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What is COBRA and What Do Employers Need to Know?

Human Resources
Article
04/03/2014

COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, offers certain employees, as well as their covered spouse 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 in 1986, individuals who left their employment (as well as any covered family members) automatically lost health insurance coverage. Their situation was further complicated when the ex-employee or a family member was ill and therefore unable to obtain new health insurance.

An individual's eligibility for COBRA as well as the length of coverage both depend on specific qualifying events (see below for more information). Generally speaking, those who qualify (along with their dependents) can maintain coverage under the previous employer's health insurance by paying the full cost of coverage. Some states allow for continuation coverage for a longer period of time than required under COBRA. Employers not subject to COBRA 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. 

Employer Responsibilities

COBRA applies to private-sector businesses with a group health insurance plan that employ 20 or more employees on 50 percent of the typical business days in the previous calendar year. 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. Businesses that do not meet these requirements are not subject to COBRA, although they may be subject to certain state continuation requirements.

As part of your requirements, you are required to notify 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 health insurance 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. 

When a COBRA notice is delinquent, the U.S. Department of Labor can fine employers $110 a day and the IRS may impose a penalty tax against businesses for failure to comply with COBRA notification requirements. 

It's also important to note that COBRA coverage offered to eligible individuals must be identical to the benefits offered to current employees.

Qualifying Events

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 Department of Labor 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 becoming 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 becoming entitled to Medicare.
  • Divorce or legal separation of the covered employee.
  • Death of the covered employee.

New government insurance marketplaces established by the Affordable Care Act will expand the range of options available to people who lack access to affordable and adequate health care. Rather than choosing COBRA, some people may decide instead to obtain insurance through a government marketplace.

Employers should consider engaging specialists in COBRA administration in order to 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.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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