A Small Business Owner's Guide to COBRA Compliance and FAQ

For small business owners, understanding your responsibilities under the Consolidated Omnibus Budget Reconciliation Act (COBRA) is critical for avoiding penalties. This guide answers common questions about COBRA administration for small businesses with 20 or more employees.

What Is COBRA Continuation Coverage?

Before Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) in 1986, employees lost health coverage after a job loss. COBRA amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code, and the Public Health Service Act to allow people facing insurance termination to continue group health coverage.

COBRA provides the following groups the right to temporary continuation of health coverage at group rates:

• Former employees
• Retirees
• Spouses
• Former spouses
• Dependent children

This coverage is available only when coverage ends because of specific events. Group health coverage for COBRA participants is usually more expensive than health coverage for an active employee. Employers often pay a part of the premium for active employees, while COBRA participants generally pay the entire COBRA premium themselves.

Does Federal COBRA Apply to My Small Business?

Federal COBRA laws apply to small businesses that sponsor group health plans for 20 or more employees. These group health plans, in turn, must give covered employees a notice of their COBRA rights (a COBRA notice) within 90 days of health insurance coverage.

Small businesses have the same federal COBRA responsibilities as larger employers. COBRA also applies to public- and private-sector employers. Some of these responsibilities include, but are not limited to, the following:

• Notifying covered employees of their COBRA rights when they join the group health insurance plan
• Notifying qualified beneficiaries of their COBRA election rights after a qualifying event
• Timely notifying the group plan administrator of qualifying events

COBRA only applies to health insurance, not other employee benefits like life insurance or disability insurance.

When Does COBRA Apply? Qualifying Events and Beneficiaries

You will need the following to qualify for COBRA benefits in a small business:

• Coverage under a qualified health plan
• A qualified beneficiary under COBRA
• A qualifying event to trigger COBRA benefits

COBRA establishes the specific criteria for these three elements.

What Is Coverage Under a Qualified Health Plan?

COBRA applies to group health plans for employers with 20 or more employees on more than 50% of their typical business days in the prior calendar year. Small business owners should count full- and part-time employees to determine whether a plan is subject to COBRA. Each part-time employee counts as a fraction of an employee. You can calculate this fraction by dividing the part-time employee‘s hours by the full-time employee’s hours.

Who Is a Qualified Beneficiary?

COBRA defines a qualified beneficiary as a person covered by a group health plan the day before a qualifying event. The following usually count as qualified beneficiaries:

• Employee
• Employee’s spouse
• Employee’s dependent child
• A retired employee
• A retired employee’s spouse
• A retired employee’s dependent children

Any child born to or adopted by a covered employee during COBRA coverage is a qualified beneficiary. Qualified beneficiaries can also include the following who participate in the group health plan:

• Agents
• Independent contractors
• Directors

Any coverage under COBRA is paid by the former employee.

What Is a Qualifying Event?

Under COBRA, a qualifying event causes a person to lose health coverage. The type of qualifying event determines the qualified beneficiaries and how long they can receive health coverage under COBRA. Plans may, at their discretion, provide extended continuation coverage.

Qualifying events for employees include:

• Reduction in work hours
• Termination of employment (except for gross misconduct)

Qualifying events for spouses are:

• Termination of the covered employee‘s employment (unless terminated for gross misconduct)
• Covered employees become entitled to Medicare
• Employer reduces hours worked by the covered employee
• Death of the covered employee
• Covered employee gets a divorce or legal separation

Qualifying events for dependent children are:

• Any of the qualifying events listed above
• Loss of dependent child status

If you’re unsure about whether you or a family member is eligible for COBRA, contact your state’s Department of Labor.

What Are Eligibility Requirements for COBRA Coverage?

COBRA eligibility for former workers in a small business applies if the employee participated in the employer’s group health plan during their employment and the health insurance plan remains in effect for active employees. COBRA continuation coverage is available upon a qualifying event that would otherwise cause a person to lose their healthcare coverage.

What Are My Responsibilities as an Employer?

