COBRA Health Insurance—Do You Need to Offer It?

As your business grows, so do your responsibilities as a business owner. Once you have 20 full-time equivalent employees and offer health insurance, you need to know about COBRA. What is COBRA? Do you have to offer it? Read on to get answers to these questions and more.

What is COBRA health insurance?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires employers to extend health insurance to employees who become ineligible for the business-provided health plan. You must also offer COBRA health coverage to eligible employees’ dependents and covered spouses. 

COBRA regulates:

  • When and how you must provide continued coverage
  • When an employee is eligible for COBRA coverage
  • How long an employee has coverage

Keep in mind that COBRA coverage is only for health plans and does not cover life or disability insurance plans. 

What is COBRA? COBRA is a federal law that requires specific employers to offer continued health coverage to qualifying individuals for up to 36 months.

Are you required to provide COBRA insurance?

You must provide COBRA continuation coverage if you:

  1. Provide a private-sector group health plan to your employees AND
  2. Employ at least 20 full-time equivalent employees (FTE)

State and local governments must also provide COBRA health coverage. However, COBRA does not apply to any health plans offered by the federal government, churches, and some church-related organizations. 

Full-time equivalent employee calculation

Is your health insurance plan eligible? If so, it’s time to calculate your FTEs. For COBRA medical purposes, you need to employ 20 full-time equivalent employees on more than 50% of your typical business days in the past calendar year. 

For example, if your business has 260 working days per year, you would need to employ 20 FTEs for 130 of those days in the past year. So, what is a full-time equivalent employee?

FTE is the total number of hours two or more part-time employees work combined to create a worker that is equivalent to one full-time employee. Each part-time employee counts as a portion of a full-time employee. 

To calculate your FTEs, add together the total hours worked by your part-time employees. Divide those hours by the total number of hours needed to be a full-time employee. 

Let’s say you have four part-time employees who each work 30 hours per week. Add all of their hours per week together. 

30 + 30 + 30 + 30 = 120 hours

Now, let’s say that full-time employees work 40 hours per week. Divide the total number of hours your part-time employees work by the 40 hours a full-time employee would work. 

120 / 40 = 3

Your total number of FTEs would be three employees. Add this number to the number of full-time employees you have (if any) to get your total FTE count. 

COBRA medical coverage eligibility

A person must be a qualifying individual with a qualifying event to receive COBRA medical coverage.

Who qualifies for COBRA coverage?

An employee may qualify for COBRA insurance coverage if they were covered by a group health plan on the day before a qualifying event (we’ll get to that later). 

Qualifying individuals can be employees or their:

  • Dependents
  • Spouses
  • Former spouses

In the event that your business files for bankruptcy, retired employees or their spouses, former spouses, and dependents may be eligible for COBRA coverage, too. 

Any children qualified individuals have or adopt while using COBRA coverage are automatically covered. 

Qualifying events for COBRA coverage

Individuals only qualify for COBRA coverage if they lose their normal group health plan due to specific events. 

Qualifying events for COBRA coverage include:

  • Employee termination or reduction of hours
  • Death of the employee
  • The employee becomes eligible for Medicare
  • A dependent loses their dependent status
  • The employee divorces or legally separates from their spouse

Employees terminated for gross misconduct are not eligible for COBRA coverage. 

What coverage does the employee receive?

Employees who use COBRA benefits must receive the exact same coverage available under your group health plan. All benefits, copays, services, open enrollment, paperwork, etc., should be the same as the regular plan coverage. 

If you change your group health plan, the COBRA medical plan changes, too. Why? Because the COBRA plan must match the company-provided plan the employee received during the eligibility period. 

Who pays for the COBRA coverage?

When you have employees, you may pay for part of their health plan premiums, and the employee pays the remainder. With COBRA coverage, you can choose to continue paying part of the health plan. Or, you can elect to have qualified individuals pay the entire cost of their participation in the COBRA continuation coverage. 

The Department of Labor (DOL) limits the COBRA health insurance cost. You can choose to pay a portion of the plan’s premiums, or you can choose to have the eligible employee pay the premiums in full. The COBRA premiums must not be more than the actual price of the plan. For example, if your total plan costs $500 per month per employee, the COBRA premium cost cannot exceed $500 for eligible employees. 

