A Primer on COBRA

A Primer on COBRA


Marc McGinnis, Vice President of National Sales at Word & Brown General Agency, recently presented a workshop on COBRA and ERISA compliance common pitfalls. What follows is an overview of Marc’s COBRA presentation.

Passed by Congress in 1985, the Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers (and their families) who lose their health insurance benefits the option to continue their group health benefits for a limited period under certain circumstances, such as voluntary or involuntary job loss, reduction in hours worked (and loss of benefits), transition between jobs, loss of benefits due to death, divorce, as well as changes in family status (e.g., birth or adoption), and other life events.

Employers subject to COBRA are those affected by the Employee Retirement Income Security Act (ERISA), a federal law regarding employer-sponsored Health & Welfare (H&W) benefit plans. That includes, generally, those firms with 20 or more full-time equivalent employees for 50% of the typical business days in the preceding year. For controlled groups, each employer is treated as a single employer and the number of employees is aggregated for purposes of determining if the company is subject to COBRA. A U.S. subsidiary with fewer than 20 employees is subject to COBRA if the controlled group has 20 or more employees worldwide. Church groups (as defined in the Internal Revenue Code, section 414(e)) and government agencies are exempt.

“Employees” includes all full- and part-time common law employees. Part-time employees are counted as fractions of an employee, equal to the number of hours a part-time employee works, divided by full-time hours.

The penalties for non-compliance include:

  • IRS penalty of $100 excise tax per day per individual ($200 family max)
  • Continuing penalties of the lesser of $15,0000 ($2,500 if a trivial violation) or the above excise tax
  • Maximum annual period equal to the lesser of 10% of the employer’s annual group health plan expense or $500,000
  • Statutory penalty under Section 502(c) of ERISA, which allows a penalty of $110 per day as a non-notification penalty
  • Potential civil lawsuits (possibly the greatest liability for an employer)
  • DOL enforcement actions or audits
  • The types of group health plans that subject to COBRA include:

  • Any plan maintained to provide health care benefits to employees, former employees, spouses, or dependents.
  • Medical, Dental, and Vision plans
  • Prescription drug plans
  • Health FSAs, HRAs, and executive reimbursement plans
  • Certain Employee Assistance Plans (EAPs), wellness programs, cancer policies, and employer-sponsored drug and alcohol treatment programs, and voluntary health plans
  • COBRA does not apply to Long Term Care, Life Insurance, Disability Insurance, or others types of ancillary insurance.


    COBRA and Health FSAs

    COBRA is only required to be offered to a plan beneficiary when a health Flexible Spending Account (FSA) is underspent and the cost to continue the FSA under COBRA is less than the benefit remaining. If the cost to continue the FSA is more than the benefit remaining, the qualified beneficiary does not need to be offered the opportunity to elect the FSA under COBRA. (Continuation need only be through the end of the plan year.)


    Health Reimbursement Arrangements (HRAs)

    An HRA is subject to COBRA. Employers must allow employees and/or dependents to continue their HRA coverage after termination if they pay the cost themselves. Premiums are determined using the rules in Section 4980B and must be the same for beneficiaries with different amounts remaining under the HRA.


    Qualified COBRA Beneficiaries and Qualifying Events

    Qualified beneficiaries include anyone covered under the group health plan: a covered employee, a covered spouse, covered dependents, or a child born to or placed for adoption with the covered employee during a period of COBRA coverage. A Domestic Partner is not a qualified beneficiary.

    Covered employees include any employee or former employee covered under the group health plan, agents and independent contractors covered by the group health plan, and corporate directors covered by the group health plan. Qualified beneficiaries must be treated in the same way as similarly situated non-COBRA beneficiaries.

    For an employee, spouse, and dependents, qualifying events include:

  • Termination of employee (except for “gross misconduct”) – voluntary or involuntary
  • Reduction in hours of employment resulting in loss of benefits or increase in premiums or employee contribution
  • For a spouse and dependents, qualifying events include:

  • Divorce or legal separation from employee
  • Loss of dependent child status
  • Death of covered employee/retiree
  • Employee entitlement to Medicare
  • Any of the above can be a “triggering event” causing a loss of coverage under the group health plan’s terms.


    Paying for Coverage

    Group health plans (including self-insured employers) are permitted to charge those who elect COBRA a premium that exceeds the actual coverage premium, as shown below:

  • Federal COBRA: 102% of the applicable premium
  • Cal COBRA: 110% of the applicable premium
  • Disability Extension (11 Months): 150% of the applicable premium
  • “Applicable premium” is defined as the cost to maintain the plan for similarly situated employees. Rate increases can be passed on to COBRA-qualified beneficiaries, but the premium must be fixed for the 12-month rate determination period.


    Notification Requirements

    A General Notice, formerly known as the Initial Notice, informs covered individuals of their rights to coverage continuation under COBRA upon qualifying event. Department of Labor regulations specify a 90-day notification timeframe.

    The General Notice must be sent when:

  • Company first becomes subject to COBRA
  • New employee (and spouse, if any) becomes covered under plan
  • Employee added spouse to plan upon marriage or open enrollment
  • The General Notice must include:

  • Basic information about COBRA
  • Advisory of responsibility of employee and spouse to notify employer
  • Rights, responsibilities, and obligations

    Important COBRA Timeline

  • 30 days: The employer has 30 days to notify the plan administration of a qualifying event.
  • 14 days: The plan administrator has 14 days to send out COBRA election notice.
  • 60 days: The qualified beneficiary has 60 days to elect COBRA coverage.
  • 45 days: Following a decision to elect COBRA, the qualified beneficiary has 45 days to make their first premium payment.
  • 30 days: COBRA participants must be given a 30-day grace period to make monthly payments for COBRA coverage.
  • Be sure to look for our related post on ERISA Compliance Pitfalls, which was also a part of Marc McGinnis’ presentation for Word & Brown brokers. You can find the post in our Newsroom.


    Note: Although we go to great lengths to ensure information we share is accurate and useful, we recommend you and your clients consult a labor or benefits attorney for legal advice if you have specific questions about COBRA and compliance with federal guidelines.

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