Do Employers Have to Offer COBRA? A Guide to Compliance

One of the biggest challenges when an employee leaves is making sure you comply with the laws and regulations governing the employee relationship through the very end. There are a lot of factors to consider like final paycheck rules, vacation pay out, and COBRA benefits. We know that COBRA, in particular, is one of the most complex termination tasks you have to deal with. This article will help you make sense of COBRA and teach you how to stay compliant

To protect workers from disruptions to their health coverage, the Employee Retirement Income Security Act (ERISA) sets standards to protect employee benefits. One of the protections is the right to Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage. And it’s essential to get COBRA right or you risk fines or even lawsuits.

At Complete Payroll Solutions, for nearly twenty years, we’ve been helping thousands of employers understand employment laws that affect them and how to comply with the requirements. And COBRA coverage is a topic we advise on daily.

Here, we’ll deconstruct the rules so you know if you need to offer COBRA, and how to be compliant if you do.

First Off, What is COBRA?

COBRA gives workers who lose their health benefits (as well as their spouse, former spouse and dependent children) the ability to continue the coverage provided by their employer for a certain period of time following life changes called qualifying events. These include:

• The death of the employee
• The employee’s loss of a job, unless it was for gross misconduct
• The employee becoming eligible for Medicare
• The employee’s divorce or separation
• A child’s loss of dependent status under the plan

While you may offer other benefits to employees like life insurance, COBRA only covers plans for medical care, including dental and vision care.

What Companies Have to Offer COBRA?

Like a lot of employment laws, the size of your company determines whether you’re covered by COBRA. Specifically, COBRA applies to employers with 20 or more employees in the previous year. When determining if COBRA applies to you, it’s important to know that both full- and part-time workers count.

However, even with 20 or more employees, you don’t have to offer COBRA to employees who either weren’t eligible yet for group coverage before they were terminated or those who opted not to participate in your plan.

State Mini-COBRA Laws

While you may not have to offer COBRA coverage because of your size, be aware that in many states, if you have less than 20 employees, you’ll need to provide something called mini-COBRA or state continuation coverage.

The state continuation laws vary in their eligibility rules and coverage terms. So you’ll want to check with your local labor department to find out if there’s a law in your state that affects your company and examine it closely.

Even if you have more than 20 employees, you may also be subject to these state laws on top of COBRA, like in Connecticut, where the state continuation law applies to all group plans, including those regulated by COBRA.

Do I Have to Pay for COBRA?

Although you can choose to provide COBRA continuation coverage at a reduced cost or no cost to your employees, you’re not required to pay any part of the premium. In fact, you can require your former employees or their dependents to pay the entire premium. However, the amount they pay can’t be more than the full cost of coverage plus a two percent administrative fee. Plans also must give 45 days after an individual elects coverage before requiring them to pay a premium.

Because of the higher costs of COBRA coverage, not all employees will opt to continue their group benefits. Instead they may choose alternatives like enrolling in their spouse’s plan or in an individual plan with an insurance provider they find in the marketplace.

How To Be Compliant With COBRA

If you have to offer COBRA coverage, there are five steps you need to follow to be in compliance with the law:

Distribute Proper Notices:

When it comes to COBRA, communication is key. There are several notices you need to be aware of that explain COBRA rights. These are provided by the health plan administrator, which may be you.

One is the qualifying event notice, which requires notifying the health plan when an employee is eligible for COBRA. As an employer, you’re only required to notify your plan if you’ve terminated or reduced the hours of an employee, the employee passed away, or they became eligible for Medicare. Otherwise, for example, in the case of divorce, it is up to the employee or qualified beneficiary to notify the plan.

After learning of a qualifying event, your health plan has 14 days to give beneficiaries an election notice that explains how they opt in to coverage.

Health plans also need to provide the employee or spouse covered under the plan a COBRA general notice within the first 90 days of coverage. The Department of Labor has a model notice. You can also include this general notice in your Summary Plan Description as long as it’s provided in the timeframe required.

Provide an Election Period:

Health plans will have to give qualified beneficiaries a certain amount of time to decide if they’re going to opt in to continuation coverage. This time period needs to be at least 60 days from the date of the qualifying event or election notice was provided – whichever is later.

Offer the Same Benefits:

When you offer continuation coverage, it’s essential that it’s the exact same coverage as what’s currently available under the plan to other similar employees. That means beneficiaries need to have the same benefits, choices and services. Likewise, employees are subject to the same rules for things like co-pays.

Maintain Coverage for a Certain Period:

Depending on what triggered COBRA coverage, you’ll either need to offer continuation coverage for 18 or 36 months. If you terminate an employee, they’re eligible for 18 months of coverage unless they became eligible for Medicare less than 18 months before you let them go. In this case, their spouse and dependents are eligible for up to 36 months of coverage. For all other qualifying events, beneficiaries must receive 36 months of coverage.

Let Employees Know if Coverage Ends Early:

While there are certain minimum limits for maintaining COBRA coverage, a group plan can terminate continuation coverage early for certain reasons, like if an employee fails to pay the premiums. In these cases, the plan has to provide qualified beneficiaries with an early termination notice.

What are the Fees for COBRA Non-Compliance?

Like violations of other employment laws, if you fail to follow the COBRA rules, the costs can quickly add up. For example, if you don’t meet the notice requirements, you could be fined $110 per day per qualified beneficiary by the Department of Labor. Plus, the IRS can also impose an excise tax for violations.

And if an employee files a civil suit against you? The average cost to defend COBRA litigation is $45,000.

See if You’re COBRA Compliant

As you can see, COBRA rules and requirements can be complicated. To mitigate your risk of non-compliance and costly penalties, it’s important to understand what’s required of you when it comes to COBRA and review to your practices. For some companies, it makes more sense to outsource. If that sounds like you, learn more about what you should consider when selecting a cobra administrator. 

At Complete Payroll Solutions, we provide compliance and benefits support to help employers like you mitigate the risk of COBRA violations. For more guidance and to learn how CPS may be able to help, read our next blog on our broker services.