Under COBRA regulations, employers must provide notices to employees and plan administrators and keep records to avoid financial penalties. Let’s take a closer look at some of the responsibilities.

Provide Notice to New Hires

Employers must provide new hires with a “COBRA General Notice” which explains their rights under COBRA. Employees must receive this notice within 90 days of their health plan coverage.

Provide Notice of Qualifying Event

When a qualifying event occurs, the employer notifies the plan administrator, which then sends a COBRA election notice to the affected employee or family member. An employer has 30 days to notify a plan administrator when:

• An employee is terminated for any reason other than gross misconduct
• An employee’s reduction in work hours causes loss of coverage
• An employee dies
• An employee qualifies for Medicare benefits

Recordkeeping

Employers should keep records of all notices given to employees and plan administrators.

How Do Employees Elect and Pay for COBRA?

A qualified beneficiary must notify the plan administrator of a qualifying event, such as divorce, legal separation, or a child losing dependency status, within 60 days of either the qualifying event or the date coverage would be lost, whichever is later.

The plan administrator sends an election notice within 14 days after receiving notice of a qualifying event. When the employer is also the plan administrator, the deadline is 44 days after the qualifying event or loss of coverage. The qualified beneficiary then has a 60-day election period to elect COBRA coverage. After electing coverage, the person has 45 days to pay the initial COBRA premium.

Can an Employee Extend COBRA Coverage?

Disability can extend the initial 18-month continuation period for a qualifying event, such as termination of employment or a reduction in hours. Coverage can be extended for a second qualifying event.

Extension for Disability

To qualify for more months of COBRA continuation coverage, the qualified beneficiary must:

• Have a ruling from the Social Security Administration that they became disabled within the first 60 days of COBRA continuation coverage
• Send the plan a copy of the Social Security ruling letter within 60 days of receipt but before the end of 18 months

If the qualified beneficiary meets these criteria, the entire family qualifies for an additional 11 months of COBRA coverage. Plans can charge 150% of the premium cost for the extended coverage period.

Extension for Second Qualifying Event

You may qualify for a COBRA extension if you experience a second qualifying event that is one of the following:

• Death of a covered employee
• Divorce or legal separation of a covered employee and spouse
• Covered employee becomes eligible for Medicare
• Loss of dependent child status

Per the U.S. Department of Labor (DOL), you can claim a second event only if it would have caused you to lose coverage under the plan without a first qualifying event.

What Health Benefits Must Small Businesses Offer for COBRA Coverage?

Small businesses must offer qualified beneficiaries coverage that is identical to the coverage available to similarly situated beneficiaries under the plan. This should equal the same coverage the qualified beneficiary had immediately before qualifying for continuation coverage.

What Is Mini-COBRA?

Mini-COBRA refers to state COBRA laws. For example, California has Cal-COBRA, which allows Californians to keep their group health plan under the following circumstances:

• Job termination
• Reduction in hours

Cal-COBRA also allows Californians who have exhausted their federal COBRA benefits to continue coverage. It applies to group health plans that cover between two and 19 employees.

Who Pays for COBRA Coverage?

Beneficiaries pay for COBRA continuation coverage. Their premium payment can’t exceed 102% of the cost for similarly situated plan beneficiaries who haven’t experienced a qualifying event. This includes portions paid by employees and any part paid by the employer before the qualifying event, plus 2% for administrative costs.

Who Enforces COBRA?

The following government agencies enforce COBRA:

• Internal Revenue Service (IRS)
• U.S. Department of Labor (DOL)
• U.S. Department of Health and Human Services (HHS)

The Employee Benefits Security Administration (EBSA) and the IRS share jurisdiction over COBRA. People can contact EBSA if they believe their employer has violated federal COBRA laws. The HHS regulates COBRA coverage for government-sponsored health insurance plans. This includes state and local government-sponsored health plans.

Get Legal Help

Small business employers must follow state and federal COBRA laws and regulations. Noncompliance can lead to severe fines and litigation. An employment attorney focused on employer obligations can help ensure your business stays in line with local laws.