by a dependent. In those two instances, you have 60 days to notify the administrator. The administrator has 14 days after notice from you to notify the person who is entitled to COBRA coverage.
After you send out the notice to an employee following a qualifying event, the employee has 60 days to notify you that he or she wants coverage. The employee can write you a letter, call you on the phone or tell you in person. If you don't hear from the employee within 60 days after your notification or 60 days after the event took place (whichever is later), the employee is no longer eligible to sign up.
COBRA election notice to include health exchange information. An election notice explaining the right to continuation of coverage must be provided by a group health plan to qualified individuals within 14 days after the plan administrator receives notice of a qualifying event.
The Department of Labor (DOL) has provided a model COBRA election which is revised to include the health care exchange coverage options available under health care reform.
The DOL guidance doesn’t state that the exchange information is required for a COBRA election notice. However, the guidance does state that use of the revised model notice will be considered to be good faith compliance with the election notice requirements under COBRA.
Paying for COBRA coverage
Who pays for COBRA coverage? The employee generally pays the full cost of the insurance premiums. In fact, the law allows the employer to charge 102 percent of the premium, and to keep the 2 percent to cover your administrative costs. When an employee gets extended COBRA coverage due to disability, you can charge 150 percent of the premium for months 18 through 29.
Timing of payments is important. Federal law states that COBRA coverage can be terminated if premium payments are late. According to the law, payment of any premium is considered to be timely if it is made within 30 days after the due date or within a longer period set out under the plan. The due date must not begin before the first day of the coverage period. And, when someone chooses to take COBRA coverage, they still have 45 days to make the first payment.
The fact that most insurers want you to pay in advance for coverage complicates this process because you have to pay in advance for the coverage under the policy, but the law states that you have to give COBRA insureds a 30-day grace period from the time the payment is due.
Ricky leaves his job and his group health plan coverage on September 1. Ricky elects COBRA coverage on October 1 and chooses to pay his COBRA premiums on a monthly basis.
Ricky's first premium payment is due on November 16. On that date she must make payments for September and October. Payment for November must be made by November 30.
Thereafter, Ricky must make a payment no later than 30 days after the first day of each month.
Complying with state COBRA-like laws
Individual states may also have COBRA-like laws concerning the continuation of benefits. Some of them cover all employers, including small employers, so you might be subject to a state law even if you are exempt from federal law. The laws are complex and differ from state to state. To find out more about your state's laws regarding continuation of coverage, contact your state labor agency or your attorney.
When researching your obligation under state law, be sure to inquire about the following:
- which benefit plans are covered
- which employers and benefit providers are subject to the law
- which employees are eligible to continue benefits under the law
- which events trigger continuation coverage (what are "qualifying events?")
- which notification requirements you must comply with
- how long continuation coverage can last
- under what circumstances coverage can be terminated
Outsourcing your COBRA administration
Complying with COBRA can be a pretty taxing job. Even big companies save time and money by outsourcing administration to companies that specialize in doing it. The complicated issues involved, particularly if you have more than a few employees, are a very good reason to consider outsourcing your administration duties.