Basic COBRA Administration, Part 1

COBRA, the Consolidated Omnibus Budget Reconciliation Act of 1985, allows qualifying people formerly covered by an employer’s group plan and their dependents to temporarily continue health coverage at group rates. Employers who don’t understand basic COBRA administration and their obligations can face penalties.

Certain employer-sponsored health plans must offer COBRA continuation coverage to employees who undergo a “qualifying event” that causes them to lose group health coverage.

Which employers must comply with COBRA? An employer must offer COBRA continuing coverage if it had 20 or more employees in the prior year and offers a group health plan. Please note that COBRA will apply to some employers that do not have to comply with the Affordable Care Act because they have fewer than 50 employees. As long as you have 20 or more employees and offer group coverage, COBRA applies. Each part-time employee counts as a fraction of a full-time employee, with the fraction equal to the number of hours that the part-time employee worked divided by the hours an employee must work to be considered full-time. If you employe a lot of part-time employees but have fewer than 20 employees on your health plan, COBRA rules still apply to your plan.

Which employees are eligible for COBRA continuation benefits? An employee must have had coverage under the group health plan on the day before a “qualifying event” occurs. “Qualifying events” include:

• Termination of employment, unless it is for gross misconduct, or a reduction in hours worked (e.g., from full-time to part-time) that causes loss of benefits.
• An employee’s death, divorce, legal separation or eligibility for Medicare.
• A change in status of a covered dependent or spouse. Under the Affordable Care Act, children can remain on a parent’s plan until age 26. This applies regardless of whether they are a student, dependent or even married.
• Being called up for active military duty.

Types of coverage. Employers must offer COBRA beneficiaries the same coverage and coverage choices (such as during open enrollment periods) as they do to non-COBRA beneficiaries. Any benefit changes for active employees will also apply to COBRA beneficiaries.

Length of coverage. COBRA provides for up to 18 months’ coverage for qualifying events such as job termination or a reduced work schedule. Certain qualifying events, or a second qualifying event during the initial coverage period, may extend coverage to a maximum of 36 months. Cobra coverage begins on the date that benefits would otherwise have been lost because of a qualifying event. An employer may terminate coverage if a beneficiary does not pay premiums on time, or if the employer stops offering any group health plan.

Notification and election. In the case of divorce, legal separation or a dependent’s change of status, such as turning 26, a qualified beneficiary has 60 days to notify the plan administrator. The administrator then has two weeks to notify the person entitled to COBRA benefits, who must decide within 60 days whether to elect coverage. Keep in mind that though an employee may choose coverage on behalf of all other qualified beneficiaries, each beneficiary has the right to independently elect COBRA coverage. For example, if an employee has a family member with an illness at the time he is terminated, that person alone can elect coverage, should he choose.
Cost of coverage. In most cases, the beneficiary pays the full cost of the insurance premiums. In fact, employers may charge up to 102 percent of the premium and keep the extra two percent to cover administrative costs. COBRA beneficiaries must make the initial premium payment within 45 days after the election date, and employers can terminate COBRA coverage if payments are late.

Special rules apply to reservists called up for military service. If military service is for 30 or fewer days, military members and their dependents can continue their coverage at the same cost they were paying before their short service. If military service is longer, the employer can require reservist and dependents to pay as much as 102 percent of the full premium for coverage. However, the military’s health plan should cover a family in this situation.

State law. Most states have laws concerning the continuation of benefits. Some cover all employers, including small employers, so your organization might be subject to a state law even if your company is exempt under the federal COBRA law. To find out more about your state’s laws regarding continuation of coverage, contact your health insurance broker or an employment law professional. Be sure to inquire about the types of benefit plans covered, eligibility rules, what constitutes a qualifying event, notification requirements, length of coverage and how coverage may be terminated.

In part two, we’ll cover COBRA audits and how they can save you money.