Understand COBRA, who must provide it and an employer's COBRA duties.
What is COBRA?
COBRA – the Consolidated Omnibus Budget Reconciliation Act - is a federal law that requires group health plans to offer continuation coverage to covered employees, former employees, spouses, former spouses, and dependent children when group health coverage would otherwise be lost due to certain events.
If you are an employer that sponsors a group health plan covered by the COBRA laws, you'll need to familiarize yourself with the basics of the law, including which employees are eligible for COBRA coverage and which benefits are covered by COBRA, the events that trigger COBRA coverage, and what your communication duties entail.
Which employers must provide COBRA benefits?
COBRA generally applies to all private sector group health plans maintained by employers that had at least 20 employees on more than 50 percent of its typical business days in the previous calendar year.
Who is entitled to continuation coverage under COBRA?
If you're an employer subject to COBRA, and if you have a group health plan, you have to provide COBRA benefits only to qualified beneficiaries and only after a qualifying event has occurred.
A qualified beneficiary is an employee who was covered under your group health plan on the day before an event that causes loss of coverage, or that employee’s spouse, former spouse, or dependent child. The type of qualifying event determines who the qualified beneficiaries are.
In some cases that involve employer bankruptcy, a retired employee and their spouse, former spouse, or dependent children may be qualified beneficiaries. Employers’ agents, independent contractors, and directors who participate in the group health plan may also be qualified beneficiaries.
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
What is a group health plan under COBRA?
Under COBRA, a group health plan is any arrangement an employer makes to provide employees or their families with medical care. “Medical care” includes:
- Inpatient and outpatient hospital care,
- Physician care,
- Surgery and other major medical benefits,
- Prescription drugs, and
- Dental and vision care.
COBRA does not cover plans that provide only life insurance or disability benefits, as those benefits are not considered “medical care.”
Which benefits are covered?
The continuation coverage must be identical to the coverage currently available under the group health plan to similarly situated individuals who are not receiving continuation coverage. Generally, this is the same coverage that the qualified beneficiary had immediately before the qualifying event.
What are the qualifying events that trigger COBRA?
Qualifying events are occurrences that cause an individual to lose group health coverage. The type of qualifying event determines who the qualified beneficiaries are and the period of time a plan must offer continuation coverage.
The following are qualifying events for a covered employee if they cause the covered employee to lose coverage:
- termination of employment for any reason, unless it is for gross misconduct
- reduction in hours of employment (e.g., from full-time to part-time)
The following are qualifying events for a spouse and dependent child of a covered employee if they cause the spouse or dependent child to lose coverage:
- termination of the covered employee’s employment for any reason, unless it is for gross misconduct
- reduction in hours worked by the covered employee
- covered employee becomes entitled to Medicare
- divorce or legal separation from the covered employee, or
- death of the covered employee
Also, under the Affordable Care Act, plans that offer coverage to children on their parents’ plan must make coverage available until the adult child reaches the age of 26.
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 qualifying event:
- in the case of termination of employment or reduction in hours — 18 months for the qualified beneficiary
- 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 requires group health plans to provide covered employees and their families with specific notices explaining their COBRA rights.
Group health plans must give each employee and spouse a general notice describing COBRA rights within the first 90 days of coverage. The Department of Labor has developed a model general notice that group health plans can use to satisfy this requirement.
An employer must notify the group health plan within 30 days of the following qualifying events:
- Termination or reduction of hours of the covered employee
- Death of the covered employee
- Covered employee becoming eligible for Medicare, or
- Employer bankruptcy
The covered employee or one of the qualified beneficiaries must notify the plan if the qualifying event is divorce, legal separation, or a child’s loss of dependent status under the plan.
After receiving notice of a qualifying event, the plan must provide the qualified beneficiaries with an election notice within 14 days. The notice describes their rights to continuation coverage and how to make an election. The Department of Labor has developed a model election notice that group health plans can use to satisfy this requirement. Qualified beneficiaries must be given at least 60 days to choose whether or not to elect COBRA coverage.
Paying for COBRA coverage
Group health plans can require qualified beneficiaries to pay for COBRA continuation coverage, although they can also choose to provide coverage at reduced or no cost. The law allows the employer to charge a maximum of 102 percent of the premium and to keep 2 percent to cover the 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.
Plans must be provided at least 45 days after the COBRA election for making an initial premium payment. If a qualified beneficiary fails to make any payment before the end of the initial 45-day period, the plan can terminate the qualified beneficiary’s COBRA rights. The plan should establish due dates for any premiums for subsequent periods of coverage but must provide a minimum 30-day grace period for each payment.
Plans can terminate continuation coverage if full payment is not received before the end of a grace period. The plan is not obligated to send monthly premium notices, but must provide notice of early termination if it terminates continuation coverage early due to failure to make a timely payment.
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 department 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 can continuation coverage 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.