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A Small Business Owner's Guide to COBRA Coverage

image for alexskopje/Shutterstock
alexskopje/Shutterstock
  • In the event of job loss or another qualifying event, COBRA continuation coverage allows employees and their dependents to stay on the same health insurance plan.
  • Federal law requires businesses with 20 or more employees to provide COBRA coverage. In many states, the minimum is fewer than 20.
  • Once they're enrolled, employers can charge former employees 102% the price of COBRA coverage premiums.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) ensures a healthcare safety net for the employee at no extra cost to the employer. It's been around since the '80s, yet even giant corporations can make a mistake: Target is currently facing a class action lawsuit from a former employee for failing to properly notify him of his COBRA coverage rights.

For small business owners navigating COBRA continuation coverage, however, it only takes a bit of due diligence to prevent such headaches down the line – the earlier, the better.

While COBRA is not legally required for small businesses with fewer than 20 employees, "I would always advise employers to start thinking about providing benefits from day one, especially if their business requires the recruitment of top talent," said Jared Weitz, founder and CEO of United Capital Source Inc. This is advice Weitz practices as well as preaches: United Capital Source has offered comprehensive benefits since growing from two employees in 2011.

For nascent businesses yet to establish steady revenue streams, however, this may not be so simple. In this case, Weitz said, "start thinking about it once you reach around 12 to 15 employees and still have designs on growing that number to more than 20 employees."

Whether your business is ready to start offering benefits such as COBRA coverage or not, it's never too early to familiarize yourself.

More than half of American workers receive health insurance through an employer-sponsored group health plan. Fortunately, a change in employment circumstances does not necessarily mean the sudden loss of health coverage, thanks to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). COBRA is a multifaceted bill, but what it's mainly known for is its mandate that employees can continue to receive job-based health insurance coverage following a disruption or "qualifying event." The coverage lasts a minimum of 18 months for all qualified beneficiaries.

Qualifying events cover a range of circumstances both sudden, such as layoffs, or anticipated, such as retirement. In any case, the purpose of COBRA continuation is to provide a buffer, giving workers time to shop for a new plan (or, as is often the case, find another job with health coverage).

COBRA mandates that the scope of the coverage remains identical, meaning the only change employees can expect is in price. This is because, whereas a portion was previously paid by the employer, the employee must now cover the entire cost of their premium (one exception to this is found in some severance packages, in which an employee will continue to receive benefits following termination). In fact, employers can charge employees up to 102% of the price of the premium, with the extra 2% going toward administration fees. While COBRA will always be more expensive than employer-sponsored health insurance, it's usually cheaper than an individual insurance plan – especially among those with pre-existing conditions.

Those entitled to COBRA coverage are referred to as "qualified beneficiaries," which means any employee on a company's group health plan. A qualified beneficiary can also be an employee's spouse, former spouse or dependent child – if they're covered by the same health plan, they're eligible for COBRA.

Private-sector employers with at least 20 full-time employees (or the equivalent) for at least half of the previous calendar year are mandated to provide COBRA coverage. Part-time employees must also be counted toward the 20-employee benchmark. For example, if a full-time employee works 40 hours per week, two part-time workers working 20 hours or four part-time workers working 10 hours are equivalent to one of the 20 full-time employees.

Employers required to provide COBRA continuation coverage are responsible for two things:

  • Notifying employees and their spouses of their rights under COBRA, both the day they join the company and the day the coverage kicks in. This includes a general notice and an election notice outlining how employees can accept or deny the coverage.
  • Keeping a record of compliance. This includes a written policy outlining how employees are notified and evidence that the policy was followed.

It should be noted, however, that these are only the federal guidelines. Many employers also have to contend with State Continuation Coverage, or "mini-COBRAs." Mini-COBRAS apply the same principles, but cast a wider net – most states mandate continuation coverage for companies with fewer than 20 employees. Employers can look up their state's COBRA laws here.

While a layoff is the most common reason an employee loses healthcare coverage, there are a number of situations in which an employee or qualified beneficiary can suddenly lose coverage. Some plans are more inclusive than others, but the qualifying events outlined in COBRA provide a bare minimum of coverage.

  • Voluntary termination (i.e., you quit)
  • Involuntary termination, unless as a result of gross misconduct (i.e., you got fired)
  • Retirement
  • Reduction in the employee's hours, which disqualifies them from their employer-sponsored health insurance (you went to part-time)
  • Bankruptcy of the employer
  • Reduction in the employer's staff, which puts the employer below the 20-employee benchmark

A qualifying event for the employee's spouse and dependent children can also be any of the above, in addition to their own set of circumstances:

  • The employee switching their coverage to Medicare
  • Divorce or legal separation, causing the employee's spouse to lose coverage
  • Loss of dependent child status (age 26 under the Affordable Care Act)
  • Death of the employee

COBRA continuation begins the first day after the qualifying event. It's up to the employee to alert their employer in the event of divorce or loss of dependent child status. In all other cases, however, the employer acts first, with 90 days to send notice to the employee (and their spouse, if the spouse resides at a different address).

Specificity is important: In the case of Target, notices were sent, but in a piecemeal fashion, which lacked crucial information. This proved enough for one former employee to sue. For most employers, it's best to defer to the Department of Labor's model election notice (a downloadable copy can be found under the Regulations tab), which provides blanks to fill in with the specifics of the company's group health plan.

Once notice is received, employees have 60 days to accept or decline COBRA coverage. If they accept, the employee has 45 days to send the first premium payment. Employees must cover premiums for the entire 60-day deliberation period, however. In other words, there is no price advantage for waiting until the 59th day.

Some employees may want to combine COBRA coverage with either Medicare or another group health insurance plan. This is permitted if it satisfies either of two conditions: (1) if the other coverage was in effect before eligibility for COBRA continuation, or (2) if the other coverage is subject to pre-existing conditions, exclusions or limitations.

The first step for small business owners is to ensure compliance. The Department of Labor (DOL) is the best place to start reading up on the fine print of the regulations outlined above – they also provide employers with this handy flowchart.

Meanwhile, employers can contact their local government labor agencies to learn more about their state's mini-COBRA laws. Once again, the earlier, the better – most states require coverage below the 20-employee minimum, so state laws should be the primary concern.

It's a safe assumption that most aspiring entrepreneurs do not want to be saddled with the role of health plan administrator. Some employers prefer paying someone else to deal with COBRA coverage by outsourcing its management to third-party administrators, or TPAs.

If that peace of mind sounds like an unnecessary expense, remember that tax penalties can range from $2,500 to $500,000. Add to that all the legal fees incurred, as the burden of proof falls to the employer.  

"I always recommend for a small group client with a small, in-house administrative staff to outsource COBRA administration," said Jonathan Mentor, a former health insurance consultant and now founder and CEO of Successment. "It's a nominal cost that protects against a huge exposure to liability if properly executed."

Employers who comply with the state and federal regulations should have nothing to fear if employees are aware of their rights. This may require going above and beyond the required COBRA notice at the beginning of employment.

"Communication was key with setting up COBRA coverage efficiently within our business," Weitz said. Employees will be more satisfied knowing their health insurance – and health, for that matter – are not at stake.

Siri Hedreen

Siri Hedreen is a graduate of King’s College London, where she wrote for Roar News, London Student and Edinburgh Festivals Magazine. Find her on Twitter @sirihedreen.