Employer’s Guide to COBRA Insurance

What is COBRA insurance?

COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a federal law created in 1985 that provides eligible employees and their dependents with health insurance coverage in the event the employee loses their job or has their hours reduced. COBRA does not provide any supplemental coverage, such as disability, life insurance or hospital care insurance. COBRA can be offered in conjunction with other severance packages. [Read related article: How to Offer Health Insurance to Your Employees]

“In everyday speak, COBRA is a government program that ensures employees, even after they leave employment, can keep their company-sponsored healthcare program,” said Laura Handrick, contributing HR professional at Choosing Therapy.

How does COBRA insurance work?

COBRA’s main purpose is to extend employees’ health insurance coverage when they are no longer eligible for an employer’s plan. This is how COBRA works from the employee’s perspective:

1. Your employer, insurance carrier or both will provide you with information on COBRA coverage when you initially enroll in the insurance plan.
2. You have up to 60 days after a qualifying event to decide if you want to continue coverage under COBRA. If you choose not to, your health insurance coverage ends the same day your employer’s plan coverage ends.
3. If you choose to continue coverage, it will begin the same day your employer’s coverage ends and offer the same benefits you had under your employer’s plan. You then have 45 days to send your first monthly premium payment.
4. Depending on your qualifying event and circumstances, your COBRA coverage will last at least 18 months, possibly as long as three years.
5. Your COBRA coverage could be terminated early if you don’t pay your premiums and fees, or if you get another job that offers health insurance before your COBRA coverage is up.

“Typically, once COBRA is canceled (or declined), it cannot be reinstated (or accepted) for that former employee with that former employer for that same event that caused COBRA in the first place,” said Michael Trust, human resources director at GNA. “There is no requirement that a former employee elects COBRA.”

What are COBRA qualifying events?

COBRA is unique in that it can only be used in certain situations, referred to as “qualifying events.”

Below are the qualifying events under which you can terminate employee benefits:

• Loss of employment (firing or laying off employees, or employees who quit)
• Significant reduction in working hours
• Employer bankruptcy
• Reduction in staff to fewer than 20 full-time employees

Qualifying events for spouses include the following:

• Loss of employment for the covered employee
• Reduction in working hours for the covered employee
• The covered employee becoming eligible for Medicare
• Divorce or legal separation from the covered employee
• Death of the covered employee

These are the qualifying events for dependent children:

• Loss of dependent child status under the existing insurance plan
• Loss of employment for a covered employee
• Reduction in working hours for a covered employee
• A covered employee becoming eligible for Medicare
• Divorce or legal separation of the covered employee
• Death of the covered employee

While COBRA can serve as a safety net in these situations, it tends to be much more expensive than a regular health insurance plan. This is because the recipient is responsible for paying 100% of the costs of the health plan, whereas the employer likely covered a portion of the costs before the qualifying event. The COBRA recipient is also responsible for a 2% administrative charge.

“The 2% administrative charge is to offset the cost of administering the program,” said Trust. “The employer pays nothing, unless they choose to waive the 2% fee.”

Who is eligible for COBRA health coverage?

Your qualifying event will determine your eligibility and how long you can be covered under COBRA.

These are the employee eligibility requirements:

• You have been employed and covered under your employer’s healthcare insurance.
• The insurance plan has been effective on more than 50% of the employer’s business days the previous year.
• You have been laid off or fired, retired, quit, or had your hours reduced to the point that your employer is no longer required to cover you under the company insurance plan.

Here are the possible eligibility requirements for dependents:

• You are the dependent of a qualifying employee.
• You are the spouse of a qualifying employee who divorces or is legally separated from the employee.
• You are the spouse of a qualifying employee who dies.

Do employers have to provide COBRA?

Employers with 20 or more full-time staff members are required to give employees the option to obtain COBRA coverage. The working hours of multiple part-time employees can be grouped together to equal one full-time employee when determining an employer’s COBRA applicability.

COBRA applies to any health insurance plans offered by private sector, state or local government employers. Federal employees are covered under a law similar to COBRA.

