- COBRA is a federal law that provides eligible employees and their dependents health insurance coverage in the event that the employee loses their job or has their hours reduced.
- Employers with 20 or more full-time employees are required to provide COBRA coverage.
- For an employee to receive COBRA coverage, they must experience a qualifying event, such as loss of employment, and meet certain other eligibility requirements.
- This article is for small business owners and HR professionals who want to learn what COBRA is and what they are required to provide for their employees regarding COBRA.
Health coverage is one of the most important employee benefits employers provide. As such, having a safety net in place in the case of certain events, like loss of employment or employer bankruptcy, is vital for the health and well-being of your employees. COBRA is a federal law that provides that safety net. In this guide, learn what COBRA is, who is eligible, and what you are responsible for providing to your employees.
What is COBRA insurance?
COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a federal law created in 1985 that provides eligible employees and their dependents with health insurance coverage in the event of the employee losing their job or having their hours reduced. COBRA does not provide any supplemental coverage, such as disability, life insurance or hospital care insurance. [Read related article: How to Offer Health Insurance to Your Employees]
"In everyday speak, COBRA is a government program that ensures employees, even after they leave employment, can keep their company-sponsored healthcare program," said Laura Handrick, contributing HR professional at Choosing Therapy.
COBRA is unique in that it can only be used in certain situations, referred to as "qualifying events."
Qualifying events for employees:
- Loss of employment (being fired or laid off, quitting)
- Significant reduction in working hours
- Employer bankruptcy
- Reduction in employer staff to fewer than 20 full-time employees
Qualifying events for spouses:
- Loss of employment for the covered employee
- Reduction in working hours for the covered employee
- The covered employee becoming eligible for Medicare
- Divorce or legal separation from the covered employee
- Death of the covered employee
Qualifying events for dependent children:
- Loss of dependent child status under the existing insurance plan
- Loss of employment for a covered employee
- Reduction in working hours for a covered employee
- A covered employee becoming eligible for Medicare
- Divorce or legal separation of the covered employee
- Death of the covered employee
While COBRA can serve as a safety net in these situations, it tends to be much more expensive than a regular health insurance plan. This is because the recipient is responsible for paying 100% of the costs of the health plan, whereas the employer likely covered a portion of the costs before the employee's qualifying event. The COBRA recipient is also responsible for a 2% administrative charge.
"The 2% administrative charge is to offset the cost of administering the program," said Michael Trust, human resources director at Sungevity. "The employer pays nothing, unless they choose to waive the 2% fee."
Key takeaway: COBRA provides eligible employees and their dependents with health insurance coverage in the event of the employee losing their job or having their hours reduced.
Do employers have to provide COBRA?
Employers with 20 or more full-time staff members are required to give employees the option to obtain COBRA coverage. The working hours of multiple part-time employees can be grouped together to equal one full-time employee, thus deciding the COBRA applicability for the employer.
COBRA applies to any health insurance plans offered by private-sector, state or local government employers. Federal employees are covered under a law similar to COBRA.
For businesses with fewer than 20 employees, most states have local laws similar to COBRA that are typically referred to as mini-COBRA plans. This chart from HR Knowledge breaks down mini-COBRA laws by state and how they apply to businesses.
Any employer required to provide COBRA coverage must:
- Notify employees and their spouses of their COBRA rights the day the employee joins the company and the day their healthcare coverage starts.
- Keep a compliance record of the notification as well as evidence that the policy was followed.
Key takeaway: Employers with 20 or more full-time employees must provide COBRA coverage. Employers with fewer than 20 employees are typically subject to state laws.
How does COBRA insurance work?
COBRA's main purpose is to extend employees' health insurance coverage when they are no longer eligible for an employer's plan. This is how COBRA works from the employee's perspective:
- Your employer, insurance carrier or both will provide you with information on COBRA coverage when you initially enroll in the insurance plan.
- You have up to 60 days after a qualifying event to decide if you want to continue coverage under COBRA. If you choose not to, coverage ends the same day your employer's plan coverage ends.
- If you choose to continue coverage, it will begin the same day your employer's coverage ends and offer the same benefits you had under your employer's plan. You then have 45 days to send your first monthly premium payment.
- Depending on your qualifying event and circumstances, your COBRA coverage will last at least 18 months, possibly as long as three years.
- Your COBRA coverage could be terminated early if you don't pay your premiums and fees, or if you get another job that offers health insurance before your COBRA coverage is up.
