Healthcare insurance is critical to employees. It is widely considered one of the most valued employee benefits. However, employees are only covered with the insurance as long as they are employed. If they lose their jobs, they also lose their employer-sponsored healthcare coverage. Employees in that situation are often eligible for COBRA coverage, which is designed to serve as a temporary insurance plan until they can find a new job.
What is COBRA insurance?
Passed in 1985, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most employer-sponsored group health plans to offer employees the opportunity to continue their health coverage in situations where the coverage would otherwise end because of certain life events (known as qualifying events).
Generally speaking, COBRA coverage will cost employees and their dependents more than what they were paying while they were employed. Since they are no longer part of the group health plan, their former employer or plan administrator is no longer paying its portion of the health coverage.
An employee can elect to use COBRA if they lose health insurance coverage for any of these reasons:
- They quit their job.
- They are fired (unless it's for gross misconduct).
- Their hours are reduced (i.e., they no longer qualify for the benefits of a full-time employee).
- They get divorced or legally separated from their spouse who was covered under the plan.
- The employee dies, in which case their covered dependents would be the COBRA beneficiaries.
- The employee becomes entitled to Medicare coverage.
- One of the employee's covered dependents has a change in status (for example, the employee's adult child ages out of coverage under the employee's health insurance).
- The employee is called to active military duty (and doesn't voluntarily maintain health coverage).
- The employee does not return to work at the end of their family or medical leave (if they had coverage at the beginning but lost it during the leave).
How does COBRA work?
COBRA is essentially a stopgap measure. The program allows employees to maintain and extend their former employer's health plan when they no longer work there. The catch is that employers are no longer paying a share of the premiums and the former employee pays it all.
The program is also modular. An employee can enroll some of their family members in COBRA while others stay out of the plan. That way, it's flexible in case the employee's spouse has other or better coverage, or their children need extended coverage from their previous employer. It's up to the employee how they parcel it out.
Decisions on whether to enroll in COBRA don't have to be made immediately. Your employees have 60 days from when their regular benefits end to decide if they want to sign up for COBRA coverage, and they are free to waive their coverage.
If an employee changes their mind after waiving it, COBRA coverage can be reinstated as long as it's within those 60 days. The coverage will be retroactive to the time they qualified for the program. However, they still have to pay their past premiums for the retroactive period. Employees can cancel their COBRA coverage at any time.
The length of coverage depends on the qualifying event that triggered the coverage. For example, in cases of termination of employment or reduced hours, coverage will last for 18 months for the employee and their dependents. For reasons other than termination, coverage can last up to 36 months.
COBRA coverage will cease:
- At the end of the coverage period
- If premiums stop being paid for any reason
- If an employee becomes eligible for Medicare during the coverage period
- If the employer goes out of business and/or stops offering health insurance coverage or group health plans to employees
Do small businesses have to offer COBRA?
Businesses in the private sector with more than 20 employees, as well as some state and local government agencies, that have a group health plan are required to offer COBRA to qualified beneficiaries. A qualified beneficiary is anyone who was covered under your group health plan on the day before the qualifying event that caused them to lose the health coverage. These are some examples of qualified beneficiaries:
- Any employees who were participants in your group health plan on the day before the qualifying event
- Their spouses and dependents
- Retirees (unless they are eligible for Medicare)
You do not have to offer COBRA coverage to any of the following:
- An employee who is not yet eligible for your group health plan
- An eligible employee who declined to participate in your plan
- An individual who is enrolled in benefits under Medicare
- An eligible employee's domestic partner, if they are not legally married
Benefits such as healthcare plans – including medical spending, dental, vision, hearing, prescription drug, alcohol and substance abuse, and mental health plans – are covered under COBRA. There are other programs called "mini-COBRA" plans that apply to companies with fewer than 20 employees.
Who qualifies for COBRA?
COBRA coverage is only available to qualified beneficiaries. To qualify, an employee must have been enrolled in your company-sponsored health plan as of the day before the qualifying event. That employee's spouse (or former spouse), children, and any other dependents who were covered under the employee's former health insurance are eligible for the COBRA benefits. (Like most federal laws, COBRA does not recognize common-law marriages; romantic partners must be legally married to the eligible employee to qualify).
Who pays for COBRA insurance, and what does it cost?
Typically, the employee pays the full insurance premiums, sometimes slightly more. As the employer, you are allowed to charge 102% of the premium and to keep the additional 2% to cover administrative costs. If your employee gets extended COBRA coverage because they have a disability, you can charge 150% of the premium for months 18 to 29.
While group rates may be available for COBRA, even after an employee no longer works for their employer, the rates can be high, as employees are now covering the full premium costs.
COBRA is pricey, but there are some other options that can help employees in this type of situation. One possibility is to use a health savings account (HSA) from a high-deductible health plan to cover part of the COBRA payment. HSAs let employees save tax-free money for healthcare costs, which can include COBRA.
Another option is federal income tax credits, but eligibility is limited. The U.S. Department of Labor offers a health coverage tax credit (HCTC) for those who lose their jobs because of the "negative effects of global trade." The HCTC pays 72.5% of premiums for those who are eligible.
Administration can be taxing and complicated for many plan administrators. Companies big and small can save time and money by outsourcing the administrative responsibilities. This works well for both parties involved, especially when a company has a large employee pool.
What are the COBRA requirements for employers?
First and foremost, it is important to communicate with your employees. There are two times that employers must provide COBRA information to employees:
- When an employee first joins a company group health insurance plan. Essentially, the company is required to provide information to every employee about COBRA, known as a general notice, within their first three months of employment at the company.
- When a qualifying event occurs. A qualifying event could be a layoff, an employee's resignation, bankruptcy, etc. After the qualifying event, an employee has 60 days to decide whether to continue coverage.
Part of this communication is letting employees know that they can receive COBRA coverage through any of the health plans that the employer offers and the employee is enrolled in, such as these:
- Health spending accounts
- Medical and dental plans
- Stand-alone vision, prescription drug and hearing plans
Employers have no obligation under the law to provide or offer continued coverage for life insurance, disability insurance, retirement plans or vacation plans.
Several government agencies are responsible for administering COBRA coverage. Currently, the Department of Labor (DOL) and the Department of the Treasury have jurisdiction over private-sector group health plans, while the Department of Health and Human Services is responsible for public-sector health plans. The DOL is responsible for disclosing and notifying the affected parties of legal COBRA requirements.
As a small business, you must not only comply with federal laws but also do it in the most efficient and cost-effective manner to keep it from affecting your business negatively. Following COBRA laws, providing your employees the right communications, and offering plans that mirror your group health insurance plans are the best ways to stay COBRA compliant. HR outsourcing, as mentioned, is also an option to ensure you are not missing any administrative tasks that could cause problems later.