COBRA, or the Consolidated Omnibus Budget Reconciliation Act of 1985¹, provides for the temporary continuation of group health plan coverage after the loss of such coverage due to certain specified events. COBRA applies to employers² with 20 or more employees on a typical business day during the preceding calendar year, so it has long been prevalent in the workplace, which may lull many employers into a state of complacency, but COBRA does have sharp teeth, so it is a good idea for employers to revisit the basic terms and requirements, as well as be alert to special situations that can frequently come up. They can sneak up on you if you aren’t paying attention.
Plans that are Subject to COBRA
COBRA applies to all “group health plans.” That means medical, dental, vision, and any plan that provides medical benefits. This can include other plans such as employee assistance plans, health flexible spending accounts, physician hotlines, and even some wellness programs. Plans that provide income replacement only and no medical benefits, such as disability and indemnity plans, are not group health plans.
When COBRA Must be Offered
COBRA must be offered whenever there is a loss of group health plan coverage resulting from certain specified events (called “qualifying events”). The specified events are:
Termination of Employment or Reduction in Hours of Employment
Divorce or Legal Separation
Ceasing to be a Dependent
Death of the Employee
It is important to note that a loss of coverage that is not due to one of the specified events does not trigger COBRA eligibility, nor does the occurrence of one of the specified events without a loss of coverage. For example, if a reduction in hours of employment or legal separation occurs, but does not result in a loss of coverage under the group health plan, then COBRA is not triggered.
Similarly, if an employee is transferred to a different division which is not eligible for the group health plan, then there would be a loss of coverage, but not due to a qualifying event, and therefore COBRA is not triggered.³
Who Must be Offered COBRA Coverage
COBRA must be offered to affected individuals who were covered under the group health plan the day before the qualifying event occurs (called “qualified beneficiaries”). So, for example, if an employee and his dependent were covered under the group medical coverage and the employee’s spouse was covered under her own employer’s medical plan, and the employee terminates employment, the employee and dependent would be qualified beneficiaries but his spouse would not be, as she was not covered under the employee’s group medical coverage the day before the qualifying event.
What Coverage Must be Offered
COBRA must be offered to qualified beneficiaries for the group health plan coverage that the qualified beneficiaries had the day before the qualifying event. So, for example, if an employee had medical and dental coverage, but had waived vision coverage, she would be offered COBRA for medical and dental only. But see the discussion below regarding changes that can be made later during the COBRA coverage period.
The Length of COBRA Coverage
The length of COBRA coverage depends on several factors:
Basic Maximum Coverage Period. The maximum coverage period depends upon what type of qualifying event triggers the COBRA coverage. Where the qualifying event is termination of employment or reduction in hours of employment, the maximum coverage period is 18 months for all qualified beneficiaries.⁴ Where the qualifying event is divorce, legal separation, ceasing to be a dependent, or death of the employee, the maximum coverage period is 36 months for qualified beneficiaries who are not the employee. The maximum coverage period generally begins on the date that the qualifying event occurs, but can begin as of the date the coverage is lost, if later.
Longer Period. If, during an initial 18-month maximum coverage period, a second qualifying event occurs or, during the first 60 days of COBRA coverage, a qualified beneficiary is determined to be disabled by the Social Security Administration, the maximum coverage period can be extended beyond the basic 18 months. In the case of a second qualifying event, such as a divorce, the maximum coverage period would be extended from 18 months to 36 months (for the ex-spouse). In the case of a determination of disability, the maximum coverage period is extended from 18 months to 29 months (for all qualified beneficiaries, not only the disabled qualified beneficiary). In no event will the maximum coverage period extend beyond 36 months.
Shorter Period. COBRA coverage may be terminated before the end of the maximum coverage period if, after electing COBRA coverage:
The qualified beneficiary fails to pay COBRA premiums on time;
The qualified beneficiary becomes covered under another group health plan;
The qualified beneficiary becomes covered under Medicare;
Before the end of the disability extension, a disabled qualified beneficiary is determined not to be disabled;
The employer⁵ ceases to provide any group health plan to any employee;
or The qualified beneficiary's COBRA coverage is terminated for cause on the same basis as would apply to a similarly situated active employee covered under the plan. This can occur when there is evidence of fraudulent claims.
Any early termination of COBRA coverage is subject to a notice requirement.
Changes to COBRA Coverage
Qualified beneficiaries who elect COBRA must be permitted to change their elections on the same terms and conditions as a “similarly situated” non-qualified beneficiary (i.e., an active employee and dependents of the active employee). This means new elections can be made on the occurrence of a special enrollment event (e.g., marriage, birth of a child) or at open enrollment to the extent that active employees may do so. Note that this includes the election of coverage options that may not have been elected, or under which the qualified beneficiary may not have been covered, when COBRA was initially offered. For example, if an employee had previously waived dental coverage, she would be offered COBRA for medical and vision on termination of employment. If she elects COBRA for medical and vision, she may elect to add dental coverage at open enrollment if active employees who are similarly situated have that ability at open enrollment.
The Bite
A failure to offer COBRA coverage can result in significant costs, including:
Excise taxes ($100 per day/$200 per day if more than one qualified beneficiary is involved)
Statutory penalties for notice failures or failure to provide requested documents of up to $110 per day.
Potential liability for unpaid medical costs not covered by insurer. Keep in mind that frequently individuals who elect COBRA do so because they are going through a health crisis and need the coverage, so medical expenses are more likely to be high-dollar, and a failure to offer COBRA on the part of the employer could result in large amounts having to be self-insured. Quick action to correct a failure can mitigate these risks, for example where the failure is discovered prior to the end of the 60-day period following the loss of coverage (which would have been the election period had COBRA been offered timely), it might be possible to work with the qualified beneficiaries6to elect COBRA prior to the end of that period so there is no gap in insurance coverage.
Charming the Snake Pit
This article covers some of the basic requirements of COBRA that employersshould be aware of, but there are many situations which are not straight-forward and may need special review, as well as many other issues not within the scope of this article, such as:
Notice requirements of the employer and the qualified beneficiary
Payment issues such as timing and amount
Special rules for health flexible spending accounts
COBRA responsibility in a corporate transaction such as a sale or merger
Coordination with retiree medical coverage
Entitlement to Medicare as an initial or second qualifying event (different rules apply depending on whether this occurs before or after an initial qualifying event)
Coordination of COBRA with military leave and other leaves of absence
Bankruptcy of the employer and retiree coverage
¹ COBRA is a federal law, but there are similar continuation coverage requirements under state law which may supplement or expand the federal requirements.
² Federal governmental and church plans are excepted.
³ Note that if there is also a reduction in hours with the transfer in this example, there would likely not be a qualifying event because the loss of coverage is due to the transfer, not due to the reduction in hours.
⁴ Some states, such as California, have laws which extend the maximum coverage period. California, under Cal-COBRA, extends this period to 36 months.
⁵ This includes any employer in the same controlled or affiliated service group.
⁶ Note that qualified beneficiaries must be allowed 60 days to elect coverage, so they cannot be required to elect coverage in a shorter period of time.
If you have questions regarding COBRA or otherwise need assistance with a COBRA situation, please contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2019, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of October31, 2019.