"Typically, once COBRA is canceled (or declined), it cannot be reinstated (or accepted) for that former employee with that former employer for that same event that caused COBRA in the first place," Trust said. "There is no requirement that a former employee elects COBRA."
Your qualifying event will determine your eligibility and how long you can be covered under COBRA.
- You have been employed and covered under your employer's healthcare insurance.
- The insurance plan has been effective on more than 50% of the employer's business days the previous year.
- You have been laid off or fired, retired, quit, or had your hours reduced to the point that your employer is no longer required to cover you under the company insurance plan.
- You are the dependent of a qualifying employee.
- You are the spouse of a qualifying employee who divorces or is legally separated from the employee.
- You are the spouse of a qualifying employee who dies.
Key takeaway: To receive COBRA benefits, you must experience a qualifying event, such as a layoff, and meet all eligibility requirements.
What COBRA notification responsibilities are there?
As an employer, you must provide employees and their spouses with specific notices regarding their rights to and under COBRA. At a minimum, according to Trust, you must inform your employee of their right to COBRA within 14 days of the beginning and end of their employment with you.
You must also provide the following documents:
Summary plan description
The summary plan description (SPD) outlines the COBRA rights provided under your company's group health plan. It provides information such as the available benefits, the rights of participants and beneficiaries under the plan, and how the plan works.
COBRA general notice
Your general health plan must give each employee and their spouse a notice of their COBRA rights within the first 90 days of coverage. Include these details in the general notice:
- Contact information of someone the employee can speak to for more information on COBRA
- A general description of COBRA coverage under the general plan
- A description of what qualified beneficiaries must do to notify the plan of qualifying events
- A statement that the general notice does not fully describe COBRA or the general plan
You can use this general notice template from the Department of Labor to create your own notice that fulfills the requirements.
COBRA qualifying event notice
Your group health plan must offer continuing coverage should a qualifying event occur. You (the employer), the employee or a beneficiary must notify the group health plan of the qualifying event. The plan administrator is not required to act until they receive proper notice. The person required to give notice depends on the qualifying event.
The employer must give notice within 30 days under in the case of these qualifying events:
- Termination or reduction in hours of the covered employee
- Death of the covered employee
- The covered employee's new entitlement to Medicare
- Employer bankruptcy
The covered employee or a qualified beneficiary must give notice in these events:
- Legal separation
- A child's loss of dependent status
Jerry Han, chief marketing executive at PrizeRebel, said to cover all the details and be as thorough as possible when you notify employees of their COBRA rights.
"Aside from the timely notification of employees and their dependents, [employers] must also correctly inform them of all the required information," he said. "Otherwise, employers risk paying penalties and fines for negligence."
Han recommends creating a script for informing employees and dependents, which can prevent you from leaving out important details.
Key takeaway: As an employer, you must provide employees and their spouses with specific notices regarding their rights to and under COBRA. At minimum, you must inform your employee of their right to COBRA coverage at the beginning and end of their employment with you.
Who gets COBRA notice?
An employer is required to notify an employee and their spouse of COBRA coverage on the day the employee's employment starts and the day their insurance coverage starts.
"It is the duty of the employer to notify about the health plan in 30 days if the employee loses their job," said Stanley Tate, owner and founder of Tate Law. "The employee has 60 days to figure out whether they are signing up for COBRA or not."
What are a qualifying event and a qualifying event notice under COBRA?
A qualifying event can be loss of employment, reduction in working hours, loss of dependent status, employer bankruptcy, divorce or legal separation. Either the employer or the employee must send a qualifying event notice to the group health plan to enact COBRA should a qualifying event occur.
How long after a qualifying event does an employee have to elect COBRA coverage?
An employee has 60 days after a qualifying event to decide if they want to enact COBRA.
When is an employee eligible for COBRA continuation coverage?
An employee is eligible if they have been employed and covered under their employer's group healthcare plan, the insurance plan was effective on more than 50% of the employer's business days the previous year, and the employee was laid off or fired, retired, quit, or had their hours reduced to the point that the employer is no longer required to cover them under the company's insurance plan.
How much does COBRA cost?
The exact cost of federal COBRA health insurance depends on how much the general health insurance plan costs the employer. The average cost for annual, employer-sponsored health insurance is over $20,000, and employees typically pay less than half that cost.
"What an employee needs to know is that they will be required to pay the full COBRA premium, their share plus the share of the premium that the employer used to pay on their behalf," Handrick said. "Nonetheless, this healthcare insurance coverage may still be cheaper for the employee than getting coverage on their own."