COBRA

If you have 20 or more employees in the preceding year, you are subject to a law known as the Consolidated Omnibus Budget Reconciliation Act of 1985, better known as COBRA. COBRA requires employers to offer individuals, who would otherwise lose health care benefits upon termination of employment, the option of continuing to have group health care plan coverage.

Employers are exempt from COBRA if they had fewer than 20 employees (other than independent contractors) on at least 50% of the working days in the preceding year.

Most states have laws concerning continuation of benefits. Some of them cover all employers, including small employers, so you might be subject to a state law even if you're exempt from federal law. The laws are complex and differ from state to state. To find out more about your state’s laws regarding continuation of coverage, contact your state labor agency or your attorney.

Complying with COBRA can be a pretty taxing job. Even big companies save time and money by outsourcing administration to companies that specialize in doing it. Still, you should know the basics about this important law.

Events that trigger COBRA. Qualifying events trigger COBRA coverage. The following are qualifying events:

an employee’s voluntary or involuntary termination of employment, unless it is for gross misconduct. COBRA doesn't define misconduct, but to establish misconduct, you'll need to show that there was a connection between the offense and the employee's job; that the employee is able to understand the gravity of the misconduct; and that the offense was willful. If the departing employee decides to challenge your determination, you're probably going to end up in federal court. Balance the estimated costs of fighting the enforcement suit against the costs of the COBRA coverage.
an employee’s reduction in hours of employment, for example, from full time to part time
a covered spouse’s divorce or legal separation from an employee (insured spouses and dependants are covered)
an employee’s death (insured spouses and dependants are covered)
an employee’s entitlement to Medicare
a covered dependent’s change in status, for example, reaching an age that no longer qualifies the dependent for coverage under the parent’s health plan
active military duty when you don't voluntarily maintain health coverage
failure to return to work at the end of family and medical leave where coverage was in effect at the beginning of the leave but was lost during the leave
your business’s bankruptcy

Depending upon the type of event and who the beneficiary is, coverage could continue for 18, 29, or 36 months after the date of the event or the coverage loss.

Your COBRA communication duties. COBRA stresses the need to inform employees of the right to continue benefits when a qualifying event occurs. You must notify covered employees and spouses of their initial rights under COBRA when they first join the plan. You have to notify covered persons of their election rights to continue coverage after a qualifying event occurs. And you have 30 days to notify the plan administrator (insurance company) when a loss occurs for any of the reasons listed above, except for divorce or change of status by a dependent. In those two instances, you have 60 days to notify the administrator.

Paying for COBRA coverage. The employee must pay the full cost of the insurance premiums. In fact, the law allows you to charge 102 percent of the premium, and to use the 2 percent to cover your administrative costs. When an employee gets extended COBRA coverage due to disability, you can charge 150 percent of the premium for months 18 through 29.

How do employees sign up for COBRA coverage? After you send out the notice to an employee following a qualifying event, the employee has 60 days to notify you that he or she wants coverage. The employee can write you a letter, call you on the phone, or tell you in person. If you don't hear from the employee within 60 days after your notification or 60 days after the event took place (whichever is later), the employee is no longer eligible to sign up.