COBRA, which stands for Consolidated Omnibus Budget Reconciliation Act of 1985, is most commonly known by its acronym. Perhaps because of this, it can sometimes be confused with an actual health plan. However, COBRA is a set of regulations that requires employers to extend access to their existing group health insurance (as well as dental and vision insurance and a few other benefits) to eligible individuals.
Since COBRA is an extension of the employers’ current health plans, there are several requirements employers must satisfy when they have an employee, an employee’s spouse, ex-spouse in the case of a divorce, and/or an employee’s child dependent who becomes eligible for coverage via COBRA. In this post we’ll walk you through the important information employers need to navigate COBRA.
Do I have to offer COBRA benefits to my employees?
Federal regulations require employers who had 20 or more full-time equivalent employees for at least 50% of their working business days the previous year to extend group health coverage to eligible employees via COBRA. If this doesn’t apply to your company, you might still be required to offer qualifying former employees COBRA benefits, depending on the state in which you operate. For example, California requires employers with 2-19 employees to offer a mini version of COBRA insurance called Cal-COBRA for up to 36 months to those that qualify under their state continuation laws.
If the federal regulations don’t apply to your company, but you’re unsure about state requirements, reach out to your state’s department of insurance.
The types of benefits employers must extend to your eligible employees include:
- Group health, vision and dental insurance (PPO, HMO, HDHP, etc.) offered through insurance providers
- Self-funded or Self-insured plans
- Health Reimbursement Account (HRA) plans
- Group benefits that are offered through other means
- Flexible Spending Accounts (FSAs), which are subject to specific, nuanced rules
- Medical Travel Accounts (MTAs)
These types of benefits which are typically excluded from COBRA coverage:
- Life insurance
- Disability benefits or insurance
- Lifestyle Spending Accounts (LSAs)
By law, you must provide eligible employees, their spouses, ex-spouses in the case of divorce, and dependent children with the identical group health insurance benefits they were enrolled in prior to the qualifying event that caused them to lose their group coverage.
Who is entitled to the benefits?
COBRA regulations are clear that any employee who is eligible to participate in the employer-sponsored group health plan, and elects to do so, can qualify to continue receiving benefits via COBRA as long as certain criteria are met.
Here are the steps to determine eligibility.
Step 1: Is the employee eligible? Any employee that meets these criteria is eligible to receive COBRA benefits if they lose access to their group plans:
- Full-time employees (plus covered spouses, ex-spouses, and dependent children)
- Part-time employees with enough hours to qualify for employer-sponsored group benefits (plus covered spouses, ex-spouses, and dependent children)
Step 2: Is the eligible employee enrolled in the group health, dental, vision or medical spending accounts? Employees can only extend the coverage they already have through COBRA.
Step 3: Did the employee and/or their spouse and dependent children experience a qualifying event that made them eligible for COBRA? Qualifying events include:
- Employee voluntarily left company
- Employee was terminated for reasons other than gross misconduct
- Employee was laid off temporarily or permanently and has lost access to group coverage
- Employee’s hours have been reduced to the point they no longer qualify to participate in group benefits. Additionally, the covered employee’s spouse or dependent children might qualify for COBRA benefits if they experience these qualifying events:
- Death of covered employee
- Divorce or legal separation from covered employee
- Covered employee qualifies for Medicare
- Dependent child ages out of coverage under parent’s group benefits Employees that meet the following criteria are not eligible for continuing group benefits via COBRA:
- Employees who are ineligible for group plan coverage
- Employees who declined to participate in group coverage
- Employees who were terminated for gross misconduct
Who pays for it?
COBRA regulations require qualifying companies to extend benefits to eligible employees, but they don’t require employers to pay for it. In fact, employers can choose to pass on 100% of benefit cost to employees plus a 2% administration fee each month. If employees are more than 30 days delinquent in their premium payment, employers can cancel their COBRA coverage retroactively.
What are the notification requirements?
If your company is subject to federal or state COBRA regulations, there are a few notification requirements you must satisfy.
- You must give a COBRA general rights notice to eligible employees within the first 90 days of coverage
- You must notify your group health plan administrator of the employee’s eligibility (and that of their spouse, ex-spouse, and dependent children if applicable) for COBRA within 30 days of the qualifying event.
- You must provide eligible employees (and their spouse, ex-spouse, and dependent children if applicable) with notification of their COBRA privileges within 14 days of the qualifying event.
- You must notify the eligible employee, their spouse, ex-spouse, and/or dependent child within 14 days if their COBRA coverage has been denied for any reason.
- The employee then has 60 days to elect.
