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What is COBRA Coverage and How Does It Affect Your Business?

Take a closer look at this article, which addresses some of the common questions related to offering the program.
what is COBRA coverage

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. A program that amends previous bills related to healthcare, COBRA requires 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 offering the program.

What is COBRA coverage?

COBRA, which was originally enacted in 1986, offers certain employees, as well as their covered spouse, former spouses and dependents, the right to pay premiums and continue group health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.

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 of the cost of employees' coverage. 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 plans offered by private employers with 20 or more employees, on more than 50 percent of typical business days in the previous year. Full-time and part-time employees count when determining whether a plan is subject to COBRA. When determining if COBRA applies, the number of employees takes in to account full-time equivalents — meaning the hours of two or more part-time workers will be combined to make a single-full time worker in order to determine if an employer meets the 20-employee minimum. Plans offered by state and local governments are also subject to COBRA; however, plans offered by the federal government and churches typically are not.

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." Businesses that do not meet these requirements are not subject to COBRA, although they may be subject to certain state continuation requirements. If your business employees 20 or more employees and offers any kind of group health insurance, it's a wise investment to consult an expert to determine if you're subject to COBRA.

What are my employer responsibilities under COBRA?

Plan administrators (in some cases, the employer will be the plan administrator) are responsible for notifying eligible individuals of the right to choose COBRA under your group plan. These individuals can include employees who quit or are let go, but employees terminated for gross misconduct are not eligible for COBRA. You are also required to notify your group health plan administrator of the individual's COBRA eligibility within 30 days of their qualifying event. The plan administrator must then provide notification about COBRA privileges to the eligible individuals. If you are the plan administrator for your group health plan, you have 44 days to provide this notification to qualifying employees.

For any qualifying employees who elect to pay for COBRA coverage, you, as the employer, are responsible for providing coverage identical to the plan the employee was offered before the qualifying event. 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.

How long do I have to provide COBRA coverage for my employees?

Typically, individuals will be covered for 18 or 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 also extend COBRA coverage past the maximum period if they experience a disability or other qualifying event while under COBRA coverage.

In addition, some states allow for continuation coverage for a longer period than required under COBRA. Employers 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 employee becomes 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 employee becomes entitled to Medicare.
  • Divorce or legal separation of the covered employee.
  • Death of the covered employee.

What fines or fees may apply for non-compliance?

Non-compliance with COBRA regulations 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 them 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.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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