For businesses with fewer than 20 employees, most states have local laws similar to COBRA that are typically referred to as mini-COBRA plans. This chart from HR Knowledge breaks down mini-COBRA laws by state and how they apply to businesses.

Any employer required to provide COBRA coverage must take the actions below:

• Notify employees and their spouses of their COBRA rights the day the employee joins the company and the day their healthcare coverage starts.
• Keep a compliance record of the notification as well as evidence that the policy was followed.

What COBRA notification responsibilities are there?

As an employer, you must provide employees and their spouses with specific notices regarding their rights to and under COBRA. At a minimum, according to Trust, you must inform your employee of their right to COBRA within 14 days of the beginning and end of their employment with you.

You must also provide the following documents:

Summary plan description

The summary plan description (SPD) outlines the COBRA rights provided under your company’s group health plan. It provides information such as the available benefits, the rights of participants and beneficiaries under the plan, and how the plan works.

COBRA general notice

Your general health plan must give each employee and their spouse a notice of their COBRA rights within the first 90 days of coverage. Include these details in the general notice:

• The contact information of someone the employee can speak to for more information on COBRA
• A general description of COBRA coverage under the plan
• A description of what qualified beneficiaries must do to notify the plan of qualifying events
• A statement that the general notice does not fully describe COBRA or the general plan

You can use this general notice template from the Department of Labor to create your own notice that fulfills the requirements.

COBRA qualifying event notice

Your group health plan must offer continuing coverage should a qualifying event occur. You (the employer), the employee or a beneficiary must notify the group health plan of the qualifying event. The plan administrator is not required to act until they receive proper notice. The person required to give notice depends on the qualifying event.

The employer must give notice within 30 days of the following qualifying events:

• Termination or reduction in hours of the covered employee
• Death of the covered employee
• The covered employee’s new entitlement to Medicare
• Employer bankruptcy

The covered employee or a qualified beneficiary must give notice if these events occur:

• Divorce
• Legal separation
• A child’s loss of dependent status

Cover all the details and be as thorough as possible when you notify employees of their COBRA rights.

Aside from the timely notification of employees and their dependents, employers must also correctly inform them of all the required information. Otherwise, employers risk paying penalties and fines for negligence.

It’s a good idea to create a script for informing employees and dependents to prevent yourself from leaving out important details.

COBRA FAQs

Who gets COBRA notice?

An employer is required to notify an employee and their spouse of COBRA coverage on the day the employee’s employment starts and the day their insurance coverage starts.

“It is the duty of the employer to notify about the health plan in 30 days if the employee loses their job,” said Stanley Tate, owner and founder of Tate Law. “The employee has 60 days to figure out whether they are signing up for COBRA or not.”

What are a qualifying event and a qualifying event notice under COBRA?

A qualifying event can be loss of employment, reduction in working hours, loss of dependent status, employer bankruptcy, divorce or legal separation. Either the employer or the employee must send a qualifying event notice to the group health plan to enact COBRA should a qualifying event occur.

How long after a qualifying event does an employee have to elect COBRA coverage?

An employee has 60 days after a qualifying event to decide if they want to enact COBRA.

When is an employee eligible for COBRA continuation coverage?

An employee is eligible if they have been employed and covered under their employer’s group healthcare plan, the insurance plan was effective on more than 50% of the employer’s business days the previous year, and the employee was laid off or fired, retired, quit, or had their hours reduced to the point that the employer is no longer required to cover them under the company’s insurance plan.

How much does COBRA cost?

The exact cost of federal COBRA health insurance depends on how much the general health insurance plan costs the employer. The average cost for annual employer-sponsored health insurance is over $20,000, and employees typically pay less than half that cost.

“What an employee needs to know is that they will be required to pay the full COBRA premium, their share plus the share of the premium that the employer used to pay on their behalf,” Handrick said. “Nonetheless, this healthcare insurance coverage may still be cheaper for the employee than getting coverage on their own.”