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COBRA Overview
What is COBRA?
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act and was signed into law in 1986. COBRA requires employers to offer employees and their dependents the right to elect health care continuation coverage if they lose coverage under the insurance plan as a result of a qualifying event.
What benefits are covered?
Any group health plan maintained by an employer to provide medical coverage to its employees would qualify for COBRA. The most common types of benefits include medical, dental, vision, and health flexible spending accounts.
What employers are required to offer COBRA?
COBRA applies to employers with 20 or more employees during the previous calendar year. Part-time employees count as a fraction of an employee for the purposes of establishing COBRA applicability.
What employees are eligible for COBRA coverage?
Employees who are covered under an employer's group health plan are considered "qualified beneficiaries" of COBRA. In addition, the spouse and children of the employee are also qualified beneficiaries and entitled to make COBRA elections independent of the employee.
What events qualify an individual for COBRA coverage and for how long?
If one of the following events occurs and causes loss of health insurance coverage, then the employee and/or dependents qualify for COBRA.
| Termination of employment (except for gross misconduct) |
18 Months |
| Reduction in hours of employment |
18 Months |
| Death of employee |
36 Months |
| Divorce or legal separation from employee |
36 Months |
| Ceasing to be a dependent child under terms of plan |
36 Months |
| Employee’s entitlement to Medicare |
36 Months |
When can COBRA be extended beyond the 18-month maximum coverage period?
There are certain circumstances in which a qualified beneficiary can extend his/her COBRA coverage beyond the 18-month period.
(1) Multiple Qualifying Events: If a second qualifying event occurs during the initial 18-month COBRA period, then the spouse and children are entitled to an additional 18 months of coverage, giving a total of 36 months. For example, an employee is terminated and both he and his spouse elect COBRA coverage. During that 18-month period, they divorce. The spouse (but not the employee) is now entitled to an 18-month extension beyond the initial period.
(2) Disability Extension: If a qualified beneficiary becomes disabled during the first 60 days of COBRA coverage, the maximum coverage period for that individual as well as the other qualified beneficiaries is extended to 29 months. In other words, let's say an employee is terminated and both he and his spouse elect COBRA coverage. Within a couple of weeks, the spouse (or employee) becomes disabled. Both the employee and spouse are now entitled to a total of 29 months of COBRA coverage instead of the initial 18 months.
(3) Employee's Entitlement to Medicare: If an employee becomes entitled to Medicare in the 18 months prior to the qualifying event (i.e. termination of employment), then the spouse is entitled to a maximum of 36 months of COBRA coverage from the Medicare eligibility date. For example, let's assume that the employee is entitled to Medicare January 1, 2004. The employee is then terminated July 1, 2004. Since the spouse is entitled to a maximum of 36 months starting from January 1, 2004, she could extend her COBRA coverage until January 1, 2007. The employee, on the other hand, can only extend coverage until January 1, 2006, which is 18 months from the date of termination.
What are the employer's responsibilities?
Below is a list of notices and other information employers are required to provide. Of these notices, the two most important are the COBRA Initial Rights Notice and the COBRA Election Notice. In addition, as of November 26, 2004, employers will be required to send two additional notices: Notice of Unavailability of COBRA Coverage and Notice of Termination of COBRA Coverage. It is suggested that all of these notices are sent via first class mail to the home of the employees or qualified beneficiaries. If a dispute were to arise surrounding an individual's COBRA rights, the employer would need to prove that these notices were sent to all qualified beneficiaries.
- COBRA Initial Rights Notice: The employer must furnish this notice to each qualified beneficiary. In general, the notice must include a description of COBRA coverage, a list of qualifying events, and the length of continuation of coverage. The notice also should outline the employee's responsibility, such as notifying the employer of a qualifying event (i.e. divorce) and address changes.
