The Consolidated Omnibus Budget Reconciliation Act (COBRA), first enacted in 1985 and revised in 1999, is a federal law that requires most employers to provide continuing health insurance coverage to employees and their dependents who are no longer eligible for the company's health insurance program. Employees can lose eligibility for coverage by terminating their employment, reducing their working hours, becoming eligible for Medicare, or in a number of other ways. Under the terms of COBRA, all businesses that employ more than twenty people and offer a group health insurance plan must give employees the option of continuing coverage at their own expense for a limited period of time when they lose eligibility for company-provided benefits. In addition, forty-four states have their own laws regarding continuation coverage, some of which apply to smaller businesses and to benefits in addition to health insurance.
COBRA and similar health insurance continuation laws affect small businesses in two ways. First, many entrepreneurs start their own businesses after leaving their jobs with larger companies. These entrepreneurs may wish to take advantage of continuation coverage for themselves and their dependents until they are able to arrange their own health insurance plans. Second, many small business owners must comply with COBRA or other applicable state laws and offer continuation coverage to their employees. Although workers must pay the actual cost of the insurance themselves, the administration of COBRA can be time-consuming and expensive for businesses. There are severe financial penalties for noncompliance, including a fine of $100 per day for failure to notify an employee of his or her COBRA rights, or even the revocation of a company's tax deduction for its group health insurance plan. Employers can also be held liable for damages, including workers' medical costs and legal fees. As a result, many companies outsource the activities associated with COBRA compliance to experienced independent administrators and management programs. For a business with 50 employees, such services are estimated to cost around $1,000 per year.
COBRA applies to nearly all businesses that have more than twenty employees and offer a group health care plan. The only exceptions are churches, church-related tax-exempt organizations, and some federal employees. Companies that are subject to COBRA are required to offer continuation coverage to all "qualified beneficiaries," a category which includes employees, spouses, dependents, and retirees who were covered under the company's group health insurance plan up until they lost eligibility for coverage through a "qualifying event." Companies are not required to offer COBRA benefits to those employees who were not eligible for or declined to participate in the group health plan, or who were eligible for Medicare benefits.
The qualifying events that activate COBRA provisions include a voluntary or involuntary termination of employment, a reduction in hours from full to part-time, a failure to return to work after taking family or medical leave, a call for active military duty, or the bankruptcy of the business. An employee's spouse or dependents can qualify for COBRA benefits—provided they were covered by the company's group health plan—upon the employee's death, the couple's separation or divorce, or a dependent's change in eligibility status (i.e., a child reaches an age at which he or she no longer qualifies for coverage under the employee's insurance). The company may deny COBRA coverage to an employee who was involuntarily terminated from employment due to willful, job-related misconduct. But since these cases often end up in federal court, the company should weigh the expense of court costs against the expense of providing continuation coverage.
When a qualifying event occurs and COBRA is triggered, the company is required to offer a qualified beneficiary the option to continue coverage under all health care plans, medical spending accounts, dental, vision, and hearing plans, prescription drug programs, substance abuse plans, and mental health programs that are offered to regular employees. However, the company is not required to offer continuation coverage for life insurance, disability insurance, retirement plans, or vacation plans. Under normal circumstances, COBRA coverage lasts a maximum of eighteen months. This time limit is extended to twenty-nine months for dependents, or in cases where the employee becomes disabled. If the employee qualifies for COBRA for a reason other than termination of employment or reduction of hours, or experiences a second qualifying event during the regular COBRA coverage period, then the time limit may be extended to thirty-six months.
The employee pays 100 percent of the costs of health insurance coverage under COBRA, plus a 2 percent surcharge to help the employer cover administrative expenses. The employer is entitled to terminate coverage if payments are late, but must allow a thirty-day grace period. This time lag may pose a problem for some small businesses, since most insurance companies require payment for COBRA coverage in advance.
Another component of COBRA involves communication with affected employees. A company is required to explain the right to continue benefits to the each employee when they first join the company group health insurance plan, and again when a qualifying event occurs. When an employee qualifies for COBRA, the company has thirty days to notify the insurance company of that person's eligibility, and the insurance company then has fourteen days to provide the employee with information regarding the costs and benefits of their health care continuation coverage. The employee has sixty days to decide whether he or she wants to continue coverage. If so, the coverage is retroactive to the time of the qualifying event so that no lapses occur.
On February 3, 1999, the Internal Revenue Service (IRS) issued a set of revised and updated guidelines for the administration of COBRA. These new regulations took effect on January 1, 2000, meaning that they applied to all qualifying events occurring on or after that date. Although the new guidelines themselves required some interpretation, many tax and human resources professionals claimed that the rules would ultimately clarify and simplify several aspects of COBRA administration for businesses. Some of the major changes to COBRA are outlined below:
Overall, compliance with COBRA and the various state laws governing health insurance continuation can be tricky and expensive. Although the revised COBRA regulations clarify some matters, they also add new rules for employers to be aware of and follow. "To ensure compliance with the new regulations, employers should review their COBRA procedures, COBRA notices, and group health plans and summary plan descriptions, including health FSA plan documents," Mark Bogart wrote in The CPA Journal. "Employers should also consider implementing new options permitted under the new rules that could help alleviate some of the complexities in COBRA administration." The U.S. Department of Labor and the U.S. Public Health Service offer free information on how the laws affect businesses.
Anastasio, Susan. Small Business Insurance and Risk Management Guide. U.S. Small Business Administration, n.d.
Bogart, Mark. "New COBRA Regulations Issued." CPA Journal. June 1999.
"How to Comply with the Newly Revised COBRA Regulations." HR Focus. August 2000.
"IRS Releases Final COBRA Guidelines." Journal of Accountancy. July 1999.
Janecek, Lenore. Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed. Allworth Press, 1993.
Kilgour, John G. "COBRA: Managing the New Problems." Employee Benefits Journal. March 2000.
Manning, Margie. "COBRA Can Create Potholes for Employers, Workers." St. Louis Business Journal. November 20, 2000.
SEE ALSO: Family and Medical Leave Act