However, as the employer, you may impose a 2% charge on the plan to cover your administrative costs. This means that qualified individuals may have to pay up to 102% for their coverage. 

How long can an employee use COBRA coverage?

Depending on the specific situation, employees may receive COBRA continuation coverage for 18 – 36 months. If your group health plan ends for any reason, COBRA coverage ends, too. 

Employees and qualified individuals can reference the DOL’s FAQs about COBRA as well as the health plan’s information for more details. 

How do employees find out about COBRA?

The health plan’s Summary Plan Description (SPD) includes the employee’s COBRA rights. If you are responsible for giving the SPD to the employees, make sure you include all pages. 

You may also include a section on COBRA in your employee handbook. Including a section gives your employees easy access to the information they need to know about their COBRA rights. 

Who must notify the health plan of qualifying events?

The employer or employee must notify the group health plan if a qualifying event occurs. Employees cannot receive COBRA coverage until you notify the group health plan. 

Employers must notify the group health plan in the event of:

Employees must notify the group health plan in the event of:

  • Divorce or legal separation
  • A child’s loss of dependent status

After your group health plan receives notice, the plan gives the qualified individual more information about their rights to elect COBRA continuation coverage. 

State laws for COBRA

States can create laws for COBRA-like health insurance continuation plans. Check with your state to find out if there are any additional laws you must follow. For example, some state laws might require employers with fewer than 20 FTEs to offer COBRA coverage.

COBRA coverage under the American Rescue Plan

The American Rescue Plan (ARP) was signed into law on March 11, 2021. The bill offers COVID-19 relief and includes provisions on COBRA qualifications and expansions. 

Included in the ARP is a subsidy period for COBRA, effective from April 1, 2021 – September 30, 2021. Eligible employers must pay the COBRA premiums for eligible employees during the subsidy period. Qualifying employees do not pay the premiums. Instead, employers must pay the entire premium for the employee. 

Eligible employees include those who:

  • Lose coverage due to involuntary termination or reduction in hours
  • Were terminated before April 1, 2021 if they were still within the COBRA coverage period AND
    • Were enrolled in COBRA as of April 1, 2021, OR
    • Did not elect to have COBRA coverage when it was originally available OR
    • Were previously enrolled in COBRA but let coverage lapse before April 1, 2021

Ineligible employees include those who:

  • Were terminated for gross misconduct
  • Voluntarily left the employment of their covered employer
  • Have access to another employer’s group health plan
  • Qualify for and have access to Medicare

Employees who become eligible for another employer’s group health plan or Medicare coverage during the subsidy period become ineligible for the subsidy coverage. 

The ARP COBRA Premium Subsidy provision does not define gross misconduct or address employees who voluntarily reduce their working hours. 

Employer requirements under the COBRA subsidy provision

Under the subsidy program, employers must notify eligible employees terminated before April 1, 2021 with a Notice of Special Enrollment. Send the notice before May 31, 2021. The special enrollment period expires 60 after the delivery of the notification. Employees have a second chance to enroll if they were terminated before April 1 and either did not elect for COBRA previously or let their coverage lapse. 

If you terminate an employee on or after April 1, 2021, send a notice within 30 days of their loss of coverage. 

COBRA subsidy provision tax credits

Employers can apply for a tax credit on their quarterly tax returns (e.g., 941) for all subsidy premium payments under the ARP. If the credit is more than the quarter’s tax liability, employers can claim a refund. 

For more information on COBRA

Your group health plan may have specific COBRA policies. Consult your plan for any additional requirements for you and qualified individuals. 

The DOL has a thorough guide about COBRA for employers to help you better understand the law. Check out the DOL website for more information about COBRA and your responsibilities as an employer. 

Make deducting health insurance from your employees’ paychecks easy with Patriot’s online payroll software. We’ll do the calculations for you so you can put away the calculators and get back to business. Start your free 30-day trial today!

This article has been updated from its original publication date of March 1, 2017. 

This is not intended as legal advice; for more information, please click here.

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