According to the Centers for Medicare and Medicaid services, separate requirements apply to the employer and the group health plan administrator. An employer that is subject to COBRA requirements is required to notify its group health plan administrator within 30 days after an employee’s employment is terminated, or hours are reduced. Within 14 days of that notification, the plan administrator is required to notify the individual of his or her COBRA rights. If the employer also is the plan administrator and issues COBRA notices directly, the employer has the entire 44-day period in which to issue a COBRA election notice.
Failure to comply could result in fines. For each delinquent COBRA notice, the Department of Labor (DOL) will fine the company $110 per day. Additionally, the IRS can levy excise tax penalties on employers for failing to correct COBRA violations in a timely manner. Penalties include $100 per day for individuals, $200 per day for families. Wronged employees can also sue their former employer for failing to notify them of their COBRA options.
COBRA election process
The process of extending group benefits via COBRA looks like this:
- Qualifying event occurs
- Employer notifies group plan administrators (for all applicable benefits) of employee, employee’s spouse and employee’s dependent child eligibility for COBRA coverage within 30 days of qualifying event.
- Employer notifies eligible employee, eligible employee’s spouse and eligible employee’s dependent children of COBRA benefits within 14 days of qualifying event.
- Beneficiaries (i.e. employee, spouse and dependent children) then have 60 days to decide whether or not they want to continue coverage under COBRA. Each person decides individually whether or not they will elect to participate in each individual benefit. That means that even if the eligible employee decides not to participate in COBRA at all, the dependent child can choose (or the legal guardian can choose for them) to continue dental coverage via COBRA and nothing else, or health, vision and dental, or whatever other combination works for them.
- Whatever benefits the beneficiaries choose to participate in must be continued exactly as they were before the qualifying event and without a lapse in coverage. That means the beneficiaries have the same deductible, copays, coinsurance responsibilities, etc.
- These benefits must be offered up to the maximum standard coverage period unless another qualifying event makes the beneficiaries eligible for an extension of COBRA coverage.
The standard coverage periods are:
- 18 months for: job termination for a reason other than gross misconduct, voluntarily leaving the company, or a reduction in hours that resulted in loss of group coverage
- 36 months when eligible employee enrolls in Medicare (for spouse and dependent children)
- 36 months when coverage status changes due to legal separation or divorce (spouse and dependent children)
- 36 months when an eligible employee passes away (for spouse and dependent children).
- 36 months when a dependent loses dependent status from health insurance at age 26.
An example of a qualifying event that would extend the maximum COBRA coverage period is if a beneficiary is disabled. If this is the case, the disabled beneficiary can extend their COBRA coverage for an additional 11 months. Outside of these qualifying events, some states allow for continued COBRA coverage beyond the standard maximum coverage periods.
Are there alternatives to COBRA?
When an employee loses their group coverage, they may be entitled to enroll in other group coverage that may be available to them through a special enrollment period. These could include a spouse’s health plan, Medicaid, or through the Health Insurance Marketplace. In addition, when purchasing health insurance through the marketplace, they may be eligible for a tax credit to lower their monthly premium. COBRA eligibility does not limit marketplace eligibility.
According to the Department of Labor’s COBRA FAQ’s, a former employee will also have an opportunity to request a special enrollment period in a group health plan or Marketplace plan if they exhaust their continuation of coverage or have new special enrollment event such as the birth of a child. If the former employee chooses to terminate their COBRA coverage early with no special enrollment opportunity, they will generally have to wait until the next open enrollment period to sign up for a new group or Marketplace plan.
What are the benefits of COBRA?
Before COBRA, if an employee lost their job and wasn’t able to secure employment that offered group benefits, they and their families would have to either purchase a private health plan that may or may not have included their doctors, or they might have had to go without health coverage. This was especially true if they or their spouse or dependent children had a pre-existing health condition that caused them to be denied coverage.
Since the advent of COBRA, people have been able to retain their same health coverage and continue seeing their doctors while looking for new employment and continue to receive care at a lower cost if they have already met their deductibles or plan maximums. This is a large benefit to them since people with health insurance tend to be healthier.
But extending group benefits through COBRA can have advantages for the employer as well. On one hand, if your employee loses access to group coverage because their hours are reduced below the qualifying threshold, enabling them to continue their health insurance and other benefits helps to instill goodwill with that employee. That employee and their spouse and dependents are also more likely to be healthier, which means the employee is more likely to be more productive.
Extending group coverage via COBRA can also help to smooth over any bad feelings that resulted from the employee’s separation from your company. Workers in the same industry talk to each other and it could hurt your recruitment efforts if you don’t offer former employees some kind of help.
If you have questions about whether or not your company is required to extend benefits through COBRA, or about COBRA benefits in general, reach out to a COBRA administration specialist.
Get started with Lively today!
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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.