As your business grows and you hire more employees, your employer responsibilities expand, too. Once you get to 20 full-time equivalent employees and offer a group health plan, you need to know about COBRA—or the Consolidated Omnibus Budget Reconciliation Act.
So, what is COBRA? What are the COBRA requirements? What do you have to do as an employer? Find out how COBRA works below.
What is COBRA insurance?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows employees, covered spouses, and dependents to continue temporarily their group health insurance coverage if they become ineligible for the plan your business provides. COBRA regulates when and how employers must provide continuation coverage, when someone qualifies for coverage, and how long coverage can last.
Am I required to provide COBRA coverage?
There are two basic criteria your business must meet to determine if you need to provide COBRA continuation coverage to employees.
First, you need to offer a private-sector group health plan to your employees. COBRA also applies to health plans provided by state and local governments. However, COBRA does not apply to health plans offered by the federal government, churches, and some church-related organizations. COBRA does not cover life insurance and disability insurance.
Second, you must employ at least 20 full-time equivalent employees on more than 50% of your typical business days in the past calendar year. Because COBRA is based on full-time equivalents, the hours of two or more part-time employees can be combined to create a worker that is equivalent to a full-time employee.
Each part-time employee counts as a portion of a full-time employee. To calculate full-time equivalents, add together the hours worked by your part-time employees. Then, divide the total hours by the number of hours an employee must work to be a full-time employee.
Let’s pretend you have four part-time employees who each work 30 hours per week. Add together the hours they each work in a week.
30 + 30 + 30 + 30 = 120 hours
Then divide the total hours by the number of hours an employee must work to be full time. In this case, let’s say you require full-time employees to work 40 hours per week.
120 / 40 = 3
Based on this example, your four part-time employees count as three full-time equivalent employees.
Who is entitled to COBRA continuation coverage?
To receive COBRA continuation coverage, a person must be a qualifying individual and a qualifying event must occur.
Qualifying individuals for COBRA coverage
An individual might qualify for COBRA insurance coverage if they were covered by a group health plan on the day before a qualifying event happened.
Qualifying individuals can be employees or their spouses, former spouses, and dependents. If your business goes bankrupt, retired employees or their spouses, former spouses, and dependents might be eligible, too.
If a qualified individual is currently using COBRA continuation coverage, any children they have or adopt are automatically covered.
Qualifying events for COBRA coverage
COBRA coverage is only available to qualifying individuals if their normal group health plan coverage is lost due to specific events.
Qualifying events for COBRA coverage include:
- The employee is terminated or experiences a reduction of hours
- The employee becomes covered by Medicare
- The employee divorces or legally separates from their spouse
- The employee dies
- A dependent loses their dependent status
If you terminate an employee for “gross misconduct,” the employee is not eligible for COBRA coverage.
What coverage does someone receive?
A qualified individual who uses COBRA coverage must receive the exact same coverage that is available under the group health plan. This means all benefits, copays, services, open enrollment, paperwork, etc. should be the same as regular plan coverage.
If your business changes its group health plan, the COBRA coverage will change accordingly to match the regular plan.
How long does COBRA coverage last?
Qualified individuals can receive COBRA continuation coverage from 18 to 36 months, depending on the specific situation. Employees and other qualified individuals can learn more by reading the U.S. Department of Labor’s FAQs about COBRA and the health plan’s information.
The group health plan can end the continuation coverage early for a variety of reasons, like if your business ceases to maintain a group health plan.
Who pays for COBRA?
You probably pay a portion of your company’s group health insurance while employees pay the remainder. With COBRA, you can continue to pay a portion of the health plan. Typically, though, employers have the qualified individual pay the entire cost of participation in the COBRA continuation coverage.
You can charge individuals a 2% fee to cover your administrative costs. The covered individual may have to pay up to 102% for their COBRA continuation coverage.
How do employees find out about COBRA?
The employee’s COBRA rights will be included in the health plan’s Summary Plan Description (SPD). If you are responsible for giving the SPD to employees, make sure it gets to them.
You might also want to include brief information about COBRA in your employee handbook. Including it will give employees easy access to the basic information they need to know about their COBRA rights.
If a qualifying event occurs, the group health plan must be notified before the employee can receive COBRA benefits. The person who notifies the group health plan depends on what the qualifying event is.
For the following events, you (the employer) must notify the plan:
- Termination or reduction of hours
- Employee death
- Employee becoming entitled to Medicare
- Small business bankruptcy
For the following events, the employee must notify the plan:
- Divorce or legal separation
- A child’s loss of dependent status
Once the group health plan receives notice, the plan will give the qualified individuals information about their rights to elect COBRA continuation coverage.
Are there state laws?
Each state is allowed to create laws for COBRA-like health insurance continuation plans. Check with your state to find out if there are any additional laws you have to follow. For example, laws in some states might require smaller employers to have COBRA coverage.
For more information
When learning about COBRA or discussing it with your employees, make sure you reference your group health plan’s specific policies. The plan might have additional requirements that you and the qualified individuals must follow.
If you offer health insurance to your employees, you need to know how much to withhold from each paycheck. When you use Patriot’s payroll software, we’ll calculate how much you need to withhold from each paycheck, meaning you have one less thing to do. Get a free trial today.
This is not intended as legal advice; for more information, please click here.