COBRA

What COBRA is and who must offer it

COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985. Its health continuation rules apply to group health plans of private employers with 20 or more employees on more than 50% of typical business days in the prior calendar year, and to state and local government plans. Part-time employees count as fractions based on their hours. Federal employees have a separate program, and church plans are exempt.

COBRA covers group health plans, which includes medical, dental, vision, prescription drug plans, health reimbursement arrangements and, in limited cases, health FSAs. It does not cover life insurance, disability insurance or retirement plans.

Smaller employers are not off the hook everywhere. Many states have mini-COBRA laws for insured plans of employers with fewer than 20 employees, such as Cal-COBRA in California, and some extend coverage beyond the federal periods.

Qualifying events and coverage periods

COBRA is triggered by a qualifying event that causes a qualified beneficiary to lose coverage. Qualified beneficiaries are the covered employee, their spouse and their dependent children who were covered on the day before the event.

18 months of coverage for the employee, spouse and dependents when coverage is lost because of:

• Termination of employment for any reason other than gross misconduct, including layoff, resignation and retirement.
• A reduction in hours, such as moving from full-time to part-time below the plan's eligibility threshold.

36 months of coverage for the spouse and dependents when coverage is lost because of:

• The death of the covered employee.
• Divorce or legal separation.
• The covered employee becoming entitled to Medicare.
• A dependent child aging out of the plan.

The 18-month period can stretch to 29 months if the Social Security Administration determines any qualified beneficiary was disabled during the first 60 days of COBRA coverage, and a second qualifying event during the 18 months (like a divorce) can extend the spouse and children to 36 months total.

Gross misconduct is narrow and undefined in the statute. Ordinary poor performance or attendance problems do not meet it, and denying COBRA on that ground is risky.

Notice deadlines

Most COBRA penalties come from missed or defective notices, not from the coverage itself. The main deadlines:

1. General notice: the plan administrator must give it to employees and spouses within 90 days after their plan coverage starts. Many employers include it in the benefits enrollment packet, mailed to the home address.
2. Employer notice to the plan administrator: within 30 days after a termination, reduction in hours, death or Medicare entitlement.
3. Employee notice: for divorce, legal separation or a child losing dependent status, the employee or beneficiary must notify the plan within 60 days.
4. Election notice: the administrator must send it within 14 days of being notified. When the employer is its own plan administrator, it has 44 days from the qualifying event (or loss of coverage, if the plan says so).
5. Election period: qualified beneficiaries have at least 60 days to elect, measured from the later of the election notice date or the date coverage would end.
6. First premium: due within 45 days after the election. Later monthly premiums have a 30-day grace period.

Coverage elected within the window is retroactive to the date it was lost. That is why some people wait to elect until they actually need care, and why the plan must reinstate coverage and process claims backward when they do. The Department of Labor publishes model general and election notices; using them reduces the risk of a defective notice.

Cost and penalties for employers

The plan can charge up to 102% of the full cost of coverage, and up to 150% during the disability extension months. Employers are not required to pay any part of it, though many subsidize COBRA in severance pay packages, often for the length of the severance period.

Non-compliance is expensive. ERISA lets a court award up to $110 a day per beneficiary for failure to provide an election notice, plus the beneficiary's medical expenses incurred while they thought they had no coverage. The Internal Revenue Code imposes an excise tax of $100 a day per qualified beneficiary (up to $200 a day per family) for COBRA failures, self-reported on IRS Form 8928. Class actions over defective election notices are common.

COBRA in layoffs and high-turnover workforces

Employers with high hourly turnover trigger qualifying events constantly. A 2,000-person contact center operation with 60% annual attrition generates about 1,200 separations a year, and every one involving a benefits-enrolled employee is a COBRA event. The risk compounds when terminations are processed late in the HRIS.

Practical controls:

• Connect termination and hours-change transactions in the HRIS directly to the COBRA administrator, so the 30-day employer notice never depends on someone remembering.
• Confirm home addresses at offboarding; election notices to an old address are a common source of claims.
• Watch reductions in hours when moving agents from full-time to part-time schedules. That is a qualifying event even though the person still works there.
• During a layoff or a WARN Act event, coordinate the notice timing so COBRA notices go out with or shortly after separation documents.
• Be careful with a qualifying life event mid-year. Divorce or a child aging out can create COBRA rights for dependents even when the employee keeps working.

Rules for state continuation, Medicare coordination and severance subsidies can get complex, so have your benefits counsel or administrator review the process at least once a year.