- COBRA Election Notice: The employer must notify each qualified beneficiary of his/her COBRA rights after being notified or becoming aware of a qualifying event. This notice is more comprehensive than the Initial Rights Notice. Some of the items that must be included are: (a) the identification of the qualifying event, (b) a listing of the qualified beneficiaries and the termination date from the plan, (c) an explanation of how to elect COBRA coverage, (d) a description of COBRA coverage, (e) an explanation of the duration of COBRA coverage, (f) a description of when COBRA coverage may be extended due to a second qualifying event or disability, and (g) the COBRA premiums and payment procedures.
- Notice of Unavailability of COBRA Coverage (new for 2004): If an employer receives notice of a qualifying event and determines that the individual is not entitled to COBRA coverage, the employer must provide a written explanation as to why the individual is not eligible.
- Notice of Termination of COBRA Coverage (new for 2004): If an employer terminates COBRA coverage prior to the end of the maximum coverage period, written notice must be provided to each qualified beneficiary.
- Notice of COBRA Premiums Short by Insignificant Amount: A COBRA payment that is short by an insignificant amount must be accepted as payment in full unless the employer notifies the beneficiary in writing and provides a reasonable amount of time to remit the balance.
- Open Enrollment Material: Qualified beneficiaries may modify COBRA coverage elections and enroll additional dependents during open enrollment period. The employer must mail open enrollment material to all qualified beneficiaries.
- Summary Plan Descriptions (new for 2003): Summary plan descriptions regarding an employer's health plan must contain information on COBRA. As of 2003, employers must include "reasonable" guidelines for employees (and dependents) to provide COBRA-related notices.
- Notice of Change in COBRA Premium: Employers must notify all COBRA participants in writing if the premium is going to increase due to a change during open enrollment or a hike in the rates by the insurance company.
What is the timing for the COBRA notification and election process?
| COBRA Initial Rights Notice: |
Employer must send within 90 days after coverage begins. |
| Qualifying Event Notice: |
Employee must notify employer within 60 days if loss of coverage will result due to divorce/separation or dependent child exceeding age limit. |
| Notice of Unavailability of COBRA Coverage: |
Employer must sent notice to employee within 14 days after receiving notice of a qualifying event. |
| COBRA Election Notice: |
Employer must send notice within 14 days after determining a qualifying event has occurred. |
| COBRA Election: |
Employee and/or dependent has 60 days from the later of (a) date group health coverage is lost, or (b) date the employer provides COBRA election notice. |
| COBRA Premium: |
Employee must pay initial premium within 45 days after electing COBRA. Subsequent premiums are due on the first of the month, with a 30-day grace period. |
What are the penalties for failing to comply with COBRA requirements?
Failure to comply with the COBRA guidelines can result in financial penalties to the employer. That is why it is extremely important for employers to ensure that all notifications are mailed within the appropriate timeframes, and that records are kept proving that all required notifications were sent. In the event that a qualified beneficiary is not notified of his/her COBRA rights, employers may be exposed to the following penalties:
- The IRS may assess penalties of up to $200 per day. These penalties are labeled "excise taxes".
- The DOL may assess penalties of up to $110 per day. These penalties are labeled "ERISA statutory penalties".
- Qualified beneficiaries may file lawsuits if employers fail to provide the required COBRA notifications. The qualified beneficiary can sue to recover lost COBRA coverage and/or unpaid medical claims.
What COBRA outsourcing services are available?
Some employers prefer to outsource their COBRA responsibilities to an outside vendor. This is a decision that varies from company to company. However, some factors to consider when deciding whether or not to outsource include: (1) number of employees, (2) rate of employee turnover, (3) workload of human resource professional or department, and (4) budget. The cost associated with hiring a COBRA vendor depends on the size of the company. It can range from about $500 to $2000 annually for companies with 50 to 200 employees.
The following list currently represents the typical services provided by a COBRA vendor.
- COBRA Initial Rights Notices
- COBRA Election Notices
- Premium billing and collection with detailed reports for employer
- Employer indemnification against fines, penalties, and excise taxes
- Internet-based communication allowing employers to notify vendor of all new hires, plan enrollees, and terminations.
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