Consolidated Omnibus Budget Reconciliation Act (COBRA)
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires employers who provide medical coverage to their employees to offer such coverage to employees and covered family members on a temporary basis when there has been a change in circumstances that would otherwise result in a loss of such coverage [26 USC §4980B] This benefit, known as continuation coverage, applies if, for example, dependent children become independent, spouses get divorced, or employees leave the employer.
Employers Subjected to COBRA
Employers are not required to provide medical coverage for employees. However, if employers choose to do so for their employees, they must comply with COBRA if they have twenty or more employees. Employers with fewer than twenty employees on at least 50 percent of their typical business days in the preceding year are exempt from COBRA's requirements. Both part-time and full-time employees are counted for purposes of this rule with part-time employees being counted as a fraction of full-time employees. Churches are exempt from COBRA. State and local government employers are subject to parallel requirements under the Public Health Service Act (PHSA). The federal government is subject to similar rules under the Federal Employees Health Benefits Amendments Act of 1998 (FEHBAA). Also, the same COBRA-type coverage must be available to employees on uniformed service leave under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA).
Medical Coverage Exceptions
COBRA Exceptions
COBRA does not apply to all types of medical coverage. There are exceptions for:
Employer facility medical care. If you provide first aid to your employees at no charge during working hours on your premises, this coverage is not subject to COBRA.
Long-term care services. If you provide long-term care services under a group plan (e.g., nursing home coverage), COBRA does not apply.
Flexible spending accounts. If the health care FSA satisfies two conditions, it need not make COBRA coverage available to a qualified beneficiary for any plan year after the year for which the qualifying event occurs: (1) the benefits are “excepted” benefits under the Health Insurance Portability and Accountability Act (HIPAA); and (2) in the plan year in which the qualifying event occurs, the maximum amount that the FSA could require to be paid for a full year of COBRA coverage equals or exceeds the maximum benefit available under the FSA for the year.
Basic Rules of COBRA
COBRA requires employers to offer employees and covered family members continued medical coverage on a temporary basis after their medical coverage ends when an employee terminates employment or other qualifying events (defined below) occur. However, employers don't have to pay for the COBRA continuation coverage. Employees or beneficiaries picking up COBRA continuation coverage must pay for their coverage, plus (at the employer's discretion) an administrative fee of up to 2 percent of the cost of the coverage.
Operating Under COBRA
COBRA continuation coverage isn't a separate health insurance plan. Rather, it's a means of allowing “qualified beneficiaries” (defined below) the opportunity to temporarily remain within an employer's health plan even though they would otherwise lose coverage due to a “qualifying event” (defined below).
The following individuals may become qualified beneficiaries if they're enrolled in (not just eligible for) an employer's medical coverage:
Employees (including former and retired employees);
Spouses of employees;
Dependent children of employees or employees' spouses;
Children born to or placed for adoption with an employee during the COBRA continuation coverage period.
Qualifying Events
A qualified beneficiary's right to COBRA continuation coverage is triggered by a loss of group medical coverage to one of the following “qualifying events”:
Termination of employment (other than by gross misconduct).
Reduction of a covered employee's hours. Any reduction in hours resulting from a strike, lockout, layoff, or leave of absence (other than one under the Family and Medical Leave Act) is a qualifying event if it results in loss of coverage. However, a subsequent termination of employment is not treated as a second qualifying event that would extend COBRA coverage.
Death of a covered employee.
Divorce or legal separation of a covered employee from the employee's spouse.
Covered employee's entitlement to Medicare benefits.
Dependent child ceasing to be a dependent under the terms of the plan (e.g., being over age 21 and no longer a full-time student).
An employer's bankruptcy proceeding under Title 11 of the U.S. Code for any covered employee retired at the time.
COBRA continuation/duration
The maximum COBRA continuation coverage period is 36 months, unless the loss of medical coverage is due to a termination from employment or reduction in hours. In those cases, the maximum COBRA continuation coverage period is 18 months. The 18-month period can be extended to 36 months if a qualified beneficiary incurs another qualifying event during the 18-month period (e.g. divorce or legal separation, death of the employee, Medicare entitlement of the employee).
Also, the 18-month period can be extended to 29 months for each qualified beneficiary entitled to COBRA continuation coverage if a qualified beneficiary is determined to have been disabled by the Social Security Administration during the first 60 days of COBRA continuation coverage.
The maximum COBRA continuation coverage period may, however, end early if any of the following occurs:
The employer no longer provides group medical coverage to any of its employees;
The premium for COBRA continuation coverage isn't timely paid;
The qualified beneficiary becomes covered under another employer's group medical coverage after the election of COBRA continuation coverage and the other coverage doesn't contain a limitation or exclusion for a pre-existing condition of the qualified beneficiary;
The qualified beneficiary becomes entitled to Medicare Part A or B coverage after COBRA continuation coverage is elected; or the Social Security Administration determines that the qualified beneficiary is no longer disabled.
Business Reorganizations
If a business is sold or reorganized, it's important to determine if there is a qualifying event. If an acquired organization continues coverage following a stock sale, there is no qualifying event. However, an asset sale will be considered a qualifying event unless the employee remains employed under the new owner or the sale does not cause a loss of coverage. Parties to a stock or asset sale may contractually allocate responsibility for COBRA coverage, if necessary.
COBRA Notification Requirements
Notice to participants upon entering the plan: A written notice of COBRA rights must be distributed to each employee and spouse when they first enter the health plan.
Notice from employer to plan administrator: In cases where the employer is not the plan administrator, the employer is responsible for notifying the administrator of certain qualifying events. The employer has 30 days from the date coverage ceases (if provided under the terms of the plan) or the date of the following qualifying events: (1) the death of the covered employee, (2) the covered employee's termination (for reasons other than gross misconduct), (3) the covered employee becoming entitled to Medicare, and (4) the employer's bankruptcy. Multiemployer plans are permitted to take more than 30 days to notify the plan administrator if permitted by the terms of the plan.
Notice from plan administrator to beneficiaries: The administrator of the health plan is obligated to notify qualified beneficiaries of their COBRA rights when a qualifying event occurs. Such notice must be provided within 14 days of receiving notice of any qualifying event. Multiemployer plans are allowed more than 14 days to notify qualified beneficiaries as long as the length of the notification period is spelled out in the plan document and summary plan description.
Notice from employees or beneficiaries to administrator: COBRA requires spouses who become divorced or legally separated from a covered employee, as well as dependents that lose their “dependent status” under the employer's plan, to notify the plan administrator that these qualifying events have occurred. Such notice must be made within 60 days of the qualifying event or the date the qualified beneficiary would lose coverage as a result of the qualifying event, whichever is later. The group health plan does not have to offer the qualified beneficiary the opportunity to elect COBRA coverage if the covered employee or qualified beneficiary fails to make the required notification.
Note: The 60 days is only a minimum period. An additional period of time can be given for making a COBRA election.
Notice Requirements
Employers will be considered to have demonstrated good-faith compliance with the law if the notice is mailed, first class, to the covered employee's and spouse's last known address(es). In addition to providing employees with written notices, employers should incorporate an explanation of COBRA rights as part of the summary plan description provided to employees.
Other Requirements
Benefit options. As a general rule, the COBRA continuation coverage must be identical to the health coverage provided to similarly situated beneficiaries under the plan to which a qualifying event has not occurred. Specifically, the continuation coverage provided qualified beneficiaries must be identical to coverage provided similarly situated employees with respect to: deductibles and coinsurance, plan options (such as conversion features), and plan limitations (e.g., maximum number of hospital days or dollar amount of reimbursable expenses).
Premiums
Generally, COBRA coverage premiums cannot exceed 102 percent of the cost of the health coverage. For disabled persons, COBRA premiums can be up to 150 percent of the cost of the health coverage for months 19 through 29 (the extended COBRA coverage period). Employers that fund or contribute to the employee's coverage should explain that the premium will not include a contribution from the employer and that the employee is responsible for the payment of the entire premium.
If a beneficiary fails to make timely payment of any required COBRA premium, the employer may terminate the beneficiary's continuation coverage short of the full coverage period. A payment will be considered timely where it is paid within the longer of: (1) 30 days from the due date; (2) the period specified in the plan document; or (3) the period permitted for the employer to make premium payments on behalf of similarly situated active employees to the insurer, HMO, or other entity providing plan benefits.
If you terminate COBRA coverage for non-payment of premiums, it's advisable to give notice to the qualified beneficiary of this termination.
There is no requirement to send monthly premium notices to qualified beneficiaries, as premium payments are the sole responsibility of the qualified beneficiary who elects COBRA coverage. However, many employers/plan administrators choose to facilitate payment by sending courtesy notices or by providing coupon booklets.
Penalties for Violating COBRA
Excise Tax; The failure to comply with COBRA requirements may subject an employer to an excise tax of $100 per day during the noncompliance period for each affected qualified beneficiary (maximum $200 per family). The noncompliance period starts on the date of the failure and ends on the date the failure is corrected or six months after the date you would have been required to provide continuation coverage (whichever is earlier). The maximum penalty is the lesser of: 10 percent of the preceding year's total costs of providing group health coverage or $500,000.
In general, employers will be spared the $10-a-day excise tax in cases where failures are for reasonable cause (rather than willful neglect) and are corrected within 30 days of the date they first occur. In addition to any penalties, qualified beneficiaries who have been denied coverage or not afforded proper notice may sue you.
For a more information regarding COBRA and how it may affect your company contact
Almond Valley Insurance Services, Inc. or visit the
Department of Labor online.
